Using real options to value capacity additions and investment expenditures in renewable energies in India

Abstract

We calculate the overall policy value of installed capacity additions and investment expenditures in wind and solar energies in India. Recent increases in capacity additions and investments by both the public and private sectors along with government support schemes have made these energies more competitive with traditional fuels like coal in generating electricity. We use a two-factor learning curve to model the decline in prices of wind and solar energies. Employing a real options approach with global coal prices as the stochastic variable we find the overall value of promotion policies in renewables to be sufficiently large. The trigger price of coal for investment in renewable energies today for electricity generation suggest early to immediate deployment of additional wind and solar technologies as the optimal policy. With the option to deploy for a longer time horizon, continuing with promotion policies of capacity additions and investment expenditures in renewables is more valuable at high global coal prices.