Research On Strategic Investment Of Renewable Energy In Power Enterprises Under Incentive Policies

The threat of global climate change, high fuel import dependence, and rapidly rising electricity demand levels in recent years have intensified the quest for renewable energy. This in turn has increased the need for policy-makers to promote electricity generation from renewable energy sources for a more sustainable development. The incentive policies of renewable energy technologies become one of the strategic goals of energy policy-makers in many countries after the targets set in 1997 for emission reductions in the Kyoto Protocol. To promote the development of renewable energy in China, government proposed Renewable Energy Act and enforced a variety of incentive policies, including fixed feed-in tariff, auction, tax credit, and investment and price subsidy, etc.The investment from power enterprises is of vital importance to develop renewable energy. One of the key tasks of policy-makers is therefore to create incentives to encourage the necessary investments to be undertaken. However, the translation of policies into clear investment signals is not straightforward. Uncertainty associated with policies has often been raised by enterprises in discussion with governments and regulators as a cause for a potential barrier to investment. The uncertainty causes potential alterations in investment incentive and finally affects investment decision-making. On the other hand, the research on decision-making of investment in renewable energy is rather limited. Lack of theoretical guide in this area tilts investment choice to those suggested by simple deterministic and expected NPV analysis rather than exact evaluation, which may affect the development of renewable energy.In view of the above background, the research focuses more on the general effects of uncertain future policies that could alter investor's expectations and decisions in order to deduce the optimal investment rule in respect of renewable energy over the whole possible investment horizon. The objective of this dissertation is to present the results of quantifying uncertainty in the process of policy evolution by applying real options approach (ROA), through its effects on the behaviour and decision of investors. Considering strategic interaction of potential investors, the game theory is incorporated into ROA to provide a modelling approach for decision-makers in power enterprises to calculate the real value and optimal timing of investment. The main contents of this dissertation are organised into following eight chapters.Chapter 1, introduction. This chapter discusses the background and theoretical and practical values of the research. The structure and main contents of the dissertation are proposed, followed by the research objectives and methodology. Some innovative contributions of the work are presented towards the end of the section.Chapter 2, literature review. This chapter aims to provide an overview of the research that has been undertaken in the areas of strategic management, traditional investment decision-making theory, ROA and incentive regulation theory. Then the shortages in existing literature are pointed out for future discussion.Chapter 3, overview and comparative analysis of renewable energy incentive policies. The necessity of policy enforcement is presented based on an analysis of the risks of developing renewable energy. A range of policies proposed and developed in western countries are discussed in detail in respect of content, strengths and weaknesses, followed by a comparison of different policy designs in terms of their effects. The policy practice in China is finally reviewed and evaluated in the section.Chapter 4, analytical framework of renewable energy strategic investment under incentive policies. Four crucial characteristics of investment in the power sector are indicated, followed by some factors to be considered for decision-making. The effect mechanism of renewable energy incentive policies on investment decision is explored. Then game theory is incorporated into ROA to provide a basic analytical framework for the research.Chapter 5, research on the two-stage real options of renewable energy strategic investment under fixed feed-in tariff policy (FIT). The characteristics of electricity market and uncertainties under FIT are argued, and the options in the two stages of project planning and construction are then discussed. In this section, a two-stage real options model accounting for the flexibility over the timing of investment is proposed, in order to deduce the value of options and the optimal investment timing. Finally, using a Monte Carlo simulation, the work concludes a number of optimal investment rules under FIT.Chapter 6, research on the two-stage real options game of renewable energy strategic investment.under auction policy. The characteristics of electricity market and uncertainties under auction policy are discussed, and the options in the stages of R&D and bid are presented. A two-stage real options game model is proposed in order to demonstrate the bidding game and identify the investment threshold, and deduce backwardly the optimal R&D timing for power enterprises. A case study of the wind farm in Zhejiang Province is conducted to empirically verify the model, and some results are then described in the section.Chapter 7, research on the two-stage real options game of renewable energy strategic investment under renewables portfolio standards (RPS). Appraising the characteristics of electricity market and uncertainties under RPS and factoring them into the investment decision, a two-stage real options game model is put forward in this section. This model aims to evaluate the value of renewable energy project being considered for investment on the basis of quantity and price game respectively, and identify the optimal timing. The quantitative valuation is extended to use in those diversified investing power enterprises as well. Finally the Monte Carlo simulation is used to verify the model and deduce the optimal investment rules under RPS.Chapter 8, conclusions and research prospects. This final section contains the insights and implications of the research results, and the areas for further research.A number of innovative contributions in the dissertation can be summarised as follows.1. Establishing a basic framework of analysing strategic investment in renewable energy under incentive policies. In this work, we focus more on the general effects of uncertainty in and from policies that could alter renewable energy investor's expectations and decisions, and consider strategic response of potential investors to propose the analytical framework. The uncertainty and changes of competitive environment resulting from the renewable energy policies which may affect investor's decisions are fully discussed. The framework provides a strategic thinking for power enterprises in renewable energy investment under various incentive policies.2. Proposing mathematical real options game models of decision making for renewable energy strategic investment under different incentive policies. In this work, a series of two-stage real options game models are developed in order to deduce the optimal renewable energy investment rules, and run separately for three different scenarios:fixed feed-in tariff, auction and renewables portfolio standards. The potential effects of uncertainty on investment behaviour are quantified in the models by applying ROA and then factored into the cash-flow analysis of the renewable energy project being considered for investment, and game theory is also incorporated to assess the project value. Besides, the models demonstrate a useful quantification technique for investment evaluation, as they effectively allow the value of different investment stages to be modelled and calculated separately or in combination over the whole possible investment horizon. The modelling approach described in this dissertation provides a model for understanding investment decision triggers as policy scenarios evolve with uncertainties, and can be extended to analyse the effects of other sources of risk.3. Simulating the dynamic decision-making process of power enterprises in renewable energy strategic investment. Using the data collected in the research, the work incorporates Monte Carlo simulation and options game models to enable an evaluation of renewable energy investment behaviour and decision that account for various individual uncertainties in the context of three different incentive policies. This work provides a useful basis for governments and regulatory institutions in renewable energy policy formulation and implementation.4. Exploring the effect mechanism of renewable energy incentive policies on investment decision-making in power enterprises. The dissertation evaluates the uncertainty associated with renewable energy policies as an exogenous risk factor facing investment decision-makers in power enterprises. The effects of renewable energy policies on investment decision are explored and modelled through a range of stochastic price assumption scenarios and two-stage dynamic programming. This type of quantitative analysis can provide useful insights for renewable energy investors and policy-makers. The quantitative results presented in the work therefore address the question of what additional level of investment incentives might be required to overcome the effects of uncertainty.