Using real options to study the impact of capacity additions and investment expenditures in renewable energies in India

We calculate the overall policy value of installed capacity additions and investment expenditures in wind and solar energies in India. Recent increases in capacity additions and investments by both the public and private sectors alongwith government support schemes have made these energies more competitive with traditional fuels like coal in generating electricity. We use a two-factor learning curve to model the decline in prices of wind and solar energies. Employing a real options approach with global coal prices as the stochastic variable we find the overall value of promotion policies in renewables to be sufficiently large. Reducing the share of coal in electricity generation is one of India’s stated goals and a high trigger price of coal suggests continued efforts of capacity additions and investment expenditures in the solar and wind sectors are needed for some time in India.