Computing Optimal Subsidies for Iranian Renewable Energy Investments using Real Options

For the valuation of the renewable energy investments, providing private investors with a financial incentive to accelerate their investment is a very significant issue. Financial subsidies are known by the majority of the people to be one of the most important drivers in renewable energy expansion and one of the main reasons which result in the development of any industry. In this paper, we present a new approach to compute the optimal subsidies over a specific time period by using the Binomial model for the Valuation of Real Options for Iranian renewable energy investments adjusted with Tax rate. We also apply linear regression method for predicting energy prices in order to allow an investor to exercise the relevant option over the timeline of the project at the optimal price. To evaluate our proposed approach, we apply it using predicted electricity prices for the next 16 years and electricity generation cost for Seid Abad, Damghan solar power plant. Our results in comparison of the base paper show that our proposed approach improves the error of subsidy’s computation by 1.57 percent since we used the predicted energy prices rather than the spot price as used before in real options’ valuation.

Keywords:

real options , subsidy , renewable energy investment , binomial metho