Investment under Policy Uncertainty
Investment under Policy Uncertainty
Special attention in this project will be given to risks stemming from the regulatory side related to climate change policies. We seek to learn about how extensions, revisions or termination of current government policies can affect investment behaviour in the long term.
We examine how perceived regulatory risk impacts the optimal investment decision. Policy uncertainty does not only contain revisions in the subsidy level, but also changes to other support mechanisms. This is especially important, since reducing policy uncertainty might be more effective than to increase the subsidy level.
The impact of different support schemes on the investment decision is investigated by Finjord et al. (2018) and Kozlova et al. (2019). The former investigates certificate trading schemes and likely changes, while the latter seeks to answer whether or not there is a policy design that is both effective in terms of technology development and cost efficient for the taxpayer. The results of Kozlova et al. (2019) indicate that a guaranteed rate of return is efficient in protecting against oversubsidizing private investors. However, this policy scheme provides questionable incentives for technology development in terms of both cost reduction and efficiency increase.
The ability to reach policy targets is further complicated when the firm has discretion over capacity as illustrated by Bigerna et al. (2019). This is because the policymaker cannot achieve both the desired timing and size with only one policy instrument. Hence the need for conditional or state-dependent subsidies.
In general, technological progress has lessened the need for renewable energy subsidies, which, in turn, has resulted in several subsidy revisions. Hence, the ability for policymakers to attract renewable energy investments crucially depend on the perceived remaining time of a subsidy scheme (Hagspiel et al., 2020). In the same line of work, we also find that the impact of policy uncertainty is mitigated by the likelihood of technological progress (Sendstad & Chronopoulos, 2020). Thus, our projects contribute to the understanding of how policies should be designed and how technological and policy uncertainty interacts to impact investment decisions.
- Bigerna, S., Wen, X., Hagspiel, V., & Kort, P. M. (2019). Green electricity investments: Environmental target and the optimal subsidy. European Journal of Operational Research, 279(2), 635-644.
- Brøndbo, H.K., A. Storebø, S.-E. Fleten and T.K. Boomsma (2017). Electricity capacity expansion in a Cournot duopoly. 14th International Conference on the European Energy Market (EEM), Dresden, 1-6.
- Finjord, F. , V. Hagspiel, M. Lavrutich and M. Tangen (2018). The impact of the Norwegian-Swedish green certificate scheme on the investment behavior: A wind energy case study. Energy Policy, Volume 123 373-389.
- Hagspiel, V., Nunes, C., Oliveira, C., & Portela, M. (2020). Green investment under time-dependent subsidy retraction risk. Journal of Economic Dynamics and Control, 103936.
- Hustveit, M., Frogner, J. S., & Fleten, S. E. (2017). Tradable green certificates for renewable support: The role of expectations and uncertainty. Energy, 141, 1717-1727.
- Kozlova, M., Fleten, S. E., & Hagspiel, V. (2019). Investment timing and capacity choice under rate-of-return regulation for renewable energy support. Energy, 174, 591-601.
- Sendstad, L. H., & Chronopoulos, M. (2020). Sequential investment in renewable energy technologies under policy uncertainty. Energy Policy, 137, 111152.