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The Implications of Policy Uncertainty on Solar Photovoltaic Investment

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  • Martina Assereto

    (Department of Banking and Finance, Michael Smurfit Graduate Business School, University College Dublin, Blackrock, A94 XF34 Dublin, Ireland
    UCD Energy Institute, University College Dublin, D04 V1W8 Dublin, Ireland)

  • Julie Byrne

    (Department of Banking and Finance, Michael Smurfit Graduate Business School, University College Dublin, Blackrock, A94 XF34 Dublin, Ireland
    UCD Energy Institute, University College Dublin, D04 V1W8 Dublin, Ireland)

Abstract

Policy and electricity price uncertainty provide disincentives to investors considering renewable energy investments. While electricity price uncertainty impacts on investment decisions relating to any energy investment, whether renewable or non-renewable, policy uncertainty will affect renewable energy investment decisions to a far greater extent. In this study, we consider the two main sources of uncertainty a solar Photovoltaic (PV) project is exposed to: electricity price uncertainty and policy uncertainty. We focus our analysis on utility-scale solar photovoltaics in the Pennsylvania, Jersey, Maryland Power Pool (PJM) electricity market and the New Jersey Solar Renewable Energy Credit (SREC) market. Using Solar Renewable Energy Credits as a proxy for policy, we find that there is considerable volatility in both electricity prices and policy. In a sample covering eleven years, we implement univariate Generalized Autoregressive Conditional Heteroskedastic (GARCH) and combinations of GARCH models with different weighting schemes and find that combination models provide superior forecasts. In renewable energy markets, policy supports have a significant impact on an investment’s profitability. The implication for policymakers is clear: to foster investment in solar PV, policy stability is critical.

Suggested Citation

  • Martina Assereto & Julie Byrne, 2020. "The Implications of Policy Uncertainty on Solar Photovoltaic Investment," Energies, MDPI, vol. 13(23), pages 1-20, November.
    • Handle: RePEc:gam:jeners:v:13:y:2020:i:23:p:6233-:d:451620
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