Real option analysis on renewable energy policy for cellulosic ethanol plants in china

Hui Zhao., Pairote Sattayatham and Bhusana Premanode

Based on real option analysis, this paper investigates the impact of renewable energy policy for cellulosic ethanol plants in China with two construction stages and double stochastic variables under government and investors perspectives. Considering the gasoline and corn cob prices as the independent stochastic variables, this paper constructs a quadrinomial lattice tree. Based on the results of the decision value function at each scenario, it indicates that at the current subsidy level, both government and investors can get more revenues if the stage-1 construction has been completed. With the subsidy increasing, the initial decision value decreases under government perspective but increases under investors perspective. However, if there exits no by-product, the initial decision values are negative when all the construction stages are completed immediately for both government and investors. Meanwhile, the value increases obviously if only the stage-1 construction is completed. Reducing subsidy can ease the loss of government and cut down the benefit of investors. Improving the technology to find more high value by-products is the effective way to enhance the revenues of cellulosic ethanol plant.

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