Measuring Financial Impacts of the Renewable Energy Based Fiscal Policy in Colombia under Electricity Price Uncertainty

Alejandro Castillo-Ramírez,Diego Mejía-Giraldo

doi:10.3390/su13042010

Abstract

This paper analyses the financial implications, from the point of view of an investor in renewable energy, which sells the energy for an uncertain price of electricity and decides to take advantage of the Colombian tax policy over the renewable energy. The policy, known as Investment Tax Allowance (ITA), encourages installation of renewable projects in a country traditionally dominated by hydro power. Price is modeled as a non-stationary autoregressive stochastic process with normally distributed error terms. Costs, and uncertain revenue and taxes are considered to assess the financial impact on a solar project when the policy is implemented. Since impact varies according to project ownership, two cases are evaluated: a generation company (GENCO-1) that only owns the solar project; and, an existent generation company (GENCO-2) that owns a portfolio of projects. Results indicate that if ITA is applied, it is likely that the GENCO-1 cannot take the full advantage of the incentive, as opposed to the GENCO-2. Although this policy might not satisfy planner objectives since it does not guarantee the construction of significantly high capacity of new renewable energy projects, it definitely represents an attractive mechanism to decrease tax obligations at the GENCO-2 level. Finally, a theoretical analysis shows that investment cost affects the mean of the present value; whereas tax rates impacts both its mean and standard deviation.

Highlights

Nowadays, the development of Renewable Energy Technologies (RET) in the world is booming
The analysis focuses on understanding the financial impact of Investment Tax Allowance (ITA) over an existent GENCO that decides to build the solar project
This paper focused on assessing the impact of electricity price uncertainty and a fiscal policy based on ITA, established by the Colombian government, on RET investments

Summary

Introduction

The development of Renewable Energy Technologies (RET) in the world is booming. Two factors that have encouraged this situation are both the establishment of environmental targets and the profitability of RET investments [1,2]. The environmental targets are a direct result of the applicable law [3,4,5,6,7,8], whereas the profitability of RET investments is highly correlated with the constantly declining cost of the investments in the sector [9]. In the last twenty years, numerous incentive policies that promote RET development have been stated and implemented. The effectiveness of (the renewable energy generation promotion) policies, measured in terms of RET investment promotion, is subject to the economic development of a country [16]

Objectives

Results

Conclusion