Real Options Valuation of Wind Energy Investments in Norway and Sweden: A Case Study
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We use the real options approach to examine the investment opportunity of a private investor, both from a Norwegian and Swedish perspective, that holds an option to invest in a renewable energy project. Norway and Sweden have implemented a common green certificate subsidy scheme, where the regulations differ between the countries. We evaluate the option values and optimal investment behaviour using a wind energy case study, and analyze how investments are affected by uncertain prices and the regulatory differences. We find that, in 2017, the investment opportunities of both investors are similar, and the regulations have a low effect on the option values and investment behaviour. At the start of 2021, there is a strong incentive to invest for both investors, as subsidies will decrease if delaying the investment. At the end of 2021, a Norwegian investor faces a deadline, and will invest for a larger range of prices. The Swedish investor, however, has a considerably more valuable investment opportunity. Further, we find that the investment opportunities are highly sensitive to the drift and volatility of the electricity price, in addition to the discount rate. When considering a Swedish policy extension to the support scheme, we find that this will delay investments in Sweden considerably. Furthermore, we find that a possible collapse in the green certificate price, reduces the values of the options. This causes the investors to delay investments for a longer period, where the Swedish investor is most affected. Being able to learn about the likelihood of a price collapse leads to a small increase in the values of the options. This increases the likelihood of investments before the Norwegian deadline for both investors. We further find that the possibility to learn is slightly more valuable for the Norwegian investor.