Generating a framework to facilitate decision making in renewable energy investments

https://doi.org/10.1016/j.rser.2018.07.035Get rights and content

Highlights

  • Economic, technical, and environmental & social factors govern investment decision.

  • Interactions exist between economic, technical, and environmental & social factors.

  • Economic cluster is found to be the most significant cluster in RE decision making.

  • The most significant element is determined as policies and regulations.

Abstract

The role of energy sector is quite crucial due to its economic, social, and political implications. World energy consumption has increased significantly with the growth of world population and gross domestic product throughout the history. There has been considerable increase in the renewable energy investments recently. However, conventional fossil fuels are still the primary source of energy generation of the world. The major objective of this study is to create a framework to support decision making process in renewable energy investments. For this purpose, main criteria that influence the decisions of the investors are determined based on an extensive literature survey and investigation of sector practice. The relevant criteria are categorized under three groups as technical, economic, and environmental & social. Then, interrelations between the criteria are identified and analytic network process method is applied to obtain the importance weights. Based on the findings of this research, economic criteria such as policies and regulations, availability of funds, and investment cost are found to be the most significant factors in the decision process of renewable energy investments. Research findings are expected to help (i) the investors assess the competencies of their investments and (ii) the governments shape their policies in line with the needs of renewable energy investments in order to increase the use of renewable energy.

Introduction

In the last few decades, focus of energy sector has shifted to renewable energy (RE). This pattern could be explained by the negative effects of mostly used traditional fossil fuel consuming power plants. Climate change and air pollution are two negative outcomes of the traditional method [1]. Furthermore, since fossil fuels are finite energy sources, they are expected to last one day in the future. Consequently, agendas of most of the governments are filled with RE investments and related incentives. On the other hand, fossil fuels are still the major source of energy in the world. Fig. 1 shows the breakdown of electricity generation by fuel type in 2014. It is observed from the figure that fossil fuels account for two third of the generated electricity. Such a situation demonstrates the dominance of fossil fuels in generating electricity.

Considering the environmental outcomes and limited available reserves, relying on fossil fuels is not a feasible strategy for both sustainability and environmental issues. This is an undeniable fact that sector participants including the governments have understood the situation and started to reshape their strategies in order to increase the RE share in total energy supply. RE investments have therefore accelerated recently. The breakdown of new capacity additions in 2015 could be seen in Fig. 2. Renewables excluding large scaled hydro power plants are forming 53% of the total additions. Wind Power Plants (WPP) comprise 62 gigawatt (GW) of those renewable investments while Solar Power Plants (SPP) have a share of 56 GW [3].

Environmental awareness, technological developments, and government policies have accelerated the usage of RE sources in the energy sector. Environmental awareness has been increased all around the world through academic articles, publications of public and private institutions and governments. There have also been tremendous technological developments in the field of RE technologies. Considerable improvements have been reached in efficiency, investment cost including initial and operation and maintenance (O&M) costs, and reliability [4]. Developments in research and development (R&D) field have made RE technologies more competitive against fuel based technologies in terms of the cost. Government policies can affect both indicators mentioned above and also further the sales prices for RE projects. There are some certain policies that are applied all around the world. Support of R&D investments, investment incentives such as low interest guarantees, tax incentives such as accelerated depreciation opportunities, tariff incentives like feed-in tariffs (FITs), and tradable certificates are some of them [5].

RE investors need to make choices between different technologies with different cost structures and production uncertainties [6]. It is of prime importance for them to select the ones providing the best return for a given level of risk [7]. However, making an appropriate selection among several alternatives is not an easy task. RE investment decisions depend mainly on a number of dimensions such as economic, environmental, and technical aspects. Thus, there is a great necessity for developing tools that support the decisions of potential RE investors.

The aim of this study is to generate a model to assist RE investment decisions. With this objective in mind, a comprehensive literature survey is conducted and sector practice is investigated to determine the main criteria that affect the decision process. The relevant criteria are classified under three categories as technical, economic, and environmental & social. Besides, interrelations between the criteria are identified. In order to attain the importance weights, analytic network process method is utilized.

Section snippets

Literature review

Investment decision criteria of RE projects have been investigated in several studies. Among the earliest studies, Wiser and Pickle [8] examined the financing process for RE projects and estimated the impact of financing terms on the energy costs. They reviewed five case studies of renewable energy policies and concluded that ignorance and misunderstanding of the project development and financing processes were the key reasons why renewable energy technology policies had not been effective. It

Research methodology

It is evident that investment decisions and related criteria do not depend only on the investor itself. RE investments require different participants such as investors, public authorities, lenders, technology suppliers, and technical staff to come together. For instance, since public policies and regulations are two important factors affecting the RE investments, those investments must be realized in coordination with the public authorities starting from the planning phase. Lenders are also

Results and discussion

According to the importance weights, it is observed that the economic cluster is the most influential cluster. It is followed by technical and environmental & social clusters. Importance weight of economic cluster is by far higher than the others. Since, economic return is the most important factor for all investors, this result was expected. We can also see a significant difference between the clusters technical and environmental & social. This can be explained by the fact that technical

Conclusion

Energy has a significant role in today's economic and social world. Due to the rising environmental concerns, RE investments have become inevitable all around the world. The main purpose of this research is to create a framework to support decision making process in RE investments. For this purpose, an extensive literature survey was conducted and meetings were organized with the energy sector experts including investors, lenders and technical consultants. A total of 23 criteria were determined

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Declarations of interest

None.

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