This paper proposes a real options model for evaluating renewable energy investment by considering uncertain factors such as CO2 price, non-renewable energy cost, investment cost and market price of electricity. A phase-out mechanism is built into the model to reflect the long-term changes of subsidy policy. We apply the proposed model to empirically evaluate the investment value and optimal timing for solar photovoltaic power generation in Ch. This paper proposes a real options model for evaluating renewable energy investment by considering uncertain factors such as CO2 price, non-renewable energy cost, investment cost and market price of electricity. A phase-out mechanism is built into the model to reflect the long-term changes of subsidy policy. We apply the proposed model to empirically evaluate the investment value and optimal timing for solar photovoltaic power generation in China. Our empirical results show that the current investment environment in China may not be able to attract immediate investment, while the development of carbon market helps advance the optimal investment time. A sensitivity analysis is conducted to investigate the dynamics of investment value and optimal timing under the changes of unit generating capacity, subsidy level, market price of electricity, CO2 price and investment cost. It is found that the high investment cost and the volatility of electricity and CO2 prices, are not conducive to attract immediate investment. Instead, increasing the level of subsidy, promoting technological progress and maintaining the stability of market are useful to stimulate investment.••••Propose real option model for evaluating renewable energy investment under uncertainty••Evaluate solar PV power generation in China by considering multiple uncertain factors••Explore the dynamics of value and optimal investment timing by sensitivity analysisRenewable energySolar PV power generationUncertaintyReal optionsMany countries have realized the importance of renewable energy development and utilization in reducing the dependence on fossil energy and mitigating climate change. As the world largest carbon dioxide (CO2) emitter, China has made substantial efforts in promoting the development and utilization of renewable energy. Although renewable energy only accounted for about 10% of total primary energy consumption in 2014, in its “Middle and Long Term Plan for Renewable Energy Development”, China government has set the target of increasing the share of renewable energy consumption to 15% by 2020.Renewable energy investment, which plays an important role in promoting the utilization of renewable energy, has four key features. First, the investment is partially or completely irreversible. Second, the investment costs of renewable electricity generation projects are often higher than fossil fuel fired electricity generation projects because of technological immaturity. Third, renewable energy investment is confronted with many uncertain factors such as market development, technological progress and supporting policies. Forth, the investment timing for renewable energy projects is discretionary (Yang et al., 2008, Fan et al., 2013). If the return of a renewable energy project is comparable to the risk it takes or the investment can be postponed to acquire more knowledge about the risk, profit-seeking investors may do the investmen. Real options method has been used to evaluate renewable energy investment since earlier 2000s. Table 1 provides a summary of earlier relevant studies on renewable energy investment with real options method, which are classified by the five attributes such as country/region, energy type, solution method, uncertain factors and purpose of study.Table 1. Summary of studies on renewable energy investment using real options method.Note: PDE—partial differential equation; DP—dynamic programming; FIT—feed-in tariff; RPS—renewable portfolio standard.As shown in Table 1, earlier studies were mainly carried out for developed countries such as the US, Greece, Germany, France and Norway. Recently, several researchers began to examine renewable energy investment in Asian countries such as China (Lin and Wesseh, 2013, Zhang et al., 2014, Wesseh and Lin, 2016). In terms of energy type, while some researchers treated renewable energy as a whole, others analyzed the investment for different types of renewable energy such as wind and hydropower. It should be pointed out that there are not many studies focusing on solar power. While China govern.
