A real options approach to renewable energy module end-of-life decisions under multiple uncertainties: Application to PV and wind in China

Abstract

The issue of large-scale retirements of renewable energy modules has attracted considerable attention from governments and the public worldwide. Using the Chinese wind and photovoltaic industries as examples, this paper, for the first time, employs a real options approach to explore the optimal time for energy firms to retire their power plants and to predict the future trend of renewable energy wastage from a bottom-up perspective. The results show that the optimal retirement time for the four subdivided categories ranges from 16 to 23 years. The later the investments are made, the earlier the decommissioning time comes and the lower the project returns. Furthermore, wind projects have been found to generate more revenue than PV projects for the same size, and the gap continues to widen. Offshore wind technology always has the longest optimal service life (18.62 years in 2022) and the greatest project returns (10.84 million CNY in 2022). Annual utilization hours, the renewable electricity price and the waste price can accelerate the retirement of plants and generate more revenue for energy companies, while the initial investment cost has a completely opposite effect. The first wave of PV retirements will occur in 2035 at 305.82 GW, while onshore wind will be in 2036 at 530.77 GW and offshore wind will not explode until 2040 at 65.84 GW. An assessment of potential policies suggests that for every 100 CNY increase in incentive strength, the retirement wave arrives 1 year earlier. In contrast, for every 100 CNY increase in the strength of penalties, the retirement wave is delayed by 1 year. In addition, we verify that the size of the plants does not affect the forecast of the retirement trend, indicating that the assumptions about installed capacity do not cause bias.