Sie sind auf Seite 1von 46

 

 
A real options model for renewable energy investment with application to
solar photovoltaic power generation in China
M.M. Zhang, P. Zhou, D.Q. Zhou
PII:
DOI:
Reference:

S0140-9883(16)30200-6
doi: 10.1016/j.eneco.2016.07.028
ENEECO 3405

To appear in:

Energy Economics

Received date:
Revised date:
Accepted date:

10 January 2015
23 July 2016
30 July 2016

Please cite this article as: Zhang, M.M., Zhou, P., Zhou, D.Q., A real options model for
renewable energy investment with application to solar photovoltaic power generation in
China, Energy Economics (2016), doi: 10.1016/j.eneco.2016.07.028

This is a PDF le of an unedited manuscript that has been accepted for publication.
As a service to our customers we are providing this early version of the manuscript.
The manuscript will undergo copyediting, typesetting, and review of the resulting proof
before it is published in its nal form. Please note that during the production process
errors may be discovered which could aect the content, and all legal disclaimers that
apply to the journal pertain.

ACCEPTED MANUSCRIPT
A real options model for renewable energy investment with

IP

M.M. Zhang a,b, P. Zhou a,b,*, D.Q. Zhou a,b

application to solar photovoltaic power generation in China

SC
R

College of Economics and Management, Nanjing University of Aeronautics and


Astronautics, 29 Yudao Street, Nanjing, China
b
Research Centre for Soft Energy Science, Nanjing University of Aeronautics and
Astronautics, 29 Yudao Street, Nanjing, China

CE
P

TE

MA

NU

___________________________________________________________________________
Abstract
This paper proposes a real options model for evaluating renewable energy investment by
considering uncertain factors such as CO2 price, non-renewable energy cost, investment cost
and market price of electricity. A phase-out mechanism is built into the model to reflect the
long-term changes of subsidy policy. We apply the proposed model to empirically evaluate
the investment value and optimal timing for solar photovoltaic power generation in China.
Our empirical results show that the current investment environment in China may not be able
to attract immediate investment, while the development of carbon market helps advance the
optimal investment time. A sensitivity analysis is conducted to investigate the dynamics of
investment value and optimal timing under the changes of unit generating capacity, subsidy
level, market price of electricity, CO2 price and investment cost. It is found that the high
investment cost and the volatility of electricity and CO2 prices, are not conducive to attract
immediate investment. Instead, increasing the level of subsidy, promoting technological
progress and maintaining the stability of market are useful to stimulate investment.

AC

Keywords: Renewable energy; Solar PV power generation; Uncertainty; Real options


___________________________________________________________________________

1. Introduction
Many countries have realized the importance of renewable energy development
and utilization in reducing the dependence on fossil energy and mitigating climate
change. As the world largest carbon dioxide (CO2) emitter, China has made
substantial efforts in promoting the development and utilization of renewable energy.

Corresponding author. Tel.: +86 25 84893751 (ext 813)


E-mail: cemzp@nuaa.edu.cn (P. Zhou); zmmsdutgl@163.com (M.M. Zhang)
1

ACCEPTED MANUSCRIPT
Although renewable energy only accounted for about 10% of total primary energy
consumption in 2014, in its Middle and Long Term Plan for Renewable Energy

IP

Development, China government has set the target of increasing the share of

SC
R

renewable energy consumption to 15% by 2020.

Renewable energy investment, which plays an important role in promoting the

NU

utilization of renewable energy, has four key features. First, the investment is partially
or completely irreversible. Second, the investment costs of renewable electricity

MA

generation projects are often higher than fossil fuel fired electricity generation
projects because of technological immaturity. Third, renewable energy investment is

confronted with many uncertain factors such as market development, technological

TE

progress and supporting policies. Forth, the investment timing for renewable energy

CE
P

projects is discretionary (Yang et al., 2008, Fan et al., 2013). If the return of a
renewable energy project is comparable to the risk it takes or the investment can be

AC

postponed to acquire more knowledge about the risk, profit-seeking investors may do
the investment. Because of these features, the traditional net present value (NPV)
method, which cannot well model the uncertain factors, becomes inappropriate for
evaluating renewable energy investment (Dixit and Pindyck, 1995).
In China, the investment on renewable energy projects is even more complicated
due to its extremely complex and uncertain investment environment. Its electricity
sector is moving slowly towards a more competitive and market-based system. Seven
provinces and cities in China have launched their pilot carbon trading emission
schemes in 2013, and a national emission trading system will be established in 2017.
2

ACCEPTED MANUSCRIPT
While carbon emission trading provides investors a new source of revenues, it is also
an uncertain factor affecting investment due to the volatility of CO2 prices. In addition,

IP

the timing and strength of supporting policies for promoting renewable energy

SC
R

investment is not clear in the long run. Due to the uncertain factors, evaluating
renewable energy investment in China becomes more challengeable.

NU

This paper aims to develop a real options model for evaluating renewable energy
investment in China by considering four uncertain factors including CO2 price,

MA

non-renewable energy (NRE) cost, market price of electricity and investment cost of
renewable energy project. Compared to earlier similar studies which will be reviewed

in the next section, this study considers more uncertain factors in model development

TE

so that the modeling results might be more consistent with the actual situations of

CE
P

China. In particular, considering the uncertainty in CO2 prices has practical


significance for examining the indirect influence of carbon emission trading scheme

AC

on renewable energy investment. In view of the fact that the incentive policies for
renewable energy should gradually be adjusted with the change of investment
environment in the long run, we built a phase-out mechanism of subsidy for
renewable electricity, which can better reflect the long-term change of timing and
strength of policy support.
The proposed real options model can be used to estimate the investment value
and optimal timing for renewable energy investment. The effects of unit generating
capacity, subsidy, market price of electricity, CO2 price and investment cost on
renewable energy investment can also be assessed by sensitivity analysis. In this study,
3

ACCEPTED MANUSCRIPT
we apply the proposed model to empirically evaluate solar photovoltaic (PV) power
generation in China to address the following questions: Is the current investment

IP

environment positive enough to attract immediate investment? What are the effects of

SC
R

different uncertain factors? How should China government adjust policies to


encourage renewable energy investment?

NU

The remainder of this paper is organized as follows. Section 2 provides a review


of earlier relevant studies. Section 3 describes the real options model as well as model

MA

solution procedures. In Section 4, we apply the proposed model to empirically


evaluate solar PV power generation in China. The last section concludes this study

TE

with some policy implications.

CE
P

2. Literature review

Real options method has been used to evaluate renewable energy investment

AC

since earlier 2000s. Table 1 provides a summary of earlier relevant studies on


renewable energy investment with real options method, which are classified by the
five attributes such as country/region, energy type, solution method, uncertain factors
and purpose of study.
Table 1
Summary of studies on renewable energy investment using real options method
Study
Venetsanos et

Country/

Resource

Solution

Region

type

method

Greece

Wind

PDE

al. (2002)

Uncertain factors

Purpose of study

Deregulated

Assessing the

energy market

profitability of wind
power plants

Davis and
Owens

USA

Renewable

PDE

Fossil fuel price

energy (RE)

Quantifying the
benefits of research

ACCEPTED MANUSCRIPT
(2003)

and development
(R&D) expenditures
on renewable
electricity
France

Nuclear

PDE

Competitive

Comparing large

Gollier et al.
(2005)

electricity price

nuclear power project

IP

with sequential

Kjaerland

Norway

Hydropower

SC
R

investments on small

PDE

Electricity price

Fleten et al.

Norway

NU

(2007)

Wind

PDE

Siddiqui et

USA

MA

(2007)

Electricity price

RE

DP (tree)

Norway

Kumbaroglu

Yang et al.
(2008)

Turkey

AC

et al. (2008)

Hydropower

CE
P

al. (2008)

TE

Bockman et

RE

Exploring the
investment decisions
of hydropower
projects
Estimating the
investment timing and
scale of wind power
Cost-benefit analysis
of research,
development,
demonstration and

al. (2007)

NRE cost

nuclear power projects

deployment programs
PDE

Electricity price

Assessing the
investment and
capacity choice for
small hydropower
plants

DP

Fuel price and

Evaluating investment

electricity price

alternatives in a
recursive manner

Nuclear

Simulation

Energy and

Analyzing the impacts

and DP

carbon price

of climate policy on
different power
stations

Fuss and

Wind

Simulation

Technical

Investigating uncertain

Szolgayova

change and

factors impact on

(2008)

fossil fuel price

replacement
investment decisions

Siddiqui and

RE

PDE

Fleten (2010)

Electricity price

Analyzing the

and operating

deployment of

cost

competing alternative
renewable energy
technologies

Lee and Shih

Taiwan

Wind

DP (tree)

(2010)
5

Fossil fuel

Evaluating the policy

prices and

value of renewable

ACCEPTED MANUSCRIPT

Lee (2011)

Taiwan

Wind

PDE

technical change

energy development

Electricity price

Examining the value


and feasibility of
renewable energy

Germany

Wind

DP

(2012)

Electricity price

Analyzing the

for renewable

decisions to invest into

Boomsma et

Nordic

Wind

PDE

Jose (2013)

Finland

Wind

and

Mongolia

Kotani
(2013)
China

Wesseh Jr
(2013)
Zhang et al.

China

RE

Wesseh Jr

Liberia

of technology type and


optimal operation

support

timing and capacity

schemes, e.g.

choice for renewable

FIT and RPS

energy projects

Simulation

Production cost,

Measuring the impact

and DP

investment cost

of the real regulatory

(tree)

and consumer

option on renewable

price index

energy project
investment

Simulation

Coal price

Exploring the potential


of renewable energy in
developing economies

DP (tree)

DP (tree)

AC

(2014)

Solar

CE
P

Lin and

RE

TE

Detert and

Portugal

capacity, the selection

Analyzing investment

MA

Denmark,

new power generating

Different

NU

al. (2012)

Manuel and

SC
R

energy

IP

Reuter et al.

investment

Fossil fuel price,

Quantifying the

and technical

benefits of solar power

change

generation

NRE cost,

Evaluating the

carbon price and

decision value and the

technical change

existence of balance
point of interest for
renewable energy

RE

DP (tree)

NRE cost and

Quantifying the

and Lin

Learning effects

benefits of R&D in

(2015)

in technologies

renewable power
generation

Wesseh Jr

China

Wind

DP (tree)

NRE cost

Assessing the viability

and Lin

of wind energy

(2016)

projects

Note: PDE-partial differential equation; DP-dynamic programming; FIT- feed-in tariff; RPS- renewable
portfolio standard.

As shown in Table 1, earlier studies were mainly carried out for developed
countries such as the US, Greece, Germany, France and Norway. Recently, several
6

ACCEPTED MANUSCRIPT
researchers began to examine renewable energy investment in Asian countries such as
China (Lin and Wesseh Jr, 2013; Zhang et al., 2014; Wesseh Jr and Lin, 2016). In

IP

terms of energy type, while some researchers treated renewable energy as a whole,

SC
R

others analyzed the investment for different types of renewable energy such as wind
and hydropower. It should be pointed out that there are not many studies focusing on
solar power. While China government has paid more attention on solar photovoltaic

NU

power generation, there are many uncertain factors affecting its development, which

MA

will be extensively examined in this study.

Real options model can be solved by three methods, including partial differential

equation (PDE), dynamic programming (DP) approach and simulation method. It can

TE

be found that previous studies mainly applied PDE and DP to solve their models.

CE
P

Nevertheless, both PDE and DP are unable to deal with more than two factors. With
the introduction of multiple uncertain market and policy factors, some researchers

AC

have begun to use simulation method to solve their real options models (Yang et al.,
2008; Manuel and Jose, 2013; Detert and Kotani, 2013).
In terms of the uncertain factors considered, previous studies mainly considered
electricity price, fossil fuel price and technological change. There are not many
studies considering carbon emission trading scheme and the varying incentive policies.
While carbon emission trading scheme is designed to reduce greenhouse gas
emissions, it indirectly affects the revenue of renewable energy investors. Nowadays
renewable energy is still heavily dependent on policy support. The way for treating
policy factors is likely to influence the evaluation results of renewable energy
7

ACCEPTED MANUSCRIPT
investment. It is thus essential to take all these factors into account to ensure the
feasibility and accuracy of evaluation results. In addition, previous studies mainly

IP

analyzed the potential of renewable energy, the ability of renewable energy to replace

SC
R

traditional energy and the benefits of renewable energy power generation. The
interactive relationship between renewable energy investment and relevant influential
factors has not received enough attention, which are worth exploring in order to

MA

NU

derive more insightful policy implications.

3. Methodology

3.1. Real options model

TE

Consider a renewable energy project with lifetime L , which can be irreversibly

CE
P

initiated in year t ( 1 t tv ) with investment cost I t . Assume that the project


construction can be finished instantaneously. After the project completion, the

AC

operating state of power generation project is assumed to be one (i.e. full load
operation), which implies that the shift between temporary suspension and full load
operation is negligible (Kumbaroglu et al., 2008). Since the value of a renewable
energy project is dependent on many uncertain factors in its lifetime, it is reasonable
to express the project value by its expectation E[] . If the investment on a renewable
energy project starts in year t, the total net present value of the project can be
represented by

tL

Vt E e r (i t ) i I t
i t

(1)

where r is the discount rate and i denotes the cash flow in year i.
8

ACCEPTED MANUSCRIPT
The yearly cash flow i of a renewable energy project usually comprises the
returns from selling electricity, gains through selling CO2 emission allowances,

IP

operation and maintenance cost, and tax expenditure. Suppose that p e and p c are

SC
R

respectively the price of renewable energy electricity and CO2 emissions, q e and

q c are respectively the quantities of renewable energy electricity and CO2


emissions sold, OMC refers to the operation and maintenance cost per unit of

NU

electricity output, and tc denotes the tax expenditure. We then have


(2)

MA

t pte qte ptc qtc OMC qte tct

It should be noted that the generating capacity of a renewable energy power

(3)

CE
P

qte qte1 (1 - dr )

TE

factors. We then get

generation system gradually decreases with the natural aging of equipment and other

where dr is the annual declining rate.

AC

In a deterministic setting without considering uncertainty and managerial


flexibility, the net present value (NPV) method is extensively used to evaluate
investment decision. Using this method, the investment is acceptable if its net present
value is not less than zero. Otherwise, the investment is uneconomic and should be
abandoned. However, the investment environment of renewable energy is closer to a
stochastic scenario that is characterized by uncertainty and managerial flexibility. In
this case, the NPV method may lead to the suboptimal investment decision and
possibly underestimate the actual value of an investment. The real options method can
create the optimal investment strategy because its analytical framework allows the
9

ACCEPTED MANUSCRIPT
investors to evaluate uncertainty and accurately determine managerial flexibility. i.e.,
the investment can be deferred in response to the arrival of new information or until

IP

the uncertainty is fully resolved. Thus the investors can grasp the optimal investment

SC
R

opportunity and obtain the maximal investment value (Shahnazari et al., 2014;
Pringles et al., 2015). The investment value calculated with real options method is the
summation of the NPV and the economic value of the flexibility under uncertainty,

NU

which can be expressed as

(4)

MA

F V OV

where F is the investment value calculated with real options method and OV is the

economic value of the flexibility under uncertainty.

TE

In other words, a profit-seeking investor just needs to make decision within the

CE
P

valid investment period t v . Based on the real options method, the investor has the
right to delay the investment and select the optimal timing for investment to

AC

maximize the project value (Hach and Spinler, 2014; Pringles et al., 2015), i.e.

F max [max( VtS ,0) e rtS ]

(5)

0t S t v

where t S is a stochastic optimal time when the investment is undertaken.

3.2. Modeling uncertainties


Renewable energy investment may be affected by a variety of uncertain factors
such as NRE cost, CO2 price and investment cost. NRE cost is one of the key factors
influencing the development of renewable energy, and the changes of NRE cost
determine the pace of the renewable energy development. Under market-based
electricity price mechanism, the changes of NRE cost determine the motion process of
10

ACCEPTED MANUSCRIPT
market price of electricity. The comparison between NRE cost and renewable energy
cost determines the deadline of price subsidy and tax incentives for renewable energy

IP

electricity. In addition, the development of carbon emission trading schemes provides

SC
R

a new source of revenue for investors. Therefore, NRE cost and CO2 price actually
represent two uncertain market factors. Investment cost may be considered as an
uncertain technological factor, which is mainly dependent on the level of

NU

technological development and accounts for a large portion of the total cost of a

MA

renewable energy project.

Stochastic process is an appropriate technique for describing the uncertain

factors. Previous studies have used the geometric Brownian motion (GBM) to

TE

describe the motion process for the NRE cost (Davis and Owens, 2003; Siddiqui,

CE
P

2007; Kumbaroglu et al., 2008; Yang et al., 2008; Siddiqui and Fleten, 2010; Fan and
Zhu, 2010 ). CO2 prices in both European and China markets were also assumed to

AC

follow the GBM, e.g. Fuss et al., (2008), Abadie and Chamorro (2008) and Heydari et
al. (2012). With the improvement of technological level, investment cost tends to
decline whereas it is also affected by the market volatility of PV component material.
The evolution of technological level may also be modeled by the GBM (Kumbaroglu
et al., 2008; Manuel and Jose, 2013; Welling, 2016). In this paper, we employ the
GBM to characterize the uncertainties in market and technological development as
follows:

dSt St dt St dz

(6)

11

ACCEPTED MANUSCRIPT
where S t denotes an uncertain variable, and represent the drift and volatility
parameters of the variable, dz represents independent increment of Wiener process

dz dt , and is a normally distributed random variable with zero mean and

SC
R

IP

unit standard deviation. It can be shown that the expected value of S is E St S0e t .
When the NRE cost is considered, let ptf denotes the NRE cost per unit of electricity
output (in RMB/kWh), f and f respectively represent the drift rate and

NU

volatility parameters of the NRE cost, and dz tf t f dt . When the CO2 price is

MA

considered, let ptc denote CO2 price (in RMB/kWh), c and c represent the drift
rate and volatility parameters of CO2 price, and dz tc tc dt . When the investment

cost is concerned, let I t denotes the unit investment cost (in RMB/kW), I and I

TE

represent the drift rate and volatility parameters of investment cost, and dz tI tI dt .1

CE
P

3.3. Characterization of supporting policies


(1) Tax policy

AC

The governmental supporting policies for renewable energy projects comprise


both price and tax incentives. In China, firm tax ( tc ) is mainly composed of
value-added tax ( vtc ) and corporate income tax ( itc ). At present, China government
will provide tax incentives, including half reduction of value-added tax and the waiver
of corporate income tax for three years. Mathematically, we can derive the following
formula:
1

The costs and benefits of renewable energy and fossil energy may mutually influence each other by exerting
impacts on investors' willingness and preference (Reuter et al. 2012; Detert and Kotani, 2013). Therefore, the new
renewable energy investment and installed capacity may reduce renewable energy cost by following learning
effects, which may have influences on the NRE cost (Zhu, 2012; Welling, 2016; Siddiqui et al., 2016). To reflect
this relationship, this study considers the correlation between the investment cost of renewable energy project,
which accounts for about 80% of the total cost of solar PV system, and the NRE cost. Let

If

denote the

correlation coefficient, we then have dz dzt dt that can quantify the extent to which both stochastic
variables influence each other (Abadie and Chamorro, 2008, Fan et al. 2013; Zhu and Fan, 2013).
12
I
t

If

ACCEPTED MANUSCRIPT
tct vtct itct

(7)

vtct ( pte qte ptc gtc ) rtv

(8)
(9)

IP

itct [( pte qte ptc qtc ) (1 rtv ) OMC qte ] rti

SC
R

Where rt v and rti respectively denote the rates of value-added tax and corporate
income tax.
(2) Price policy

NU

With regard to the price for renewable energy electricity, China government

MA

implements feed-in tariff (FIT) policy that is a fixed payout for unit electricity
generated from renewable energy. An adequate FIT, fixed for a longer period of time,

could promote the wide deployment of renewable energy (Schmidt et al., 2013). The

TE

FIT in China is composed by market price of electricity ptd and price subsidy Pbt

CE
P

(NDRC, 2006; Zhang et al., 2014), i.e.


pte ptd Pbt

(10)

AC

In this paper, we assume that once the investment is implemented, the level of
subsidy will be determined and kept constant for the entire lifetime of the project.
Chinas electricity pricing policy is transiting from a government-regulated
mechanism to a market-based one. Currently, power generation sector takes
sub-regional electricity pricing mechanism, and most of the provinces adopt the
baseline electricity price. Since the change of market price of electricity is related to
the change of NRE cost, we may model the change of market price of electricity by
(Fan and Zhu, 2010):
dptd d ptd dt d ptd dztd

(11)
13

ACCEPTED MANUSCRIPT
where ptd is the market price of electricity (RMB/kWh), dz td is the independent
increment of Wiener process dz td td dt , td is a normally distributed random

IP

variable with zero mean and unit standard deviation. d and d represent the drift

SC
R

rate and volatility parameters of market price of electricity, which are respectively
equal to the drift rate and volatility parameters of the NRE cost. The expected value of

p d is E[ Pt d ] P0d e d t .2

NU

There must be a phase-out mechanism of subsidy in the long run because the

MA

subsidy would be reduced with technical progress and the perfection of market system.
National Development and Reform Commission (NDRC), which is the main

decision-making institution of subsidy, ever declared that the price subsidy should be

TE

adjusted based on such factors as the change of investment cost and technological

CE
P

progress from time to time. Therefore, in this paper we assume that the price subsidy
is adjusted based on the change of the investment cost that often accounts for about

AC

80% of the total cost. Rigter and Vidican (2010) also derived the expected annual
declining rate of FIT based on solar PV system cost. By assuming that price
subsidy has a constant reduction rate before the deadline of subsidy, we derive the
following formula:

Pbt Pbt 1 e S , t t z

t tz
Pbt 0,

(12)

where s represents the constant reduction ratio equal to the drift rate of investment
2

There may be an interaction between CO2 price and market price of electricity in the long run. Thus this study

considers the correlation between CO2 price and market price of electricity.

cd denotes

the correlation

coefficient between them with dz dz dt , which can reflect what extent both stochastic variables
influence each other beyond their development trends (Abadie and Chamorro, 2008; Fan et al., 2013; Zhu and Fan,
2013).
c
t

d
t

cd

14

ACCEPTED MANUSCRIPT
cost, and t z stands for the deadline of subsidy.
There indeed exists a deadline after which the subsidy would be ceased. The

IP

deadline for price subsidy are determined by the comparison between the NRE cost

SC
R

and the renewable energy cost. When the unit NRE cost is greater than or equal to the
unit renewable energy cost, price subsidy will be ceased. The unit renewable energy

electricity generated.

1
(1 dr ) e r 1
It
e
q
[(1 dr ) e r ]L 1

(13)
(14)

UI t

MA

t z inf t ptf OMCt UIt

NU

cost can be obtained by dividing all the expenditures in the lifetime by the amount of

TE

where UI t denotes the unit investment cost (RMB/kWh) for the renewable energy
project invested in year t which can obtained by dividing the investment cost by the

CE
P

amount of renewable energy electricity.

3.4. Model solution

AC

In view of the complexity of project value function and the introduction of many
uncertain factors, a method, which consists of the backward dynamical programming
algorithm and the Least Squares Monte Carlo (LSMC) methods, is used to solve the
real options model. The backward dynamic programming algorithm begins from the
last decision point, working back to the starting decision point and comparing
exercising investment versus the continuation value (Dixit and Pindyck, 1994). The
Least Squares Monte Carlo method, which is based on the Monte Carlo simulation
and least squares regression method, is used to calculate the continuation value and
optimal investment rules (Longstaff and Schwartz, 2001; Zhu and Fan, 2011; Zhu,
15

ACCEPTED MANUSCRIPT
2012). Must point out is that the result of least-square regression is an efficient
unbiased estimator of the conditional expectation function and allows accurately

IP

estimating the optimal stopping-rule for the options. The Least Squares Monte Carlo

SC
R

method, which has advantages over other solving techniques for real options, is not
only efficient to value American financial options, but also can be extended to valuing
complex real investments with several embedded real options and multiple uncertain

NU

variables. The solution procedures in our study resemble some earlier studies such as

MA

Yang et al., (2008), Zhou et al., (2014), Shahnazari et al., (2014) and Pringles et al.,
(2015). The detailed solution procedure is given below.

Step 1. Let W and N respectively denote the numbers of simulation path and

TE

decision point per path, where N

tv
and t is the step size. Simulate the change
t

CE
P

paths of these uncertain factors based on their discrete approximations.


Step 2. For any path j , calculate the expected net present value of the project at

AC

each discrete decision point during the validity period of investment ( tv ) according to
Eq. (1).

Step 3. For any path j , the problem can be solved by dynamic programming
backward recursion. At the final observation date of the validity period ( t tv ),
conditional on not having invested in the previous periods, we can obtain
Ft , j max Vt , j , 0

(15)

1,V 0
t , j t , j
0, Otherwise

(16)

Where t , j 1and t , j 0 respectively denote immediate and delaying investments.

16

ACCEPTED MANUSCRIPT
Step 4. For every period 1 t tv , evaluate whether it is better to invest
immediately or delay the investment by comparing the expected net present value

IP

from immediate investment with the expected investment opportunity value from
delaying investment.3

(17)
(18)

NU

1,V e r Et Ft 1, j
t , j t , j
0, Otherwise

SC
R

Ft , j max Vt , j , e r Et [ Ft 1, j ]

Step 5. The recursion proceeds by rolling back in time and repeating the

MA

procedure until the exercise decisions at each possible exercise time along each path

has been determined. t j is the optimal investment timing in path j . The optimal

TE

investment timing ( t S ) is the one with highest frequency. The investment value is
computed by taking the average value over all the paths.

1
W

(e

r t j

Ft j , j )

1 t tv

(19)

j 1, 2,3......W

(20)

AC

CE
P

t j inf t t , j 1

It should be pointed out that the accuracy of the Monte Carlo method is heavily
dependent on the scale of simulation, i.e. the number of sampling points and

In Eq. (17), the conditional expected value of continuation ( e r Et [ Ft 1, j ] ) is estimated by least squares

regression method. The dependent variable is the investment value from year t 1 until the end of the project
lifetime under the assumption of optimal investment behavior. Since this study also consider the uncertainty in
investment cost, the independent variables used are the expected cumulative cash flow C t for the whole lifetime
and investment cost I t

if the investment decision is exercised in year

. The continuation functions

are e Et Ft 1 a0 a1C t a2 (C t ) a3 It a I , which is same with that in Shahnazari et al., (2014) and Pringles
r

2
4 t

et al., (2015). Longstaff and Schwartz (2001) have argued that the results are remarkably robust to the choice of
basis functions and the value of regression is unaffected by the correlation among the independent variables. In
order to ensure the rationality of results, we test various polynomials in this study by following Shahnazari et al.,
(2014), which shows the results may not be affected significantly in this study.
17

ACCEPTED MANUSCRIPT
simulation paths. Renewable energy investment is featured by large time span and
multiple influencing factors. If simulation trajectory contains a large number of

IP

sampling points, the computational complex could be greatly increased. In order to

SC
R

solve this problem, this paper applies the antithetic variable variance reduction
technique in the process of Monte Carlo simulation (Lavenberg and Welch, 1981).

NU

4. Empirical study

MA

The development of solar PV power generation in China plays an important role


in adjusting energy structure, controlling carbon dioxide emissions and building a

low-carbon society. At the end of 2014, the newly installed capacity reached 1.06

TE

million kW and the total installed capacity reached 2.805 million kW (National

CE
P

Energy Administration, 2014). Nevertheless, there is still a big gap between China
and other developed countries in the installed capacity and technological level which

AC

might be an indication of the great potential for solar PV power generation in China.
On the other hand, the trade friction between China and Europe in PV module had
serious impact on Chinese PV equipment manufacturing industry. These imply that
the expansion and investment of the solar PV power generation in China is inevitable.
In this section, we shall apply the models described in section 3 to evaluate the
feasibility and economy of the investment on solar PV power generation. The base
year is 2015 and the validity period of investment is 15 years (2016-2030). And the
step size is one year. For simplicity, we use the unit value, i.e. the value that unit solar
PV system (kW) brings, in the followings.
18

ACCEPTED MANUSCRIPT
4.1. Parameters estimation
This section shows the parameters used in our empirical study which are mainly

IP

collected or compiled from governmental documents and previous studies. For clarity,

SC
R

we differentiate the parameters for stochastic variables from others which are
respectively displayed in Tables 2 and 3. In the followings, we provide additional

Table 2
Parameters for stochastic variables
Variable

Description

Initial value

CO2 price

0.12
RMB/kWh

Drift rate of
CO2 price

0.02

Volatility rate of
CO2 price
NRE cost

pd

d
d

It

Obtained with the estimation in Zhu and Fan


(2011) and the average of CO2 price for the
period between June 2013 and August 2014 in
Shenzhens emission trading market.
Calculated with the data on CO2 prices in
Shenzhens emission trading market a.

D
TE

CE
P

Drift rate of NRE


cost
Volatility rate of
NRE cost
Market price of
electricity
Drift rate of market
price of electricity
Volatility rate of
market price
of electricity
Investment cost

AC

Parameter estimation process

MA

pc

pf

NU

descriptions on the determination of some parameters.

Drift rate of
investment cost

0.03
0.29
RMB/kWh
0.02

Calculated with the data on CO2 prices in


Shenzhens emission trading market b.
Use the average generation cost of coal-fired
electricity generation.
Taken from Zhou et al., (2014).

0.02

Taken from Zhou et al., (2014).

0.43
RMB/kWh
0.02

The average desulfurization electricity price in


China.
The same as the drift rate of NRE cost.

0.02

The same as the volatility rate of NRE cost.

12000
RMB/kW

Estimated with the data in Report on the


development of Chinas photovoltaic industry
development in 2013 (CREIA and CPIA,
2013) as well as the analyses in Zeng et al.,
(2012) and Zhang et al., (2013).
Calculated from the data on the change of
investment cost in China a.

-0.06

19

ACCEPTED MANUSCRIPT

cd

0.23

0.1

Taken from Zhu and Fan (2013).

t In( Pt / Pt 1 ) and = / t ,

NU

a. The drift rate is calculated by

Calculated from the data on the change of


investment cost in China b.
Calculated with the method in Zhu (2012) and
Fan et al. (2013).

IP

If

0.04

SC
R

Volatility rate of
investment cost
The correlation
coefficient between
investment cost of
renewable energy
and NRE cost
The correlation
between CO2 price
and market price of
electricity

where is the mean of

and t represents the length of time interval with year as the unit (Insley, 2002).
b. The volatility rate is calculated by S (1/ l 1) l ( )2 and
t

S / t , where

l 1 is the

MA

t 1

number of observations and Pt represents variable value at the end of one period (Insley, 2002).

Table 3

Variable

Descriptions

TE

Other key technical and economic parameters


Initial value

0.54
RMB/kWh

Unit production and


operation cost
The amount of
electricity by unit
solar PV system
Annual decline rate
of the unit
generating capacity
The amount of
reduced carbon
emission by unit
solar PV system

0.2
RMB/kWh
1500 kWh

rv

The rate of value


added tax

0.085

ri

The rate of

0.25

OMC

qe

dr

qc

AC

Pbt

CE
P

Unit price subsidy

Parameter estimation process


Calculated by Eq. (10) with the data from
Notice
on
promoting
the
healthy
development of solar PV industry by the role
of leverage (NDRC, 2013)
Taken from Lin and Wesseh Jr.(2013)
Use the average unit generating capacity of
the solar PV power generation system in
China
Taken from the Report on development of
Chinese photovoltaic industry development in
2013 (CREIA and CPIA, 2013).
Because we have convert the unit of CO2

0.02

1500kWh

price to RMB/kWh, the q becomes the same


e

as q . The emission factor is 0.997 kg/kWh.


Taken from Notice on the tax of PV power
generation project (Ministry of Finance and
State Administration of Taxation, 2013).
Taken from Corporate Income Tax Law of
20

ACCEPTED MANUSCRIPT

Lifetime of solar PV
system
The constant
reduction ratio of
subsidy

25

15
(2016-2030)

-0.06

It is equal to the drift rate of investment cost


because the subsidy is adjusted with the
change of the investment cost.

NU

The validity period


of investment

IP

tv

0.08

the Peoples Republic of China (State


Administration of Taxation, 2007).
Estimated from the data in Energy Research
Observer (http://www.chinaero.com.cn/)
The period when investors have right to
invest.

SC
R

corporate income
tax
Discount rate

MA

4.1.1. Parameters for stochastic variables


(1) Non-renewable energy cost

Since coal-fired power generation fully dominates thermal power generation in

TE

China, this paper takes the average cost of coal-fired power generation to represent

CE
P

NRE cost. Lin and Wesseh Jr (2013) estimated that the proportion of coal cost is
about 68% of NRE cost in China. Then we estimate the NRE cost

AC

by p f Pcoal (3.33 104 ) / 68%, where P coal denotes coal price (RMB/ton). In this
study, we use the monthly average coal prices in 2013 obtained from Qinhuangdao
Coal Net (http://www.cqcoal.com/) to compute the average coal price of Bohai rim
steam coal. The values of the drift and volatility rates for the NRE cost are directly
taken from Zhou et al. (2014).
(2) Market price of electricity
To make thermal power plant (mainly the coal-fired power plant) install
desulphurization

facilities,

Chinese

government

determines

price

for

desulfurization electricity. Currently, 90% of coal-fired power plants have been


21

ACCEPTED MANUSCRIPT
installed desulphurization facilities. Thus this paper uses desulfurization electricity
price to represent market price of electricity. The data were collected from the Notice

IP

on reducing the price of coal-fired electricity and electricity prices for industrial and

SC
R

commercial use in 2015 (NDRC, 2015). The pricing mechanism of electricity is


assumed to be a market-based system, which indicates the change of electricity price
depends on NRE cost, i.e. the values of drift and volatility rates for desulfurization

NU

electricity price are same with that for NRE cost.

MA

(3) CO2 price

In 2013, seven provinces/cities in China launched their pilot carbon emission

trading schemes which provide a new source of revenue for the investors. Shenzhen is

TE

the first city implementing carbon emission trading in China. In view of the

CE
P

estimation in Zhu and Fan (2011) and the the daily CO2 prices from June 2013 to
August 2014 in Shenzhen carbon trading market, we can calculate the average CO2

AC

price as well as the values of the drift and volatility rates of CO2 price.
(4) Investment cost
With the improvement of R&D capability as well as the growth of installed
capacity, the investment cost of solar PV power generation has been declining.
According to China photovoltaic development report (CREIA and CPIA, 2013) as
well as the estimations in Zeng et al., (2012) and Zhang et al., (2013), we obtain the
costs of PV modules over time (see Fig. 1). It has been estimated that PV modules
account for about 60% of the total investment cost. Using I I pm / 60% where

I pm refers to the cost of PV module, we then obtain the unit investment cost.
22

SC
R

IP

ACCEPTED MANUSCRIPT

NU

Fig. 1. Changes of the unit cost of PV modules

MA

4.1.2. Other technical and economic parameters

The NDRC of China issued the Notice on promoting the healthy development of

TE

solar PV industry by the role of leverage which provided the level of FIT for solar
PV power (NDRC, 2013). Based on these figures and the average desulfurization

CE
P

electricity price in China, we can obtain the unit price subsidy ( Pbt ) by Eq. (10).
According to the reports of Energy Research Observer (http://www.chinaero.com.cn/),

AC

in view of the rise of financial institutions financing consciousness and the


development of solar PV power generation, the investment return of solar PV system
has begun to decline. At present, the rate of investment return of solar PV system for
residential use decreased from 6%-8% to 4.4%-6.1%, and that of other PV power
generation system decreased from 8%-12% to 6.5%-8.2%. Considering the situation
of solar PV power generation in China, we assume that the discount rate of solar PV
power generation is 0.08. In addition, we assume that a solar PV system has a lifetime
of 25 years.

23

ACCEPTED MANUSCRIPT
4.2. Main results
The investment value and optimal investment timing for solar PV power

IP

generation in China are examined in this section. Since most of the provinces in China

SC
R

dont implement carbon emission trading scheme, we have also investigated the
potential effects of carbon emission trading on the investment value and optimal
investment timing. At first, it is necessary to examine the robustness of the model to

NU

the number of simulation paths (Pringles et al., 2015). Fig. 2 illustrates the statistical

MA

convergence of investment value depending on the number of simulation paths. It can


be observed that the solution is robust for a number of simulations greater than 7700.

Thus we perform 10000 simulations in our solution process. Figs. 3 to 6 show 100 out

TE

of the 10000 simulation paths of NRE cost, investment cost, desulfurization electricity

AC

CE
P

price and CO2 price over time.

Fig. 2. Statistical convergence of investment value

24

NU

SC
R

IP

ACCEPTED MANUSCRIPT

AC

CE
P

TE

MA

Fig. 3. Simulation paths of NRE cost

Fig. 4. Simulation paths of investment cost

Fig. 5. Simulation paths of desulfurization electricity price

25

NU

SC
R

IP

ACCEPTED MANUSCRIPT

Fig. 6. Simulation paths of CO2 price

MA

Table 4 shows the results when carbon emission trading is considered or not

considered. Without considering carbon emission trading, the investment value

TE

calculated by the NPV method is negative. When the real options (RO) method is
used, the investment value becomes 1185.3 RMB. Since the delay option value is

CE
P

1619.8RMB (1185.3+434.5=1619.8), the optimal decision is not to invest


immediately. Actually, the optimal investment time is the year 2028. These may

AC

explain why the solar PV power generation industry in China has not rapidly
developed from an investment perspective. When carbon emission trading is
considered, the investment value increases no matter whether the NPV method or RO
method is used. The investment value based on the NPV method is 1159.8 RMB,
which means immediate investment decision can be made. Using the real options
method, however, the investment value is 2019.5 RMB and the optimal investment
time becomes the year 2026, which means that the investment should be delayed. If
immediate investment decision is made, the delay option value 859.7 RMB
(2019.5-1159.8=859.7) would be abandoned.
26

ACCEPTED MANUSCRIPT
Comparing the results with and without carbon emission trading, we may find
that carbon emission trading influences the investment value and optimal investment

IP

timing, and then changes the investment decision. The value that carbon emission

SC
R

trading brings to investors with the NPV method (1594.3 RMB) is higher than that
with the RO method (834.2 RMB). And whether or not to consider carbon emission
trading, the subsidy value with RO is always less than that with NPV. These indicate

NU

that the significance of subsidy and carbon emission trading in promoting renewable

MA

energy investment is decreasing in the long run. Additionally subsidy value is always
higher than carbon emission trading value, which indicates carbon emission trading

cannot replace the role of subsidy on promoting investment for solar PV power

TE

generation project temporarily.

CE
P

In addition, we can also find the impact of using real options method relative to
the NPV approach by comparing the results calculated with these two methods. On

AC

one hand, since the determination of investment strategy with real options method
synthetically considers the investors managerial flexibility and the uncertainties in
the long-term changes of CO2 price, investment cost, the NRE cost and the subsidy
policy, the derived investment strategy, which may grasp the future investment
opportunities and make the best of new information, can bring the maximal
investment value to investors. In this case, investors are more willing to delay
investment decision, which is obviously not conductive to the growth of solar PV
power generation. On the other hand, the government can deprive the underlying
reasons that limit the further growth of solar PV power generation from an investment
27

ACCEPTED MANUSCRIPT
perspective. Thus the government can introduce more useful and appropriate policies
to minimize the possibility of policy risk and promote the investment in solar PV

power generation projects.

IP

Table 4

Methods

Investment
value

Delay
Option value

Without
carbon
trading

NPV

-434.5

RO

1185.3

With
carbon
trading

NPV

1159.8

RO

2019.5

Subsidy
value

Investment
decision

7409.5

Dont invest

1619.8

1042.3

Invest in 2028

1594.3

7409.5

Invest
immediately

834.2

1232.3

Invest in 2026

MA

859.7

TE

4.3. Sensitivity analysis

Carbon
trading
value

NU

Scenarios

SC
R

Results without and with carbon emission trading (unit: RMB/kW)

CE
P

It is well known that the investment in solar PV power generation project is


affected by many factors like unit generating capacity, subsidy level, market price of

AC

electricity, CO2 price and investment cost. It is meaningful to examine the sensitivity
of investment value and optimal investment timing with respect to these factors.
Based on this, we may acquire some useful findings on how to promote more
investments in solar PV power generation project.
(1) Unit generating capacity
Fig. 7 shows the changes of investment value and optimal investment timing
under different levels of unit generating capacity. The solar energy resource, i.e.
natural resource endowment, is mainly reflected in the unit generating capacity for
solar PV system. Currently, the unit generating capacity of solar system ranges from
28

ACCEPTED MANUSCRIPT
1000 kWh to 2100 kWh in China. As shown in Fig. 7, on one hand, the investors in
the regions with high unit generating capacity would get more benefit. The investment

IP

value increases from 663 RMB at the lowest capacity level to 5671.8 RMB at the

SC
R

highest capacity level with an average growth rate of 21.7%. On the other hand, the
optimal investment timing is shifted to an earlier year with the increase of unit
generating capacity. When unit generating capacity is increased to over 1900 kWh,

NU

the optimal investment time becomes the year 2016, which indicates that it may not

MA

be necessary to provide policy support to solar project investors in the regions with
such unit generating capacity. However, when unit generating capacity is under this

level, the policy support, which could play an important role in encouraging investors

AC

CE
P

TE

to invest on solar PV power generation projects as soon as possible, should be offered.

Fig. 7. The influence of unit generating capacity

The results described have some policy implications. On one hand, although
China is abundant with solar energy resources, the distribution of solar energy
resources is extremely uneven. Thus government can adjust the nationwide unified
29

ACCEPTED MANUSCRIPT
incentive policies, e.g. FIT and tax incentive, and make them be to be sub-regional,
which helps perfect market system and promote the investment on solar PV power

IP

generation project with minimum extra financial support. On the other hand, unit

SC
R

generating capacity, which is determined by natural resource endowment, could be


increased by improving generating efficiency of PV system. The investor should take
some measures e.g. strengthening R&D capability and improving daily management,

NU

to raise generating efficiency of PV system.

MA

(2) Subsidy level

Fig. 8 shows how investment value and optimal investment timing vary with the

change of subsidy level. The government may take different policies, e.g. subsidy and

TE

tax incentive, to influence investment value and optimal investment timing, and then

CE
P

affect the investors decisions. Compared with subsidy, the scope and strength of tax
incentive are relatively small, so we only consider subsidy here. It can be seen from

AC

Fig. 8 that the effect of subsidy is significant. On the one hand, the investment value
increases from 786 RMB to 6897 RMB with an average growth rate of 24.5%. On the
other hand, the optimal investment timing is shifted to an earlier year. When subsidy
increases to 0.7 RMB/kWh, the optimal investment timing will be advanced to the
year 2016. Currently, the average subsidy level for solar PV power generation in
China is about 0.54 RMB/kWh which is not high enough to attract immediate
investment of solar PV project obviously.

30

NU

SC
R

IP

ACCEPTED MANUSCRIPT

MA

Fig. 8. The influence of subsidy level

The above analysis provides a way to assess subsidy level from the perspective

TE

of investment. To make investor invest solar PV power generation immediately,


government should properly increase subsidy level now. Of course, the subsidy

CE
P

couldnt be increased too high because it is mainly compensated by additional fees


collected from consumers. If the subsidy is too high, the market system would be

AC

destroyed and the enthusiasm of consumers toward renewable energy electricity


would be reduced. Additionally, the subsidy level should be gradually reduced with
the improvement of market and technology year by year.
(3) Market price of electricity
Fig. 9 shows the investment value and optimal investment timing vary with the
changes of market price of electricity. The FIT of solar PV power generation in China
is based on market price of electricity, and different regions in China implement
different levels of market price of electricity. As shown in Fig. 9, on one hand, there is
a huge growth in investment value when market price of electricity is gradually raised.
31

ACCEPTED MANUSCRIPT
On the other hand, the optimal investment timing is advanced to an earlier year with
the increase of market price of electricity. When electricity price is increased to 0.8

IP

RMB/kWh, the optimal investment timing becomes the year 2016, which indicates

SC
R

that immediate investment decisions could be made. Although we cannot increase the
market price of electricity freely, we can provide higher subsidy for investors to

CE
P

TE

MA

NU

promote solar PV power generation investment.

AC

Fig. 9. The influence of market price of electricity

Fig. 10 shows the changes of investment value and optimal investment timing
under different volatility levels of electricity price. The electricity price volatility,
which mainly comes from the fluctuation of NRE cost, could lead to an increase in the
investment value with an average rate 18.2%. This is consistent with the main idea of
the real options theory. In addition, the optimal investment timing is delayed by the
increase of electricity price volatility. As long as the volatility rate is increased to 0.05,
the optimal investment timing could be postponed to the year 2030. Although the
volatility of electricity price helps increase investment value, it postpone the optimal
32

ACCEPTED MANUSCRIPT
investment timing. To solve negative effects caused by volatility of electricity price,
Governments can take two measures. First, since coal-fired power generation fully

IP

dominates thermal power generation in China, they can take measures, e.g. improving

SC
R

the legal system, regulating market management and guaranteeing supply, to maintain
the stability of coal price. Second, the reason that solar PV power generation
investment could be affected by volatility of market price of electricity is the

NU

disadvantage of current pricing mechanism of solar power. It is essential to design a

MA

pricing mechanism which is more suitable for solar power and could make solar

AC

CE
P

TE

power separate from market price of electricity.

Fig. 10. The influence of electricity price volatility

(4) CO2 price


Fig. 11 shows how the investment value and optimal investment timing vary with
the changes of CO2 price. In 2013, China has implemented the pilot carbon emission
trading scheme in seven provinces and cities. Carbon emission trading not only brings
new benefit resource for renewable energy investors but also deepens the uncertainty
33

ACCEPTED MANUSCRIPT
of investment environment. It can be seen from Fig. 11 that when CO2 price increases
from 0 to 0.48 RMB/kWh, the investment value increases from 1185.3 RMB to

IP

5486.5 RMB. And the optimal investment timing is also advanced to an earlier year.

SC
R

When CO2 price is increased to 0.48 RMB/kWh, the immediate investment decision
could be made in 2016. Carbon emission trading scheme can be recognized as an
incentive measures for renewable energy. With the implementation of carbon emission

NU

trading scheme, government may provide less payment to investor. Chinese

MA

government should establish a nationwide unified carbon emission trading market as


soon as possible. In our opinion, CO2 price would increase with the perfection of

national carbon emission policy, the deepening of civil understanding for low-carbon

TE

idea and the promotion of low-carbon technology. It can be imagined carbon emission

CE
P

trading scheme would provide more support for promoting investment of solar PV

AC

power generation in the future.

Fig. 11. The influence of CO2 price

34

ACCEPTED MANUSCRIPT
Fig. 12 displays the changes of investment value and the optimal investment
timing caused by the CO2 price volatility. The increase of CO2 price volatility could

IP

increase the investment value with an average growth rate 7.9%. The investment

SC
R

value increases from 1968.2 RMB when the volatility rate of CO2 price is 0 to 4145.4
RMB when the volatility rate of CO2 price is 0.1. However, the increase of CO2 price
volatility could postpone the optimal investment timing. Once the volatility rate of

NU

CO2 price is raised to 0.06, the optimal investment timing could be delayed to the year

MA

2030. Thus the volatility of CO2 price is positive related to investment value and
negative related to the optimal investment timing. Government should take measures,

e.g. perfecting market and policy system, regulating operation management and

TE

strengthening international cooperation with European and American countries that

CE
P

own rich experience in carbon emission trading, to maintain the stability of the
CO2 price. Only by these can we attract more immediate investment and minimize the

AC

negative effect of CO2 price volatility.

Fig. 12. The influence of CO2 price volatility


35

ACCEPTED MANUSCRIPT
(5) Investment cost
Fig. 13 shows how the investment value and optimal investment timing vary

IP

with the change of unit investment cost. Currently, solar PV power generation

SC
R

technology is still immature. High investment cost is still one of the most important
factors affecting solar PV project investment. As shown in Fig. 13, the investment
value decreases at an average rate 14.9% with the increase of investment cost, and the

NU

optimal investment timing is postponed to a later year. If unit investment cost could

MA

be reduced to 9000 RMB, the optimal investment timing could be advanced to the
year 2016. Clearly, the level of investment cost is not conductive to increase

investment value and advance optimal investment timing. Investment cost couldnt be

TE

fundamentally reduced by market control measures. The most basic way is to promote

CE
P

technological progress. Therefore, Chinese government should take some measures,


e.g. increasing the expenditure on R&D, establishing R&D investment guarantee

AC

mechanism, culturing high-quality R&D personnel and strengthening international


cooperation with countries owning advanced technology, to promote technological
progress.

36

NU

SC
R

IP

ACCEPTED MANUSCRIPT

MA

Fig. 13. The influence of investment cost

Fig. 14 shows the changes of investment value and optimal investment timing

TE

caused by the volatility of investment cost (technological volatility). According to real


options theory, the increase of investment cost volatility is not conductive to the

CE
P

gradual reduction of investment cost in the long run. In this case, the long-term
reduction trend of investment cost is slowed down and the cost advantage in the future

AC

is reduced. Therefore, the investment value is reduced from 2105.9 RMB when the
volatility rate of investment cost is 0 to the 1996 RMB when the volatility rate of
investment cost is 0.1 with an average growth rate 0.5%. At the same time, the
optimal investment timing is gradually advanced from the year 2027 to the year 2023
with the increase of investment cost volatility. Although the increase of investment
cost volatility can advance optimal investment timing, it is not conductive the
development of solar PV power generation because of its adverse effects on the
reduction of investment cost and the growth of investment value.

37

NU

SC
R

IP

ACCEPTED MANUSCRIPT

MA

Fig. 14.The influence of investment cost volatility

TE

5. Conclusions

Renewable energy utilization has been identified as one important way to

CE
P

address climate change, energy security and sustainable development in China.


Attracting renewable energy investment plays an important role in promoting the

AC

diffusion of renewable energy and the transformation of economic growth pattern.


Based on real options theory, this paper proposes a model for evaluating renewable
energy investment in China. The uncertainties in CO2 price, NRE cost, investment
cost of renewable energy and market price of electricity are all considered. A
phase-out mechanism of subsidy is built to reflect the long-term change of timing and
strength of policy support. The backward dynamic programming technique and Least
Squares Monte Carlo method are used to solve this model. Using the proposed model,
the investment value and optimal timing for renewable energy investment can be
evaluated. The effects of unit generating capacity, subsidy, market price of electricity,
38

ACCEPTED MANUSCRIPT
CO2 price and investment cost on investment value and optimal investment timing
could also be examined by sensitivity analysis.

IP

Our empirical analysis on evaluating Chinas solar PV power generation yields

SC
R

several interesting findings. First, we find that the current investment environment in
China is not positive enough to attract immediate investment, which could explain
why the development of solar PV power generation industry in China is not as rapid

NU

as people expected. Second, when carbon emission trading is considered, the

MA

investment value tends to increase substantially, and the optimal investment timing
could also be shifted to an earlier year. Third, the increase of unit generating capacity,

market price of electricity, CO2 price and subsidy could increase investment value and

TE

advance optimal investment timing, whereas the increase of investment cost plays an

CE
P

opposite role. The volatility in market price of electricity and CO2 price could delay
the optimal investment timing though it would increase investment value. The

AC

volatility of investment cost could slightly advance optimal investment timing and
reduce investment value.
These results have some important policy implications. First, China government
should increase subsidy so that the investment without delay becomes the optimal
strategy for the investors. Second, maintaining stability of market conditions,
including CO2 price and market price of electricity, are also important for attracting
immediate investment. It indicates that increasing subsidy should be implemented
together with maintaining the stability of market condition. Otherwise, the effects of
policies would be greatly reduced, and the financial burden of government would be
39

ACCEPTED MANUSCRIPT
increased seriously. Third, China government should take a variety of measures, e.g.
increasing the expenditure on R&D, establishing R&D investment guarantee

IP

mechanism, culturing high-quality R&D personnel and strengthening international

SC
R

cooperation, to promote technological progress. Forth, a nationwide unified carbon


emission trading market should be established as soon as possible. Additionally, the
market and policy system as well as operation management for carbon emission

NU

trading should be improved.

MA

While our proposed model considers the actual situations in China as much as
possible, it inevitably has some limitations in view of the complexity of renewable

energy investment. First, there could be other influencing factors that are not

TE

considered in our study. Second, the improvement of power generation efficiency

CE
P

resulting from technological progress is not considered in this paper. Third, due to the
limitation of data, we only use GBM to describe uncertain factors which may be

AC

insufficient. And the accurate values of drift rate and volatility rate are also difficult to
be estimated. Further researches could be carried out to improve the evaluation model
by addressing these limitations. Given the importance of other types of renewable
energy in China, it is also worthwhile applying our model to evaluate other renewable
energy projects by considering their special characteristics.

Acknowledgements
The authors gratefully acknowledge the financial support provided by the
National Natural Science Foundation of China (nos. 71573121, 71573119, 71273005
& 71373122), the Jiangsu Natural Science Foundation for Distinguished Young
40

ACCEPTED MANUSCRIPT
Scholar (no. BK20140038), the Ph.D. Programs Foundation of Ministry of Education
of China (no. 20123218110028), the 333 programme research project in Jiangsu

IP

province (no. BRA2015332), and the NUAA fundamental research fund (nos.

SC
R

NE2013104 & NJ20150034).

References

AC

CE
P

TE

MA

NU

Abadie, L.M., Chamorro, J.M., 2008. European CO2 Prices and carbon capture
investments. Energy Economics 30, 2992-3015.
Bockman, T., Fleten, S., Juliussen, E., Langhammer, H., Revdal, I., 2008. Investment
timing and optimal capacity choice for small hydropower projects. European
Journal of Operational Research 190, 255-267.
Boomsma, T.K., Meade, N., Fleten S.E., 2012. Renewable energy investments under
differeent support schemes: a real options approach. European Journal of
Operational Research 220, 225-237.
Chinese photovoltaic Industry Alliance (CPIA), China Resources and Energy
Association (CREIA). 2013. China photovoltaic development report. Chinese
photovoltaic Industry Alliance and China Resources and Energy Association,
Beijing (in Chinese).
Davis, G., Owens, B., 2003. Optimizing the level of renewable electric R&D
expenditures using real options analysis. Energy Policy 31, 1589-1608.
Detert, N., Kotani, K., 2013. Real option approach to renewable energy investments
in Mongolia. Energy Policy 56, 136-150.
Dixit, A.K., Pindyck, R.S., 1994. Investment under uncertainty. Princeton University
Press, Princeton, NJ.
Dixit, A.K., Pindyck, R.S., 1995. The options approach to capital investment. Harvard
Business Review 73, 105-115.
Fan, Y., Zhu, L., 2010. A real options based model and its application to Chinas
overseas oil investment decisions. Energy Economics 32, 627-637.
Fan, Y., Mo, J.L., Zhu, L., 2013. Evaluating coal bed methane investment in China
based on a real options model. Resource Policy 38: 50-59.
Fleten S.E., Maribu K.M., Wandensteen I., 2007. Optimal investment strategies in
decentralized renewable power generation under uncertainty. Energy 32, 803-815.
Fuss, S., Szolgayova, J., Obersteiner, M., 2008. Gusti M. Investment under market
and climate policy uncertainty. Applied Energy 85: 708-721.
Gollier, C., David, P., Franoise, T., Gilles W., 2005. Choice of nuclear power
investments under price uncertainty: Valuing modularity. Energy Economics 27,
667-685.
Hach, D., Spinler, S., 2016. Capacity payment impact on gas-fired generation
41

ACCEPTED MANUSCRIPT

AC

CE
P

TE

MA

NU

SC
R

IP

investments under rising renewable feed-inA real options analysis. Energy


Economics 53, 270-280.
Heydari, S., Ovenden, N., Siddiqui, A., 2012. A real options analysis of investment in
carbon capture and sequestration technology. Computational Management Science
9, 109-138.
Insley, M., 2002. A real options approach to the valuation of a forest investment.
Journal of Environmental Economics and Management 44, 471492.
Kjaerland, F., 2007. A real option analysis of investments in hydropower-the case of
Norway. Energy Policy 35, 5901-5908.
Kumbaroglu, G., Madlener, R., Demirel, M., 2008. A real options evaluation model
for the diffusion prospects of new renewable power generation technologies.
Energy Economics 30, 1882-1908.
Lavenberg, S.S., Welch, P.D., 1981. A perspective on the use of control variables to
increase the efficiency of Monte Carlo Simulations. Management Science 27,
322-335.
Lee, S.C., Shih, L.H., 2010. Renewable energy policy evaluation using real option
model - The case of Taiwan. Energy Economics 32, 67-78.
Lee, S.C., 2011. Using real option analysis for highly uncertain technology
investments: The case of wind energy technology. Renewable and Sustainable
Energy Review 15, 4443-450.
Lin, B.Q., Wesseh Jr, P.K., 2013. Valuing Chinese feed-in tariffs program for solar
power generation: A real options analysis. Renewable and Sustainable Energy
Review 28, 474-482.
Longstaff, F.A., Schwartz, E.S., 2001. Valuing American options by simulation: A
simple least square approach. The Review of Financial Studies 14, 113-147.
Manuel, M.B., Jose, BI., 2013. Valuation of projects for power generation with
renewable energy: A comparative study based on real regulatory options. Energy
Policy 55, 335-352.
Ministry of Finance and State Administration of Taxation, 2013. Notice on the tax of
PV power generation project. Ministry of Finance and State Administration of
Taxation, Beijing (in Chinese).
National Development and Reform Commission (NDRC), 2006. Trial Measures for
the management of renewable energy power generation prices and cost sharing.
NDRC Pricing Bureau, Beijing (in Chinese).
National Development and Reform Commission (NDRC), 2013. Notice on promoting
the healthy development of solar PV industry by the role of leverage. NDRC,
Beijing (in Chinese).
National Development and Reform Commission (NDRC). 2015. Notice on reducing
the price of coal-fired electricity and electricity prices for industrial and
commercial use in 2015. NDRC Pricing Bureau, Beijing (in Chinese).
National Energy Administration. 2014. Photovoltaic power generation statistics in
2014. Retrieved from http://www.nea.gov.cn/2015-03/09/c_134049519.htm.
Pringles, R., Olsina, F., Garces, F., 2015. Real option valuation of power transmission
investments by stochastic simulation. Energy Economics 47, 215-226.
42

ACCEPTED MANUSCRIPT

AC

CE
P

TE

MA

NU

SC
R

IP

Reuter, W.H., Szolgayova, J., Fuss, S., Obersteiner, M., 2012. Renewable energy
investment: Policy and market impacts. Applied Energy 97, 249-254.
Rigter, J., Vidican, G., 2010. Cost and optimal feed-in-tariff for small scale
photovoltaic system in China. Energy Policy 38, 6989-7000.
Shahnazari, M., McHugh, A., Maybee, B., 2014. Evaluation of power investment
decisions under uncertain carbon policy: A case study for converting coal fired
steam turbine to combined cycle gas turbine plants in Australia. Applied Energy
118, 271-279.
Schmidt, J., Lehecka, G., Gass, V., Schmid, E., 2013. Where the wind blows:
Assessing the effect of fixed and premium based feed-in tariffs on the spatial
diversification of wind turbines. Energy Economics 40, 269-276.
Siddiqui, A., Marnay, C., Wiser, R.H., 2007. Real options valuation of US federal
renewable energy research, development, demonstration, and deployment. Energy
Policy 35, 265-279.
Siddiqui, A., Fleten, S.E., 2010. How to proceed with competing alternative energy
technologies: a real options analysis. Energy Economics 32, 817-830.
Siddiqui, A., Tanaka, M., Chen, Y., 2016. Are targets for renewable portfolio
standards too low? The impacts of market structure on energy policy. European
Journal of Operational Research 250, 328-341.
State Administration of Taxation, 2007. Corporate Income Tax Law of the Peoples
Republic of China. State Administration of Taxation, Beijing (in Chinese).
Venetsanos, K., Angelopoulou, P., Tsoutsos, T., 2002. Renewable energy sources
project appraisal under uncertainty-The case of wind energy exploitation. Energy
Policy 30, 293-307.
Welling, A., 2016. The paradox effects of uncertainty and flexibility on investment in
renewable under governmental support. European Journal of Operational
Research 251, 1016-2018.
Wesseh Jr, P.K., Lin, B.Q., 2015. Renewable energy technologies as beacon of
cleaner production: a real options valuation analysis for Liberia. Journal of
Cleaner Production 90, 300-310.
Wesseh Jr, P.K., Lin, B.Q., 2016. A real options valuation of Chinese wind energy
technologies for power generation: do benefits from the feed-in tariffs outweigh
costs? Journal of Cleaner Production 112, 1591-1599.
Yang, M., Willian, B., Richard, B., Derek. B., Clarlie, C., Tom, W., 2008. Evaluating
the power investment options with uncertainty in climate policy. Energy
Economics 30, 1933-1950.
Zeng, M., Lu, W., Duan, J.H., Li, N., 2012, Study on the cost of solar photovoltaic
power generation using double-factors learning curve model. Modern Electric
Power 29(5), 72-76 (in Chinese).
Zhang, M.M., Zhou, D., Zhou, P., 2014. A real option model for renewable energy
policy evaluation with application to solar PV power generation in China.
Renewable and Sustainable Energy Reviews 40, 944-955.
Zhang, W., Liu, R.F., Liu, J., Pan, W.Y., Chen, T.E., 2013. Cost and trend prediction
model of photovoltaic power generation based on multi factor analysis. Shannxi
43

ACCEPTED MANUSCRIPT

AC

CE
P

TE

MA

NU

SC
R

IP

Electricity 11, 17-20 (in Chinese).


Zhou, W.J., Zhu, B., Chen, D.J., Zhao, F.X., Fei, W.Y., 2014. How policy choice
affects investment in low-carbon technology: The case of CO2 capture in indirect
coal liquefaction in China. Energy 73, 670-679.
Zhu, L., Fan, Y., 2011. A real options-based CCS investment evaluation model: Case
study of Chinas power generation sector. Applied Energy 88, 4320-4333.
Zhu, L., 2012. A simulation based real options approach for the investment evaluation
of nuclear power. Computer & Industrial Engineering 63, 585-593.
Zhu, L., Fan Y., 2013. Modelling the investment in carbon capture retrofits of
pulverized coal-fired plants. Energy 57, 66-75.

44

ACCEPTED MANUSCRIPT
Research Highlights
Propose real option model for evaluating renewable energy investment under
uncertainty

IP

Evaluate solar PV power generation in China by considering multiple uncertain


factors

AC

CE
P

TE

MA

NU

SC
R

Explore the dynamics of value and optimal investment timing by sensitivity


analysis

45

Das könnte Ihnen auch gefallen