A critical analysis of recent advances in the techniques for the evaluation of renewable energy projects

• Review the latest development of appraisal methods in renewable energy investment.
• Discuss the limitations of the existing approaches.
• Limitations include ignoring behavioural uncertainty and contract breakup threat.
• Apply the notion of risk-bearing capacity to address the limitations.
• Use an illustrative example to demonstrate how the new method works.

Renewable energy investment is an integral part of sustainable economic development agenda. Whereas some important advances have been made in recent years to assist project investors in making better use of financial risk management instruments and taking into consideration real options embedded in renewable energy projects, this research asserts that, owing to failure to consider both behavioural uncertainty and the limit of risk transfer, these approaches may still lead to a biased evaluation result. Drawing on a novel concept of “risk-bearing capacity”, the research suggests developing a new approach whereby investors can incorporate the choice of financial protection measures into investment evaluation in a coherent way.