Investment in hydropower plants under uncertainty
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Investment in renewable energy production in Norway is since the 1st of January 2012 granted subsidies through a market for elcertificates common with Sweden. The underlying purpose is to reach the Norwegian and Swedish government's goal of adding 26.4 TWh of renewable generation capacity within 2020. This thesis considers how the introduction of elcertificates has affected the expectations of investors investing in small hydropower plants in Norway. Data from 214 licenses granted from 2001 including 2008 are used to replicate the investor's decision problem. By taking a real options approach, investment timing and uncertainty in electricity and subsidy prices are considered. Solving for the required subsidy level for investment to be optimal, one can study the implicit expectation towards the elcertificates at the realized timing of investment. The analytical solution shows that the average investor expected subsidies in line with prices in the Swedish elcertificate market according to the optimal decision rule. Additionally, real options theory seems to better explain investment behaviour compared to the NPV rule, as investors were found to respond to subsidy uncertainty according to our predictions.