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The value of renewable energy research and development investments with default consideration

Sim, Jaehun, Kim, Chae-Soo
Renewable energy 2019 v.143 pp. 530-539
Monte Carlo method, alternative energy industry, carbon, carbon dioxide, commercialization, emissions, energy, environmental impact, fossil fuels, models, prices, research and development, risk, uncertainty, uncertainty analysis, wastes, water power
As one of the largest energy-consumption nations, the South Korean government has recently invested in the deployment and commercialization of various renewable energy sources to reduce the environmental impacts of fossil fuel-based energy sources. Thus, in order to investigate the likelihood the government will default on the investment of research and development (R&D) in the renewable energy industry, this study utilizes a system-dynamics approach to develop a default-prediction model based on the Black-Scholes-Merton model, while investigating the interactions of uncertainty factors and the impacts of the probability of default (PD) on renewable energy production and carbon emission reduction amounts from 2017 to 2030. The results of this study indicate that R&D investments in marine energy (2.64%) has a high default risk, while the use of waste energy (46.95 B kg CO2) results in the largest reduction in the amount of carbon emissions. In addition, the results show that the PD of the R&D investment decreases when the uncertainty of the unit price, the R&D investment amount, and the renewable energy production amount have increased. Further, the results of a Monte Carlo simulation indicate that the PD of the R&D investment is not greatly affected by the risk-free interest rate.