Subsidies for Renewable Energy Facilities under Uncertainty

Dean Paxson, Roger Adkins

Research output: Contribution to journalArticlepeer-review


We derive the optimal investment timing and real option value for a facility with price and quantity uncertainty, where there might be a government subsidy proportional to production quantity. Where the subsidy is proportional to the multiplication of the price and quantity, dimensionality can be reduced. Alternatively, we provide quasi-analytical solutions for different quantity subsidy arrangements: permanent (policy is certain); retractable; suddenly permanent; and suddenly retractable. Whether policy uncertainty acts as a disincentive for early investment depends on the type of subsidy arrangement. The greatest incentive for early investment is an actual retractable subsidy, a ‘flighty bird in hand’.
Original languageEnglish
Article numberdoi 10.1111
Pages (from-to)222-259
JournalManchester School
Issue number2
Early online date20 Feb 2015
Publication statusPublished - 2016


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