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Defer option valuation and optimal investment timing of solar photovoltaic projects under different electricity market systems and support schemes

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  • Cheng, Cheng
  • Wang, Zhen
  • Liu, Mingming
  • Chen, Qiang
  • Gbatu, Abimelech Paye
  • Ren, Xiaohang

Abstract

This paper applies the real options method to analyse the defer option value and optimal investment timing for solar photovoltaic projects in China. The main purpose of this paper is to examine investment behaviours under different market systems and support schemes. This paper further investigates the interaction of technological progress and support schemes. Four scenarios are designed, and the corresponding real options models are established. In the case study, we find that electricity market reform enhances the defer option value in the short term but makes the owners of solar PV projects postpone their investment. Nevertheless, the government can stimulate investment by implementing appropriate support schemes. Additionally, the impacts of different support schemes vary according to the market system. The impacts of feed-in tariffs and price premiums are similar in a regulated market but are different in a free market. The price premium scheme greatly promotes the defer option values in the short term, but the feed-in tariff scheme excels in the long term. A feed-in tariff has a greater impact on reducing the expected execution time and its variance than the price premium. In addition, more attractive support schemes are required when the technological level is improved.

Suggested Citation

  • Cheng, Cheng & Wang, Zhen & Liu, Mingming & Chen, Qiang & Gbatu, Abimelech Paye & Ren, Xiaohang, 2017. "Defer option valuation and optimal investment timing of solar photovoltaic projects under different electricity market systems and support schemes," Energy, Elsevier, vol. 127(C), pages 594-610.
  • Handle: RePEc:eee:energy:v:127:y:2017:i:c:p:594-610
    DOI: 10.1016/j.energy.2017.03.157
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    References listed on IDEAS

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    Cited by:

    1. Paulino Martinez-Fernandez & Fernando deLlano-Paz & Anxo Calvo-Silvosa & Isabel Soares, 2019. "Assessing Renewable Energy Sources for Electricity (RES-E) Potential Using a CAPM-Analogous Multi-Stage Model," Energies, MDPI, Open Access Journal, vol. 12(19), pages 1-20, September.
    2. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    3. Kim, Byungil & Kim, Changyoon & Han, SangUk & Bae, JuHyun & Jung, Jaehoon, 2020. "Is it a good time to develop commercial photovoltaic systems on farmland? An American-style option with crop price risk," Renewable and Sustainable Energy Reviews, Elsevier, vol. 125(C).
    4. Barbara Glensk & Reinhard Madlener, 2019. "Energiewende @ Risk: On the Continuation of Renewable Power Generation at the End of Public Policy Support," Energies, MDPI, Open Access Journal, vol. 12(19), pages 1-25, September.
    5. Bertolini, Marina & D'Alpaos, Chiara & Moretto, Michele, 2018. "Do Smart Grids boost investments in domestic PV plants? Evidence from the Italian electricity market," Energy, Elsevier, vol. 149(C), pages 890-902.
    6. Bistline, John E. & Comello, Stephen D. & Sahoo, Anshuman, 2018. "Managerial flexibility in levelized cost measures: A framework for incorporating uncertainty in energy investment decisions," Energy, Elsevier, vol. 151(C), pages 211-225.

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