Evaluating Investments in Renewable Energy Under Policy Risks
37 Pages Posted: 18 Oct 2015 Last revised: 12 May 2016
Date Written: May 2016
The considerable amount of required infrastructure and renewable energy investments expected in the forthcoming years also implies an increasingly relevant contribution of private and institutional investors. In this context, especially regulatory and policy risks have been shown to play a major role for investors when evaluating investments in renewable energy and should thus also be taken into account in risk assessment and when deriving risk-return profiles. In this paper, we provide a stochastic model framework in order to quantify policy risks associated with renewable energy investments (e.g. a retrospective reduction of a feed-in tariff), thereby also taking into account energy price risk, resource risk, and inflation risk. The model is illustrated by means of simulations and scenario analyses and applied to identify potential country diversification effects within a portfolio of onshore wind parks.
Keywords: Renewable energy, wind parks, policy risk, diversification, value at risk
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