Valuing Chinese feed-in tariffs program for solar power generation: A real options analysis

Combustion of coal accounts for about 75% of total power generation in China. The global call for CO2 emissions reduction, exposure to oil risks and their bearing on energy security, require China to properly determine its future energy policies. This study has attempted to quantify the benefits provided by current Chinese feed-in tariff (FIT) policy for solar power generation by using real option pricing approach to estimate the value of solar energy technologies in the face of uncertain fossil fuel prices and learning effects in solar technologies. The optimal solution as calculated renders the government′s FIT effort as a sufficient mechanism to make solar an economically competitive alternative in China′s energy future. In addition, options values in terms of internalized external costs and variation in the level of FIT are also compared. Simulation results reveal the options value to be significantly greater when external costs are internalized. Nevertheless, it was found that the average current FIT level is non-optimal, and should be increased to between 1.5 RMB/KWh and 1.7 RMB/KWh to ensure maximum investment incentive with minimal government expenditures. Furthermore, given solar to be an attractive alternative for the future, his study hypothesizes that solar power use in China can potentially reduce CO2 emissions by approximately 1.3% by 2020 compared to the 2005 level.