Renewable Energy Investment: Policy and Market Impacts

Using a real options model, the authors of this report seek to analyze the decision of an electricity producer to invest in new capacity, select the type of technology, and optimize its operation. The model finds that if policymakers can assure renewable energy producers there is no chance feed-in tariffs will be abandon over a 30-year period, ratepayers will see a noticeable decline in the feed-in tariff level required to spur maximum investment in renewable energy sources. However, at low levels of tariff-elimination probability, changes in the probability that a feed-in tariff will be eliminated have a non-linear relationship to the tariff level required by producers, causing the required tariff level to rise at an increasing rate.