Green Certificates and Investments in Small Hydro Power Plants

Investment in renewable energy production in Norway is since the 1st of January 2012 subsidized through a market for green certificates common with Sweden. We study how the prospects of a future green certificates scheme affected the expectations of investors investing in small hydropower plants in Norway. Data from 214 licenses granted from 2001 including 2008 are used to replicate the investor's decision problem. We derive the implied expected subsidies at the time the investment decisions were made assuming investors acted in accordance with a traditional net present value rule or in accordance with a real options rule. In the latter, investors will only invest if the net present value is at least as high as the value of postponing the investment decision. We find empirical support for investors acting in accordance with real options theory indicating that they value the opportunity to optimally time their investment. Moreover, professional investors value the opportunity to wait higher than do non-professional investors; i.e. the implied subsidies when investing are higher for these investors