A real option model for renewable energy policy evaluation with application to solar PV power generation in China

Abstract

This study proposes a policy evaluation model from the perspective of government and investors. The proposed model, which integrates American option method and two-factor learning curve method, can be used to evaluate the unit decision value and save-path rate for renewable energy development and examine the existence of balance point of interest. Several uncertain factors including non-renewable energy cost, carbon price, renewable energy cost, and price subsidy are all considered in this model. The model has been applied to evaluate the solar photovoltaic (PV) power generation in China. Our empirical results show that real option analysis (ROA) is more effective than net present value analysis (NPV) when handling uncertainty. Under current level of subsidy, the government would suffer loss and the investors could benefit so that it is difficult to achieve the balance of interest during the planning period. With the reduction of subsidy rate, they can achieve the balance of interest.