A real options model for renewable energy investment with application to solar photovoltaic power generation in China

This paper proposes a real options model for evaluating renewable energy investment by considering uncertain factors such as CO2 price, non-renewable energy cost, investment cost and market price of electricity. A phase-out mechanism is built into the model to reflect the long-term changes of subsidy policy. We apply the proposed model to empirically evaluate the investment value and optimal timing for solar photovoltaic power generation in China. Our empirical results show that the current investment environment in China may not be able to attract immediate investment, while the development of carbon market helps advance the optimal investment time. A sensitivity analysis is conducted to investigate the dynamics of investment value and optimal timing under the changes of unit generating capacity, subsidy level, market price of electricity, CO2 price and investment cost. It is found that the high investment cost and the volatility of electricity and CO2 prices, are not conducive to attract immediate investment. Instead, increasing the level of subsidy, promoting technological progress and maintaining the stability of market are useful to stimulate investment. •Propose real option model for evaluating renewable energy investment under uncertainty•Evaluate solar PV power generation in China by considering multiple uncertain factors•Explore the dynamics of value and optimal investment timing by sensitivity analysis