A real options valuation of Chinese wind energy technologies for power generation: do benefits from the feed-in tariffs outweigh costs?

• Published in: Journal of cleaner production Vol. 112; pp. 1591 - 1599
• Main Authors: Wesseh, Presley K., Lin, Boqiang
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 20.01.2016
• Subjects: carbon dioxide; China; energy; energy costs; greenhouse gas emissions; issues and policy; Policy benefit; power generation; Real options; Renewable energy technologies; tariffs; viability; wind; Wind power; China; Renewable energy technologies; Wind power; Real options; Policy benefit; China
• ISSN: 0959-6526; 1879-1786
• DOI: 10.1016/j.jclepro.2015.04.083

In order to assess the viability of wind energy projects in China, this paper takes a real options approach by accounting for flexibility over deployment of the technology in response to a stochastic non-renewable energy cost. The difference between the latter and the R&D-enhanced cost of renewable energy operation may be thought of as a benefit from using wind. On the other hand, the Chinese government provides feed-in tariffs to encourage further adoption of wind, which should be included as a cost. This work, thus, shows that there is substantial options value to China's wind energy program, which is bolstered if the cost of carbon dioxide emissions is internalized. Moreover, by varying the rate of feed-in tariffs, the model may be used to show plausible ranges for the feed-in tariffs, which could be a useful policy insight. Furthermore, the study hypothesizes that with the likelihood of renewable energy to replace non-renewable energy, wind power in China can potentially reduce CO2 emissions by approximately 6.4% by 2020 comparing to the 2005 level and highlights the significant role of wind power in China's emission targets and energy security. This is a relevant paper, especially given the importance of a sustainable energy transition for China. More generally, using the real options approach from a policy perspective could provide insights about the viability of renewable energy programs and robustness of feed-in tariffs rates. •Viability of wind energy projects in China is assessed using real options.•Chinese feed-in tariffs to encourage wind adoption presents a cost.•Results show huge options value to wind program, bolstered by including externalities.•Showing plausible ranges for varying feed-in tariffs presents useful policy insights.•Wind power in China can potentially reduce CO2 emissions by about 6.4% by 2020.