Optimum Sequential Investments Model on Renewable Energy Power Investments under Renewable Portfolio Standards

Abstract

Abstract:

By requiring retail electricity suppliers to procure a certain quantity of renewable power, renewable portfolio standards (RPSs) backed by renewable energy certificates (RECs) have emerged as the principal policy for drivers of renewable energy investments. Also, the deployment capacity of large-scale renewable energy has been installed in smaller in stages. In the case of RPSs and capacity with constraints of resource endowment, the investors have to hedge the risks of certificate and electricity prices. In parallel, they have to formulate the optimal sequential investments with respect to the investment time and capacity. Theoretically, the real option scheme is employed to derive the optimal sequential investments. Experimentally, the sequential investments are specifically studied with respect to value of offshore wind in China by the Least Squares Monte Carlo simulation approach. The results reveal that the scheme, investment with slightly small capacity ahead then completing the total capacity gradually, enables the investors to explore the market information and to reduce the exposure to unknown risks effectively. Compared to the total capacity invested by one investment only, the scheme above would strikingly increase the investment value. Also, the deployment of project would be completed earlier. The proposed theoretical and numerical schemes offer significant implementation metric for the investors increasing the project profits and utilizing the flexibility of investment timing effectively. Moreover, relatively high technical costs or relatively low initial-certificate prices are unable to make the investors implement the deployment of renewable energy projects as soon as possible. In that sense, successful implementation of RPSs needs to match the level of technical advancement and the requirement of green electricity for the policy maker.

Key words: renewable portfolio standards, uncertainties, real options, sequential investments, least-squares Monto Carlo simulation

Li Li, Zhu Lei, Fan Ying. Optimum Sequential Investments Model on Renewable Energy Power Investments under Renewable Portfolio Standards[J]. , 2019, 31(9): 37-46.

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