Economic Feasibility Analysis of Renewable Energy Investment: A Cost-Benefit Model under Carbon Pricing Mechanisms

Junxi Zhuo

doi:10.6981/FEM.202609_7(9).0013

Authors

Junxi Zhuo College of Economics and Management, Shandong Agricultural University, Tai'an, 271018, China

DOI:

https://doi.org/10.6981/FEM.202609_7(9).0013

Keywords:

Renewable Energy Investment; Carbon Pricing; Cost-benefit Analysis; Net Present Value; Levelized Cost of Energy; Carbon Cost Savings; Technology Heterogeneity.

Abstract

We build a cost-benefit model to assess the economic viability of renewable energy investment under carbon pricing mechanisms, drawing on 540 project-level observations from solar photovoltaic, onshore wind and offshore wind technologies in 30 jurisdictions over the period 2019 to 2024. The analytical approach integrates levelized cost of energy analysis with carbon-adjusted net present value estimation and includes technology-specific learning curves as well as carbon cost savings as a mediation pathway. Using baseline regressions with year and technology fixed effects, it is seen that an additional carbon price of 1 USD per metric ton of CO2 equivalent is associated with a 4.32 USD/kilowatt increase in the project’s net present value, which is found to be robust to various assumptions on the outcome measure and the discount rate between 5 and 9 percent. Carbon cost savings - the avoided emission costs compared with a fossil fuel generation baseline - are found to mediate the pricing effect using the Baron and Kenny approach by reducing the carbon price coefficient from 4.316 to 2.294. The technology heterogeneity is evident in the scenario analysis, when the carbon price is low (25 USD/Mt), medium (75 USD/Mt) and high (150 USD/Mt). Solar PV projects turn into positive NPVs in all three scenarios and have the highest marginal sensitivity of 5.82 USD/kW/USD$ increase in carbon price, followed by onshore wind (4.16) and offshore wind (3.58). Due to the fact that offshore wind is more capital intensive than more mature technologies, a carbon price of over ~40USD/MT is required for it to become cost-competitive.

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