Costs, Benefits, and Security of Supply in Bio-Electricity Feed-in Tariff Systems: A Real Options Approach

Renewable energy subsidies in the form of feed-in tariffs implicitly give investors the possibility to shut down their renewable power plants temporarily or permanently. This real option is especially valuable for electricity from biomass, an important pillar of European renewable energy goals. The shut-down option is similar to a put on agricultural commodity prices, while the costs and benefits to the public are similar to underwriting a binary put. We apply our results to biogas plants subsidized by Germany’s renewable energy policies and find that the option’s share in investment value is sizable, while costs and benefits to the public are much lower than would be assessed by DCF measures but benefits decrease more. Simulations using the historic measure P show that there is a high likelihood that biogas will not contribute to a stable electricity supply or political goals of the share of renewable power sources. We derive suggestions for an improved feed-in legislation for electricity from