Understanding the indirect costs of renewable energy using real option theory

We examine the economic efficiency of incentive mechanisms used to promote renewable energy as a policy in the European Union (EU). We evaluate the financial performance of renewable investments and employ real option theory to model and analyze their impact in the EU’s liberalized electricity markets. Our analysis covers key European countries and uses five years of the most recent historic electricity price data from 2009 to consider sensitivities in key parameters. As renewable energy policies are presented as public goods to address environmental concerns, we explain how the financial performance of these policies can strike a balance between social costs and private benefits. We consider how markets may incorporate renewable energy without major adjustments. For other regions, our research offers lessons on effectiveness and cost-efficiency in designing renewables incentive schemes