Renewable energy technologies as beacon of cleaner production: a real options valuation analysis for Liberia

• Benefits provided by RETs R&D investment in Liberia are quantified.
• An Optimal solution suggests that RETs are economically attractive but funding is low.
• Some options value in terms of externalities and varying expenditures are compared.
• RETs hold a significant value which cannot be detected without external costs.
• Renewable power in Liberia can potentially reduce CO2 emission by about 13.9% by 2015.

The importance of energy consumption for growth and development calls for improved decision support for a sustainable energy transition. Given Africa's dependence on fossil fuels, the economic and environmental savings from research & development and deployment of renewable energy technologies may be substantial. Although the benefits of renewable energy technologies research & development funding may appear to be low assuming immediate deployment, the uncertainty in the non-renewable energy price and the flexibility over timing makes research & development program more appealing. This study develops different scenarios in order to quantify benefits provided by research & development funding for renewable power generation in Liberia by using real options pricing approach to estimate the value of renewable energy technologies while taking into account the uncertainty of fossil fuel prices and learning-by-doing in renewable energy technologies. The optimal solution shows that renewable energy technologies are economically attractive especially when external costs are internalized. However, annual research & development funding is low and should be raised significantly in order to guarantee the highest possible investment incentives with minimal expenditures. The study also hypothesizes that with the likelihood of renewable energy to replace non-renewable energy, renewable power use in Liberia can potentially reduce carbon dioxide emissions by approximately 13.9% by 2015 compared to the 2008 levels. The key insight provided by the real options analysis in this study is that, while renewable energy may have inherent limitations such as seasonality of supply, low energy content and capacity factor issues, they still hold a significant amount of value which can only be detected when externalities are internalized, thus underscoring the need for external costs-related policies.