Optimal timing and capacity choice under the rate-of-return renewable energy support

Abstract

This article presents a stylized renewable energy (RE) investment project profitability analysis under a rate-of-return RE support type. We use a dynamic programming approach to value the real options. While the method is widely used in RE policy analysis, the rate-of-return support is presented in this framework for the first time. We formulate a stylized RE project under the rate-of-return regulation in the dynamic programming framework and solve for optimal investment timing and project size. • A stylized renewable energy (RE) investment under rate-of-return RE support is presented in the dynamic programming framework; • The system is solved for optimal capacity choice in the presence of the electricity price uncertainty. We also comment on the optimal investment timing, which turns out to be a now-or-never decision in this case.

Keywords

• Dynamic programming
• Real options
• Renewable energy policy
• Investment timing
• Capacity choice