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

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Keywords

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

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