Why Has Wind Power Capacity Been Overinvested Under Uncertainty in China?

Abstract:

There are many uncertainties associated with the investment in wind power capacity in China. Nevertheless, wind capacity in China has been overinvested in the past several years and continues to be invested. This study attempts to explore the reasons why overinvestment has occurred under uncertainty. The analytical result implies that it would be optimal to invest more under uncertainty than in the corresponding risk-free world if an increase in the capital stock of wind capacity can significantly reduce the risk of wind abandonment. Since the majority of the investors are SOEs, it is very likely that the investors believe that higher wind capital stock can help to significantly reduce the risk, and thus have incentives to invest more under uncertainty. This belief is mainly backed up by the fact that SOEs play a special role in the economy. Therefore, overinvestment in wind capacity can hardly be avoided.

Keywords:

Windpowercapacity, Investment, Uncertainty

JELClassifications:

Q42, Q43, Q48

Citation as:

Xuemei Liu (2016). "Why Has Wind Power Capacity Been Overinvested Under Uncertainty in China?", Review of Economics & Finance, Vol.6, No.1, pp. 01-12.