Optimal timing and capacity choice under the rate-of-return renewable energy support

Mariia Kozlova; Stein-Erik Fleten; Verena Hagspiel

doi:10.1016/j.mex.2020.100828

Optimal timing and capacity choice under the rate-of-return renewable energy support

MethodsX. 2020 Feb 24:7:100828. doi: 10.1016/j.mex.2020.100828. eCollection 2020.

Authors

Mariia Kozlova¹, Stein-Erik Fleten², Verena Hagspiel²

Affiliations

¹ School of Business and Management, Lappeenranta University of Technology, Finland.
² Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology, Norway.

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.

Keywords: Capacity choice; Dynamic programming; Investment timing; Real options; Renewable energy policy.