Exploring the efficacy of renewable energy support policies in uncertain environments: A real options analysis

Abstract

This paper explores the impact of various renewable energy support policies on investor behavior and environmental value. Specifically, the study investigates the effects of fixed feed-in tariff (FIT) and tradable green certificates (TGC) on investor’s flexibility and environmental value under conditions of uncertainty. Real options theory and envelope theory are employed to analyze these uncertainties, with an empirical analysis of China’s electricity market serving as the basis for the study. The results of the analysis demonstrate that the use of TGC can lead to higher environmental value for utility-scale photovoltaic (PV) projects in China. For onshore wind, substituting FIT with TGC may be more appropriate. However, for offshore wind projects, FIT may be more suitable due to their increased vulnerability to uncertainty. Additionally, the study finds that greater support is required for projects deployed under FIT policies.