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Uncertainty in Renewable Energy Policy: How do Renewable Energy Credit markets and Production Tax Credits affect decisions to invest in renewable energy?

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  • Eryilmaz, Derya
  • Homans, Frances

Abstract

This paper examines the impacts of uncertainties in the US renewable energy policy on the investment decisions of renewable electricity producers. We develop a dynamic optimization model to understand how investment in wind energy depends on market and policy uncertainties in renewable energy markets. These uncertainties include the stochastic prices in the market for Renewable Electricity Credits (RECs) and the federal government's uncertain decision about continuation of Production Tax Credit (PTC) program. Results contribute to our understanding of the impact of the REC market and policy decisions on the profitability threshold required for investors to commit to renewable energy investments. Uncertainty about the renewable energy policy raises the threshold to invest in renewable energy. This paper also examines the relationship between two important renewable energy policies and their impacts on these investments. This paper has the potential to significantly contribute to the existing renewable energy development debate because the RECs prices are introduced explicitly as a random factor in a model of investment in renewable energy.

Suggested Citation

  • Eryilmaz, Derya & Homans, Frances, 2013. "Uncertainty in Renewable Energy Policy: How do Renewable Energy Credit markets and Production Tax Credits affect decisions to invest in renewable energy?," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150018, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea13:150018
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    File URL: http://ageconsearch.umn.edu/record/150018/files/AAEA%20submissions.pdf
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    References listed on IDEAS

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    1. Robert S. Pindyck, 1984. "Uncertainty in the Theory of Renewable Resource Markets," Review of Economic Studies, Oxford University Press, vol. 51(2), pages 289-303.
    2. Ray C. Fair, 1993. "Estimating Event Probabilities from Macroeconometric Models Using Stochastic Simulation," NBER Chapters,in: Business Cycles, Indicators and Forecasting, pages 157-178 National Bureau of Economic Research, Inc.
    3. Balikcioglu, Metin & Fackler, Paul L. & Pindyck, Robert S., 2011. "Solving optimal timing problems in environmental economics," Resource and Energy Economics, Elsevier, vol. 33(3), pages 761-768, September.
    4. Pindyck, Robert S, 1980. "Uncertainty and Exhaustible Resource Markets," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1203-1225, December.
    5. Fuss, Sabine & Szolgayova, Jana & Obersteiner, Michael & Gusti, Mykola, 2008. "Investment under market and climate policy uncertainty," Applied Energy, Elsevier, vol. 85(8), pages 708-721, August.
    6. Fuss, Sabine & Szolgayová, Jana & Khabarov, Nikolay & Obersteiner, Michael, 2012. "Renewables and climate change mitigation: Irreversible energy investment under uncertainty and portfolio effects," Energy Policy, Elsevier, vol. 40(C), pages 59-68.
    7. Pindyck, Robert S, 1993. "A Note on Competitive Investment under Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 273-277, March.
    8. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
    9. Palmer, Karen & Burtraw, Dallas, 2005. "Cost-effectiveness of renewable electricity policies," Energy Economics, Elsevier, vol. 27(6), pages 873-894, November.
    10. Fell, Harrison & Linn, Joshua & Munnings, Clayton, 2012. "Designing Renewable Electricity Policies to Reduce Emissions," Discussion Papers dp-12-54, Resources For the Future.
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    Keywords

    Environmental Economics and Policy; Resource /Energy Economics and Policy;

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