Wind Power Investment under Uncertainty and Simultaneous Electricity and Green Certificate Equilibrium

Abstract

This paper introduces the combination of an equilibrium model for electricity- and certificate supply and demand of and real options valuation theory for evaluating the effectiveness of support schemes applied in the electricity market. We study how a green certificate scheme affects investment behavior for a potential wind farm. The investor is assumed to take into account the micro-structural properties of supply and demand through explicitly considering a simultaneous equilibrium in the green certificate market and the electricity market. The source of uncertainty in the model lies in the investment cost, which is described as a mean reverting process. At any time the investor possesses an option to develop the wind farm or postpone the decision. Regarding future revenues as deterministic and the investment cost as a one-time expense at exercise, we derive a real options-based rule for the optimal investment timing. Using the Swedish/Norwegian green certificate market as foundation for calibration and focusing on support scheme efficiency, the resulting renewable power development rates are compared to the case where there are no subsidies, as well as the case of a feed-in tariff system. We highlight policy insights from investment aspects that interact with the simultaneous equilibrium in the electricity and green certificate markets. We conclude that for the specific goal of boosting investment in production capacity for renewable energy, and within the framework constructed by the assumptions made in this model, the feed-in tariff will perform better than the green certificate scheme.