Impact of Policy Uncertainty on Renewable Energy Investment: Wind Power and PTC

Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets

“…12 Baldursson and von der Fehr (2007) study a model where governments with different environmental preferences alternate stochastically. 13 Barradale (2008) argues that while uncertainty associated with the federal production tax credit (PTC) has affected investment in wind power plant in the US, alternative implementations of the policy to support renewable energy may have higher perceived reliability.…”

“…It may be both positive or negative, depending upon the assumption about the expected difference between spot and forward prices. 10 Moreover, firms behave such that, at optimum, they all have the same subjective valuation of quota-price risk. This implies that Cov(U 0 ,r) EU 0 is identical across all firms; in other words, independently of their emission technology and allocation of quotas; trade on the forward markets leads all firms to positions so that the sign of the covariance between quota price and marginal utility of profits is the same.…”

Environmental Policy Design Characteristics and Technological Innovation

“…(For a recent paper which looks at the role of policy uncertainty on abatement investment decisions, rather than innovation per se, see Löfgren et al 2008. ) However, there is significant anecdotal evidence in the area of renewable power development to support the hypothesis that policy predictability has played at least as important a role as policy stringency (see Söderholm et al 2007, Wiser and Pickle 1998, Barradale 2008. For instance, Barradale (2008) argues that in the case of the United States, uncertainty concerning the annual renewal of the federal production tax credit (PTC), discouraged investment in renewable energy.…”

“…) However, there is significant anecdotal evidence in the area of renewable power development to support the hypothesis that policy predictability has played at least as important a role as policy stringency (see Söderholm et al 2007, Wiser and Pickle 1998, Barradale 2008. For instance, Barradale (2008) argues that in the case of the United States, uncertainty concerning the annual renewal of the federal production tax credit (PTC), discouraged investment in renewable energy. This finding is supported by anecdotal evidence presented in Wiser and Pickle (1998) concerning both wind and solar power.…”

“…A history of abrupt policy changes can discourage investment, and this is likely to be exacerbated by the perception that such instability is likely to continue. Interestingly, Barradale (2008) provides evidence that perceived uncertainty is correlated with instrument choice. Investors in the sector believed that renewable energy portfolio standards were more likely to stay in effect long enough to influence long-term investment decisions than depreciation rules, tax credits, feedin tariffs or production subsidies.…”