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Renewable energy investment under stochastic interest rate with regime-switching volatility

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  • Detemple, Jérôme
  • Kitapbayev, Yerkin
  • Reppen, A. Max

Abstract

We examine the impact of the interest rate and its characteristics, such as long run mean and instantaneous variance risk (VR), on renewable energy investments in the power sector. The model has stochastic electricity price, stochastic interest rate, and variance regime switches. We show that an increase in the interest rate, while generally increasing the value of a power project, can have a non-monotone effect if the subsidy is sufficiently large. VR increases (reduces) the project value in the high variance regime, if the subsidy is sufficiently large (low). Under a fixed price contract, value declines and it is optimal to delay investment following an increase in the interest rate. The model helps to explain the US offshore industry experience in 2023.

Suggested Citation

  • Detemple, Jérôme & Kitapbayev, Yerkin & Reppen, A. Max, 2024. "Renewable energy investment under stochastic interest rate with regime-switching volatility," Energy Economics, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324004420
    DOI: 10.1016/j.eneco.2024.107734
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    More about this item

    Keywords

    Green energy; Investment; Real options; Interest rate uncertainty;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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