Abstract
This article presents a stylized renewable energy (RE) investment project profitability analysis under a rate-of-return RE support type. We use a dynamic programming approach to value the real options. While the method is widely used in RE policy analysis, the rate-of-return support is presented in this framework for the first time. We formulate a stylized RE project under the rate-of-return regulation in the dynamic programming framework and solve for optimal investment timing and project size.•A stylized renewable energy (RE) investment under rate-of-return RE support is presented in the dynamic programming framework;•The system is solved for optimal capacity choice in the presence of the electricity price uncertainty. We also comment on the optimal investment timing, which turns out to be a now-or-never decision in this case.
Highlights
A stylized renewable energy (RE) investment under rate-of-return RE support is presented in the dynamic programming framework;
The rate-of-return subsidy is defined as an annuity based on project investment costs I(x), plus operating costs, and minus expected revenues from electricity sales Q(x)S(t), where S(t) is the stochastic electricity price
The profit flow of the project under the rate-of-return subsidy consists of electricity sales and the subsidy payments
Summary
A stylized renewable energy (RE) investment under rate-of-return RE support is presented in the dynamic programming framework;. [2] Kozlova M., Fleten S.–E., Hagspiel V., An Alternative Design of Renewable Energy Support: Investment Timing and Capacity Choice under the Russian Capacity Mechanism, Energy, 174, 2019, 591–601 A RE investment project is assumed to be characterized by the following investment cost function (1) and electricity production (2)
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