Analysis on one-off subsidy for renewable energy projects based on time value of money

Abstract

Due to the incentive policies of governments, renewable energy plays an increasingly important role in the global energy supply system. Among the subsidy schemes, the one-off subsidy is mainly applied in the projects with a long investment period where the time value of money cannot be ignored due to the long payback period. In this article, a microeconomic model of enterprises with a discount factor is established. The impact of the one-off subsidy by the government is discussed in different periods. The results show that only when the investment period is long enough, the government would give the enterprise one-off subsidy and the given subsidy is positively correlated with the investment period. Besides, the enterprise is more willing to invest in the project when getting close to the end of the investment period and the subsidy increases with the growth of capital-output elasticity. This article analyzes the optimal period of giving the one-off subsidy under the condition of different internal rates of return (IRRs). Based on the extended framework of subsidy analysis by game theory, it is found that if IRR of the enterprise is larger than that of the government, the subsidy is suggested to be given at the beginning of the project.