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The Influence of Policy Regime Risks on Investments in Innovative Energy Technology

This paper dissects the ways in which policy regime risks influence decisions over innovative energy technology investments. We apply compound real options methodology to evaluate the investment in a virtual power plant platform and distributed energy resource (DER) assets in view of volatile electricity market prices and an uncertain future electricity market design. The analysis reveals two aspects of policy regime risks: a policy content effect relating to actual market dynamics resulting from a (new) policy regime, and a policy process effect relating to (uncertainty about) the speed and probability of a regime change. The paper underlines the importance of predictable policymaking to stimulate risky investment. It further details the need to account for technology-specific investment responses to different policy regimes and risks, caused by different degrees of market versus subsidy exposure and differences between platform versus non-platform technologies.

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JEL Codes: Q42: Alternative Energy Sources, D47: Market Design, D81: Criteria for Decision-Making under Risk and Uncertainty, Q41: Energy: Demand and Supply; Prices, G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity

Keywords: Policy uncertainty, Virtual power plant, Distributed energy, Real option

DOI: 10.5547/01956574.37.SI2.egar

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Published in Volume 37, Bollino-Madlener Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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