The impact of different environmental premium mechanisms on investment decisions in photovoltaic power generation projects: evidence from China

The acceleration of the solar photovoltaic (PV) technology adoption has been widely recognized as a pivotal pathway for driving the energy transition. However, as Chinese electricity market reforms progress and Feed-in Tariff (FIT) subsidies are phased out, PV projects are increasingly relying on market mechanisms such as carbon trading, green certificate trading, and green power trading to obtain environmental premiums. This shift has made project investment decisions more complex. This study develops a real option (RO) model to examine the optimal investment decisions for PV power generation projects under four different scenarios: baseline, carbon trading, green certificate trading, and green power trading. The influence of key variable fluctuations, including investment costs, operating hours, and electricity prices, on investment decisions is further analysed across these scenarios. We find that, compared to a scenario without any environmental premium, carbon trading increases the project investment value by a factor of 4.48. Green power trading also positively impacts the project investment value, increasing it by 1.47 times, while advancing the optimal investment timing by one year. In contrast, green certificate trading has a relatively limited effect on investment decisions but exerts a more positive influence when green certificate prices rise. Furthermore, investment costs, operating hours, and electricity prices exhibit a threshold effect on investment decisions. Our research findings can assist investors and policymakers in better understanding the critical role of environmental premiums in the energy transition.