Green investment under time-dependent subsidy retraction risk

Sala 6.4.30, FCUL, Lisboa

Por Carlos Oliveira (Cemapre, ISEG - School of Economics and Management).

Abstract: Driven by ambitious targets to reduce greenhouse gas emissions many countries have introduced support schemes to accelerate investments in renewable energy (RE). However, in recent years experience showed that, over time, retraction of support schemes becomes more likely. This has a severe effect on investment behavior. We split this presentation into two parts. In the first one, we address the general problem of making a managerial decision when the investment project is subsidized, which results in the resolution of an infinite-horizon optimal stopping problem of a switching diffusion driven by either a homogeneous or an inhomogeneous continuous-time Markov chain. Additionally, we provide a characterization of the value function (and optimal strategy) of the optimal stopping problem. Indeed, we can prove that the value function is the unique viscosity solution to a system of HJB equations. In the second part, we study, particularly, the effect of a potential subsidy retraction on investment timing in RE production capacity. Subsidy implemented in the form of fixed feed-in tariffs (FIT) is subject to potential future retraction. We explicitly account for the fact that the likelihood of policy retraction may change over time.

CEAUL - Centro de Estatística e Aplicações da Universidade de Lisboa