A public policy aid for bioenergy investment: Case study of failed plants

Recent failures of renewable energy plants have raised concerns regarding government's role in providing credit subsidies and have harmed the long-run development of renewable energy. The major reason for these failures lies in government loan appraisers not having a model that addresses these root causes and instead relying on traditional net present value (NPV) analysis. What is required is a model representing entrepreneurs' investment decision processes when faced with uncertainty, irreversibility, and flexibility that characterize renewable energy investments. The aim is to develop such a model with a real options analysis (ROA) criterion as the foundation. A case study comparing NPV with ROA decisions for 50 and 100 million gallon ethanol plants is used as a basis for future development of a template government loan appraisers can use for evaluating the feasibility of renewable energy investments.

► The role net present value (NPV) analysis is investigated in failed ethanol plants.
► NPV optimal entry and exit margins are compared to real options approach (ROA).
► The entry–exit margin gap is smaller under the NPV than it is under the ROA.
► Government policymakers employing NPV tend to react aggressively to margin stimuli.