Striving for a net-Zero emission future: Impact of feed-in tariffs on BOT highway investment and subsidy decisions

Integrating green electricity generated by renewable energy sources (RES) to power highways is a crucial strategy for developing low-carbon transportation. Previous research on highway investment and pricing decisions under Build-Operate-Transfer (BOT) schemes has seldom considered the impact of integrating clean energy, let alone the impact of the associated incentive tools. This study develops a stylized model to analyze private sector investment decisions in RES-integrated highway projects, alongside public sector subsidy design under RES incentive policies (feed-in tariffs, FIT). We derive the optimal highway and RES capacities as well toll charges, finding that the FIT rate initially increases both highway and RES capacity but eventually impedes highway investment, leading to higher tolls. We further demonstrate that both the RES cost subsidy and the volume-based subsidy can effectively substitute for the FIT, with equilibrium subsidy levels endogenously offsetting its impact on investment when the FIT rate is low. Conversely, under high FIT rates, a larger volume-based subsidy is required to offset the profit gap between toll revenues and green electricity sales, whereas the RES cost subsidy becomes ineffective. This study provides valuable insights for policymakers and for both the public and private sectors involved in sustainable highway projects under BOT schemes.