The Value of Green Energy under Regulation Uncertainty

25 Pages Posted: 2 Jun 2020 Last revised: 9 Jun 2020

See all articles by Jerome Detemple

Jerome Detemple

Boston University Questrom School of Business; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Yerkin Kitapbayev

North Carolina State University

Date Written: May 4, 2020

Abstract

We examine investments in power generation projects under policy uncertainty, when the investor has the choice between two alternative technologies, a gas-fired plant and a wind plant. Increased risk of subsidy withdrawal reduces the payoff from and postpones investments in the wind technology. Simultaneously, it accelerates investments in gas, thereby eliminating or further postponing investments in wind capacity. We show that this substitution phenomenon can be of first order importance: it can have a significant impact on the timing of investment, the wind premium, and the probability of investing in the wind technology. Our results provide new insights about the scope and impact of green energy regulation.

Keywords: green energy, wind plant, gas-fired plant, real options, subsidy, regulation uncertainty

JEL Classification: G13, Q40, Q42, L94.

Suggested Citation

Detemple, Jerome and Kitapbayev, Yerkin, The Value of Green Energy under Regulation Uncertainty (May 4, 2020). Energy Economics, Forthcoming, https://doi.org/10.1016/j.eneco.2020.104807, Available at SSRN: https://ssrn.com/abstract=3592711 or http://dx.doi.org/10.2139/ssrn.3592711

Jerome Detemple

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 353-4297 (Phone)
(617) 353 6667 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada

Yerkin Kitapbayev (Contact Author)

North Carolina State University ( email )

Hillsborough Street
Raleigh, NC 27695
United States

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