Carbon pricing, policy design, and investment timing: An integrated NPV and real options analysis of wind energy in Türkiye

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Chinese explanation / 中文解读

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Original abstract

Context—Renewable energy investments are increasingly shaped not only by technological progress and market dynamics but also by the design and stability of policy instruments. In Türkiye, renewable energy support mechanisms such as the Renewable Energy Support Mechanism (YEKDEM) and domestic component incentives aim to improve investment attractiveness; however, the absence of an established carbon pricing mechanism creates significant uncertainty regarding long-term investment feasibility. This policy gap makes it essential to evaluate how support mechanisms and potential carbon pricing jointly influence renewable energy investment decisions.Objective—This study aims to analyze the financial feasibility and optimal investment timing of wind energy projects in Türkiye under 2025 market conditions by evaluating the combined effects of renewable energy support mechanisms, carbon pricing, and investment uncertainty. The study also seeks to identify the threshold carbon price required for investment feasibility and provide policy-relevant insights for a future Emissions Trading System (ETS) in Türkiye.Method—An integrated Net Present Value (NPV) and real options framework was employed. First, the financial feasibility of a representative onshore wind power plant was evaluated using NPV analysis under three policy scenarios: (i) YEKDEM only, (ii) YEKDEM with domestic component support, and (iii) YEKDEM with additional carbon credit revenues under low, medium, and high carbon price assumptions. Second, a Cox–Ross–Rubinstein binomial real options model was applied to evaluate optimal investment timing under uncertainty by incorporating deferment flexibility.Results—The results show that YEKDEM and domestic component incentives improve project revenues but remain insufficient to ensure financial feasibility, as NPV remains negative in both scenarios. When carbon credit revenues are included, investment feasibility improves significantly with increasing carbon prices. The project becomes financially viable only under the high carbon price scenario (60 USD/tCO₂), where NPV reaches approximately 15.9 million TRY. The analysis further identifies a break-even carbon price of approximately 52 USD/tCO₂. Real options analysis indicates that even under negative NPV conditions, investors can rationally postpone investment and gain additional option value. The optimal deferment period decreases systematically as policy support and carbon prices strengthen.Conclusion—The findings demonstrate that carbon pricing plays a critical role in improving renewable energy investment feasibility in Türkiye and should be designed as a complementary mechanism to existing support schemes rather than a standalone policy tool. The study highlights that static financial metrics alone cannot fully explain investment behavior under uncertainty and that real options analysis provides a more realistic framework for policy-sensitive energy investment decisions.

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