Green electricity investments

Environmental target and the optimal subsidy

Simona Bigerna, Xingang Wen, V. Hagspiel, Peter Kort

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We investigate the optimal investment decision in renewables under market demand uncertainty, in the context of the Italian strategy for renewable deployment under the EU policy. The firm has to decide about the time and size of the investment. We find that a higher subsidy level induces the firm to invest earlier with a smaller investment capacity. This implies that a given environmental target cannot be reached by a too high (too low) subsidy level since this will cause the investment level to be too low (too late). We show that there exists an optimal (intermediate) subsidy level. Due to uncertain demand, in some cases ensuring to reach the environmental target in time requires an additional (conditional) subsidy. We propose a heuristic for policy makers stating when and how much subsidy to provide. Furthermore, we find that in a more uncertain economic environment the subsidy adjustment to maintain the target level of investment results in the firm investing earlier, which is opposite to the standard real options result.
Original languageEnglish
Pages (from-to)635-644
JournalEuropean Journal of Operational Research
Volume279
Issue number2
DOIs
Publication statusPublished - Dec 2019

Fingerprint

Electricity
Target
Demand Uncertainty
Real Options
Optimal Investment
Adjustment
Economics
Heuristics
Imply
Green electricity
Environmental investment
Subsidies
Business
Policy

Keywords

  • investment analysis
  • renewable energy sources
  • public subsidies
  • investment timing
  • investment size

Cite this

@article{089d3a514c4941dc9190e4b22678476a,
title = "Green electricity investments: Environmental target and the optimal subsidy",
abstract = "We investigate the optimal investment decision in renewables under market demand uncertainty, in the context of the Italian strategy for renewable deployment under the EU policy. The firm has to decide about the time and size of the investment. We find that a higher subsidy level induces the firm to invest earlier with a smaller investment capacity. This implies that a given environmental target cannot be reached by a too high (too low) subsidy level since this will cause the investment level to be too low (too late). We show that there exists an optimal (intermediate) subsidy level. Due to uncertain demand, in some cases ensuring to reach the environmental target in time requires an additional (conditional) subsidy. We propose a heuristic for policy makers stating when and how much subsidy to provide. Furthermore, we find that in a more uncertain economic environment the subsidy adjustment to maintain the target level of investment results in the firm investing earlier, which is opposite to the standard real options result.",
keywords = "investment analysis, renewable energy sources, public subsidies, investment timing, investment size",
author = "Simona Bigerna and Xingang Wen and V. Hagspiel and Peter Kort",
year = "2019",
month = "12",
doi = "10.1016/j.ejor.2019.05.041",
language = "English",
volume = "279",
pages = "635--644",
journal = "European Journal of Operational Research",
issn = "0377-2217",
publisher = "Elsevier Science BV",
number = "2",

}

Green electricity investments : Environmental target and the optimal subsidy. / Bigerna, Simona; Wen, Xingang; Hagspiel, V.; Kort, Peter.

In: European Journal of Operational Research, Vol. 279, No. 2, 12.2019, p. 635-644.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Green electricity investments

T2 - Environmental target and the optimal subsidy

AU - Bigerna, Simona

AU - Wen, Xingang

AU - Hagspiel, V.

AU - Kort, Peter

PY - 2019/12

Y1 - 2019/12

N2 - We investigate the optimal investment decision in renewables under market demand uncertainty, in the context of the Italian strategy for renewable deployment under the EU policy. The firm has to decide about the time and size of the investment. We find that a higher subsidy level induces the firm to invest earlier with a smaller investment capacity. This implies that a given environmental target cannot be reached by a too high (too low) subsidy level since this will cause the investment level to be too low (too late). We show that there exists an optimal (intermediate) subsidy level. Due to uncertain demand, in some cases ensuring to reach the environmental target in time requires an additional (conditional) subsidy. We propose a heuristic for policy makers stating when and how much subsidy to provide. Furthermore, we find that in a more uncertain economic environment the subsidy adjustment to maintain the target level of investment results in the firm investing earlier, which is opposite to the standard real options result.

AB - We investigate the optimal investment decision in renewables under market demand uncertainty, in the context of the Italian strategy for renewable deployment under the EU policy. The firm has to decide about the time and size of the investment. We find that a higher subsidy level induces the firm to invest earlier with a smaller investment capacity. This implies that a given environmental target cannot be reached by a too high (too low) subsidy level since this will cause the investment level to be too low (too late). We show that there exists an optimal (intermediate) subsidy level. Due to uncertain demand, in some cases ensuring to reach the environmental target in time requires an additional (conditional) subsidy. We propose a heuristic for policy makers stating when and how much subsidy to provide. Furthermore, we find that in a more uncertain economic environment the subsidy adjustment to maintain the target level of investment results in the firm investing earlier, which is opposite to the standard real options result.

KW - investment analysis

KW - renewable energy sources

KW - public subsidies

KW - investment timing

KW - investment size

U2 - 10.1016/j.ejor.2019.05.041

DO - 10.1016/j.ejor.2019.05.041

M3 - Article

VL - 279

SP - 635

EP - 644

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

IS - 2

ER -