Evaluating India’s energy targets using real options approach

Abstract

Purpose The authors formulate India’s energy targets in light of pushing for renewable energy sources and reducing the dependence on imported coal. Share of imported coal in electricity generation has been approximately 10 per cent in recent years. While investments in renewables have grown in recent years as seen in installed capacities, coal-fired electricity generation has grown because of rising demand for electricity. The purpose of this study is to find a planner solution when high global coal prices force greater investments in renewable energies. Design/methodology/approach The authors use real options approach where global coal prices are the stochastic variable. They present an optimal stopping problem and solving the problem backward, the revenues from continuing with the current energy generation mix and those from replacing imported coal with wind and solar is compared for each period. Findings The “trigger price” for global coal prices when it is optimal for the social planner to invest in additional wind and solar capacities is found. Trigger prices is the threshold when investment must be undertaken whatever be the future evolution of coal prices; this gives the problem a value of waiting. India cannot afford to wait to invest if faced with strict short-term goals. Originality/value The work evaluates India’s domestic targets and its Paris Agreement goals in light of using more of wind and sun and replacing imported coal. Various data sources (government reports, research articles) are consulted to predict shares of electricity from various sources in future and the authors find the operating costs and the investment costs associated with switching to renewables.