Development of flexible supportive policy with real options for renewable energy projects: Case of photovoltaic systems

Abstract

Climate change and environmental crises as primary drivers of renewable energy development were invigorated uncertainties in the fossil fuel supply chain and price. Managing these uncertainties needs more flexibility in supportive policies. The minimum revenue guarantee and total income cap as two options are used in this research for renewable energy development. The diminution of government role in addition to replacement of fixed prices, like feed-in tariffs, with price range are the main peers for having flexible supportive policy. Application of options provide a range for the profitability of investments and assures that as well as guaranteeing a minimum income, excess profits are limited so the reliability in market prices is increased. Introducing options beside evaluating related projects with binomial lattice, contributes a basis for innovation in overcoming obstacles of PV development. Profitability index is used as a comprehensive measure for modifying time horizon, uncertain variable and target prices in flexible power purchase agreements. However, obtaining to a flexible power purchase agreement needs consideration of different factors, this research paved the way by proposing a novel method of applying real options in renewable energy development for risk management, especially the price risk as a major concern in such investments.