Modeling business risk: The effect of regulatory revision on renewable energy investment – The Iberian case

Highlights

Regulatory changes are expected to be rather similar in both countries.

Five post regulatory change scenarios are considered in Portuguese context.

We apply NPV and real option approaches to evaluate an investment under above mentioned scenarios.

The delay option is considered due to regulatory risk.

Abstract

Regulatory risk is commonly accepted as one of the most important risks in the energy business, particularly renewable energy. With the recent changes (in June 2014) in the Spanish regulatory framework, investors’ returns might be significantly affected. Further, as the Spanish and the Portuguese electricity systems are integrated, a change in the regulatory framework of Spain might also affect renewable energy policies and investment strategies in Portugal. This study is a projection of business risk under the assumption that the Portuguese government may adopt similar regulatory changes. Monte Carlo method is used to simulate the data under different scenarios. Applying Net Present Value and Real Options approaches, a 50 MW wind power project is evaluated. This study has considered the delay option to study five regulatory scenarios. A higher value for the delay option suggests that a high financial loss is expected if new wind power projects of similar capacity are implemented under the new regulatory framework.

Keywords

  • Risk modeling;
  • Investment modeling;
  • Renewable energy business risk;
  • Regulation revision;
  • Regulation uncertainty;
  • Iberian market;
  • Renewable energy project

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