The Implications of Policy Uncertainty on Solar Photovoltaic Investment

Martina Assereto,Julie Byrne

doi:10.3390/en13236233

Abstract

Policy and electricity price uncertainty provide disincentives to investors considering renewable energy investments. While electricity price uncertainty impacts on investment decisions relating to any energy investment, whether renewable or non-renewable, policy uncertainty will affect renewable energy investment decisions to a far greater extent. In this study, we consider the two main sources of uncertainty a solar Photovoltaic (PV) project is exposed to: electricity price uncertainty and policy uncertainty. We focus our analysis on utility-scale solar photovoltaics in the Pennsylvania, Jersey, Maryland Power Pool (PJM) electricity market and the New Jersey Solar Renewable Energy Credit (SREC) market. Using Solar Renewable Energy Credits as a proxy for policy, we find that there is considerable volatility in both electricity prices and policy. In a sample covering eleven years, we implement univariate Generalized Autoregressive Conditional Heteroskedastic (GARCH) and combinations of GARCH models with different weighting schemes and find that combination models provide superior forecasts. In renewable energy markets, policy supports have a significant impact on an investment’s profitability. The implication for policymakers is clear: to foster investment in solar PV, policy stability is critical.

Highlights

Described by the United Nations as “one of the most pervasive issues of our time”, climate change is an area that has attracted increasing attention in the literature
Our findings suggest that policy uncertainty is an extremely important factor when considering investing in solar photovoltaic and that failing to include policy uncertainty could lead to incorrect investment decisions
The need for improved accuracy in volatility forecasting for renewable energy technologies is evident in the increasing implementation of investment decision-making methodologies that move away from static discounted cash-flow techniques, towards non-static models that include the value of flexibility in the decision-making process, such as real options

Summary

Introduction

Described by the United Nations as “one of the most pervasive issues of our time”, climate change is an area that has attracted increasing attention in the literature. While most studies rightly focus on the volatility of future electricity prices to accurately price the risk of investing in renewable energy, other sources of uncertainty are likely to be of concern to potential investors (see for example [1]). Energy Agency (IEA) find that policy certainty is key to attracting renewables. When making an investment decision, investors consider the cash flows the project will generate in the future and compare it with the cost of investing today. Any uncertainty surrounding the estimates of the future cash flows adds to the investors’ perceived risk of investing in the project. The net cash flows from a solar energy project arise as a result of considering the total revenues the project will generate over its lifetime less the overall costs of the solar PV system. The total costs include upfront capital costs such as hardware costs, land costs, system design, and connection costs, as well as ongoing operational and maintenance costs.

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