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Stepwise Green Investment under Policy Uncertainty

Author

Listed:
  • Michail Chronopoulos
  • Verena Hagspiel
  • Stein-Erik Fleten

Abstract

We analyse how market price and policy uncertainty, in the form of random provision or retraction of a subsidy, interact to affect the optimal time of investment and the size of a renewable energy (RE) project that can be completed in either a single (lumpy investment) or multiple stages (stepwise investment). The subsidy takes the form of a fixed premium on top of the electricity price, and, therefore, investment is subject to electricity price uncertainty. We show that the risk of a permanent retraction (provision) of a subsidy increases (decreases) the incentive to invest, yet lowers (raises) the amount of installed capacity, and that this result is more pronounced as the size of the subsidy increases. Additionally, we show that increasing the number of policy interventions lowers the expected value of a subsidy and the size of the project. Furthermore, we illustrate that, although an increase in the size of a subsidy lowers the relative value of the stepwise investment strategy, the expected value of a lumpy investment strategy is still lower than that of stepwise investment.

Suggested Citation

  • Michail Chronopoulos & Verena Hagspiel & Stein-Erik Fleten, 2016. "Stepwise Green Investment under Policy Uncertainty," The Energy Journal, , vol. 37(4), pages 87-108, October.
    • Handle: RePEc:sae:enejou:v:37:y:2016:i:4:p:87-108
    DOI: 10.5547/01956574.37.4.mchr
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, December.
    2. repec:aen:journl:2010v31-02-a05 is not listed on IDEAS
    3. Boomsma, Trine Krogh & Meade, Nigel & Fleten, Stein-Erik, 2012. "Renewable energy investments under different support schemes: A real options approach," European Journal of Operational Research, Elsevier, vol. 220(1), pages 225-237.
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    Cited by:

    1. Kinga B. Tchorzewska, 2024. "A Lost Opportunity? Environmental Investment Tax Incentive and Energy Efficient Technologies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(12), pages 3301-3333, December.
    2. Arasteh, Abdollah, 2025. "A data-driven prediction method for multi-period portfolio optimization using the real options approach," Finance Research Letters, Elsevier, vol. 80(C).
    3. Spyros Giannelos, 2025. "Reinforcement Learning in Energy Finance: A Comprehensive Review," Energies, MDPI, vol. 18(11), pages 1-41, May.
    4. Hagspiel, Verena & Kort, Peter M. & Wen, Xingang, 2025. "Green technology investment: Announced vs. unannounced subsidy retraction," Journal of Economic Dynamics and Control, Elsevier, vol. 170(C).
    5. Liu, Yanyun & Liang, Jing & Zhao, Ruili & Sun, Baiqing, 2026. "Renewable energy investment under subsidy withdrawal risk and mean-reverting electricity price," Renewable Energy, Elsevier, vol. 258(C).

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