An uncertainty analysis for offshore wind power investment decisions in the context of the national subsidy retraction in China: A real options approach

Abstract

As a new clean and sustainable energy that can reduce carbon emissions, offshore wind energy has received much more attention in recent years. In response to the complexity and flexibility issues in the decision-making process of offshore wind power investment, this paper proposes an investment decision framework based on a bidimensional binominal lattice that embeds deferral options, aiming to derive the appropriate development timing and investment potential for corporate investors in uncertain environment of market and technological development. And the investment model embedding revenue from carbon emission reduction highlights the advantages of clean energy. Furthermore, we creatively compare the policy effects of three subsidy schemes using the model as a policy analysis tool and use scenario analysis to simulate the impacts of dynamic adjustments in subsidies on investment decisions. For the case of an offshore wind power plant in Guangdong province, China, we find that the local government has to provide a subsidy of 0.11 CNY/kWh to allow the project to be profitable. In the absence of subsidies, however, it is preferable to defer the decision of investment with a wait-and-see attitude. Given the same total government financial input, we find that it will be more beneficial for the government to provide R&D subsidy than electricity tariff subsidy and operation subsidy in terms of long-term sustainable development. Our findings also demonstrate that considerations in the carbon trading market will also contribute to the development of offshore wind power. The conclusions of this article can provide valuable guidelines for corporate investors to adjust the appropriate development timing and for policymakers to optimize subsidy allocation, so as to promote the healthy development of offshore wind power and low-carbon transition.