Policymakers demand an increase in electric power from renewable resources, but are often not precise with respect to the implementation of support schemes. Decisions on whether and when to invest in new capacity depend on uncertainty with respect to future cash flows generated by the renewable electricity projects. One source of uncertainty is climate policy. The uncertainty may be with respect to the future climate policy itself or with respect to the impact of existing climate policies on future cash flows.
The project’s aim is to show how real option modeling can guide authorities in designing better policies. Therefore the project also includes stakeholders from policy and industry, who are involved in the scientific process and confronted with the results and developed tools. Based on the results policy makers can use the available instruments, like feed-in tariffs or subsidies, more efficiently and design better policies to foster investment into new technologies.
IIASA contributes to the analysis by modeling the investment into wind and hydro-power facilities using a real options approach. In those models we are taking the market effect of investment and production decisions (in an oligopolistic setting), as well as environmental, price and policy uncertainties, explicitly into account. Our models investigate the decisions to invest into wind farms of various magnitudes, hydro-power plants and independent green power energy islands and analyze the effects on these decisions by various policy support schemes.
Last edited: 28 May 2014
International Institute for Applied Systems Analysis (IIASA)
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