Renewable and Sustainable Energy Reviews 73 (2017) 782–788

Contents lists available at ScienceDirect

Renewable and Sustainable Energy Reviews

journal homepage: www.elsevier.com/locate/rser

Renewable energy investment risk evaluation model based on system MARK

dynamics
⁎
Ximei Liua, , Ming Zengb
a
Smart Grid and Renewable Energy Research Group, Electric Power Research Institution, State Grid JiBei Electric Power Company, China
b
School of Economics and Management, North China Electric Power University, Beijing, China

A R T I C L E I N F O A BS T RAC T

Keywords: China currently faces the dual constraints of developing low-carbon economy and enabling sustainable energy
Renewable energy utilization. It is an inevitable choice for the strategic transformation of economy development and energy
Investment risk evaluation development in China to develop renewable energy. Since renewable energy is a capital-and tech-intensive
System dynamics industry, which requires a large amount of investment and a high level of technology innovation. Investors face
many different uncertainties when making a renewable energy project investment decision. Therefore, it has
great significance for the development of renewable energy to evaluate the risks in renewable energy investment
projects, and then make the best investment decisions. Based on above background, the topic of renewable
energy investment risk is studied in this paper using system dynamics method. In the first part of the work,
three main risks in renewable energy investment, technical risk, policy risk and market risk, have been
discussed, and then causal loop diagram of investment risk and risk assessment model have been established by
the system dynamics method, after that a numerical example was given in the last part of the paper. The result
of the numerical example indicated that policy risk was the main factor affecting the investment in the early
development stage, while policy risk and technology risk decline gradually, market risk has gradually become
the main uncertainty affecting the investment in the mature development stage.

1. Introduction in to the renewable energy projects. Therefore, in order to ensure a

Along with the continuous development of economy and society,
China's energy demand continues to grow rapidly. Energy and envir-
onment problems have become increasingly prominent, which signify
that accelerating the development and utilization of renewable energy
has become the only way to response the serious energy and environ-
ment crisis [1]. Prompted by “Renewable Energy Law” and related
policies, renewable energy has developed rapidly in China. Wind
energy is now entering large-scale development stage, and solar energy
is rapidly developing. The scale of renewable energy industry is
expanding with continuous technology advancement. By 2013, the
installed capacity of renewable energy comes to 380 million kW, and an
increase of 18% compared with 2012, accounting for 30% of total
installed capacity [2]. China's renewable energy generating capacity
reached 1 trillion kW·h in 2013, accounting for about 20% of the
national electricity generation [3]. At present, more and more investors
begin to invest in renewable energy projects, while uncertainties in
investments have become increasingly prominent [4]. These uncer-
tainties caused by complex investment environment could bring failure
reasonable return on investment, it is necessary to identify various
kinds of risks in renewable energy investment activities. The basic task
of risk identification is to identify and understand the types of risk, as
well as the possible serious consequences. Without risk identification, it
is impossible to know what type of risk exists, what would happen
during the process of projects implementation, and may lose the
opportunity to control or address these risks timely and effectively
Table 1.
In order to identify the risks in renewable energy investment,
scholars have made a lot of research work, of which focused on risk
source, assessment and response of renewable energy investments [5–
9]. Research on risk sources indicate that policy risk, technology risk,
economic risk, security risk and other related factors exist in renewable
energy investment. Risk evaluation of wind power project was studied
in Literature [10], investment risk evaluation index system based on
Life Cycle Theory, as well as TOPSIS evaluation model based on Gray
Relation Grade, has been constructed, the author also examined the
rationality and feasibility of the model through a numerical example.
Decision variable of business risk is analyzed based on beta model in

⁎
Corresponding author.
E-mail address: meimeiliu126@163.com (X. Liu).

http://dx.doi.org/10.1016/j.rser.2017.02.019
Received 12 April 2016; Received in revised form 22 November 2016; Accepted 3 February 2017
Available online 08 February 2017
1364-0321/ © 2017 Elsevier Ltd. All rights reserved.
X. Liu, M. Zeng Renewable and Sustainable Energy Reviews 73 (2017) 782–788

Table 1
Incentives policy in different development stages of renewable energy.

Development stage Policy Institutional incentive policies Fiscal and taxation Investment and financing incentive
objective incentive policies policies

Research and Support Renewable Energy Law; National special subsidies; Policy loans;
development Strategic development planning; Set up special research and Preferential commercial loan;
stage development fund;
Technology Development Plan. Accelerated depreciation; Policy investment.
Investment credit policy;
Income tax relief;
financial discount policy;
Financial subsidies to
producers;
Government procurement
policy;

Primary Support Feed-in tariff policy; Fiscal subsidies; Policy loans;

development
stage Bidding system; Technology and equipment Preferential policies of the commercial loan;
Gradual introduction of the quota system; tariff reduction; Policy investment;

Gradual introduction of green certificate Tax reduction policy; Securities or equity financing;
transactions. Issue bonds.

Large-scale Support Part of the implementation of feed-in tariff policy Gradual reduction of Gradual elimination of Gradually policy-related
development and competitive-bidding system; Implementation financial subsidies and tax loan, preferential policies of the commercial
stage of quota system and green certificate transactions; incentives. loan, policy investment, securities or equity
Gradual introduction of fair competition in financing, and issue bonds.
energy market.

Mature stage Regulate Gradual elimination of bidding and quota system; Marketization Marketization
Implementation of fair competition in the energy
market.

Literature [11]. Literature [12] used a multiple risk factors method to
quantify market risk of wind power. Literature [13] used NPV and
Monte Carlo Simulation to calculate the risk of renewable energy
investments. Integrating a variety of risk assessment methods, Relative
difference degree of fuzzy risk assessment model based on interval
variable weight was established in Literature [14], and the wind power
project in Inner Mongolia has been taken as an example to verify the
practicability of this model.
From the literature analysis on investment risk of renewable
energy, it is known that some shortcomings were existed in traditional
risk analysis methods. First, the traditional risk analysis methods don’t
consider the dynamically change of risks in the whole project cycle and
the influence on the system risk affected by feedback loops. Secondly,
the interaction among different risks is not considered in traditional
risk analysis method. Finally, the traditional risk management methods
are mostly based on qualitative analysis and research. Based on the
analysis above, System Dynamics Theory will be introduced to establish
renewable energy investment risk model in this paper. Then, taking a
wind power project for example, the investment risks of the project
were identified and evaluated with VENSIM software. System
Dynamics model constructed in this paper can help investors to
evaluate risks in the early stage of the project, as well as to provide
decision-making reference for investors and governments.
The paper is arranged in the following way: in Section 2 methodol-
ogy used in the paper is introduced. Section 3 presents the renewable
energy investment risk model structure and its general description
based on System Dynamics Model. Section 4 introduces the case
analysis. Section 6 discusses the major conclusions.
2. Methodology
2.1. System dynamics theory
System Dynamics is a subject about information feedback proposed
by MIT's famous professor Jay W Forrester in the 1960s. It is an
analysis method of combining qualitative analysis, quantitative analy-
sis and synthesis reasoning, which is regarded as an effective ap-
proaches and methods for nonlinear complex systems and scientific
decision-making. System dynamics is a methodology for studying and
managing complex feedback systems, such as one finds in business and
other social systems. In fact it has been used to address practically
every sort of feedback system. While the word system has been applied
to all sorts of situations, feedback is the differentiating descriptor here.
Feedback refers to the situation of A affecting B and B in turn affecting
A perhaps through a chain of causes and effects. One cannot study the
link between A and B and, independently, the link between B and A and
predict how the system will behave. So, if we want to get the correct
results, the only way is study of the whole system as a feedback system.
System dynamics modeling is useful for understanding the under-
lying behavior of complex systems over time, taking into account time
delays and feedback loops [15]. The dynamic relationship among the
structure, function and behavior could be studied through the estab-
lishment of the system dynamics model, using DYNAMO simulation
language or VENSIM software.
2.2. System dynamics used in renewable energy investment risk
analysis
The complexity and dynamics of renewable energy investment
risk make accurate risk evaluation difficult if using a simple static
model or a comprehensive evaluation method, while System
dynamics is an approach to understanding the behavior of complex
systems over time, which meet the requirements of risk assessment
for renewable energy investment. It deals with internal feedback
loops and time delays that affect the behavior of the entire system.
What makes using system dynamics different from other ap-
proaches to studying complex systems is the use of feedback loops
and stocks and flows. These elements help describe how even

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X. Liu, M. Zeng
seemingly simple systems display baffling nonlinearity. 1
Renewable energy investment risk evaluation is a complex system.
In this system, sub-risk (technology risk, policy risk and market risk)
affecting renewable energy investment risk and renewable energy
investment risk in turn affecting sub-risk through a chain of causes
and effects. For the sub-risk, technology risk, policy risk and market
risk affecting each other through a chain of causes and effects.
Consequently, we cannot study the link among technology risk, policy
risk, market risk and renewable energy investment risk and, indepen-
dently, the link among technology risk, policy risk, market risk and
renewable energy investment risk and predict how the system will
behave. Only the study of the whole renewable energy investment risk
system as a feedback system will lead to correct results.
3. Investment risk model of renewable energy based on
system dynamics theory
3.1. Analysis of renewable energy investment risk
Renewable energy power generation projects possess the character-
istics of randomness, volatility and intermittent, which bring signifi-
cant uncertainties to investment activity, and may lead to investors’
huge losses. Therefore, in order to promote renewable energy indus-
try's investment, it is necessary to evaluate renewable energy projects’
investment risk. On the one hand, potential risks and their character-
istics could be identified by classifying and analyzing various potential
and unconspicuous uncertainties facing by investment activity in
renewable energy, which could find out the types of risks and their
serious consequences. On the other hand, through risk analysis,
investors can understand which risks existed in specific projects, which
risks are likely to occur, and then make scientific and rational
investment decisions. Renewable energy investment risk is compre-
hensive analyzed in section below based on their characteristics.
3.1.1. Technical risk
Technology plays an important role in the success of renewable
energy project investment. For an enterprise, especially for one that is
in renewable energy industry, its R & D and innovation capacity,
product technology is the guarantee to gain market competitive
advantage. As a typical capital and technology -intensive industry,
the risk and return of renewable energy projects investment are
determined by the maturity, applicability and progressiveness of the
technology, which also are the driving force of renewable energy
industry development. Therefore, technical risk is one of the main
risks of renewable energy investment. Specifically, renewable energy
technology risk comes mainly from technology maturity, technology
progressiveness, R & D capacity, alternative technology, etc. For the
renewable energy projects with high maturity technology, investors
take on relatively lower risk. Factors affecting the maturity of technol-
ogy come mainly from the reliability, feasibility of technology and so
on. Two main aspects affecting alternative of technology include:
whether the technology is likely to be replaced by other technologies
and whether the technology is easy to be imitated. Company's core
technology determines its independent R & D capabilities, and for the
protection of core technology, enterprises should attach great impor-
tance to the application and protection of intellectual property, and
handling of trade secrets.
Take solar photovoltaic industry for example. Key technical risks
faced by solar industry come mainly from the following areas. First,
lack of core technology has limited the renewable energy investment.
Currently, due to the lack of high-purity polysilicon purification
technology, the supply of upstream raw material in China's solar
industry is completely dependent on international markets.
1
MIT system dynamics group.
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Renewable and Sustainable Energy Reviews 73 (2017) 782–788
Independent research on polysilicon purification technology is out of
breakthrough on account of inability to solve the problem of high
energy consumption and environmental pollution of raw material
purification. Without core technologies, investors take more technical
risk, which goes against to mobilizing their enthusiasm, and it is not
conducive to the long-term development of solar energy industry.
Second, the technical risk in solar photovoltaic industry is also reflected
by the long recovery period of investment in R & D projects, and the
tremendous amount of investment. In general, construction cycle of a
silicon material project is about two years, and full production also
requires 4–5 years, which is a huge challenge for any investment
company's cash flow. Thirdly, for private enterprise, risk and return of
thin film solar cell industry remain uncertain. Compared with crystal-
line silicon cells equipment, initial investment in thin film photovoltaic
cell industry is greater. What is more, the solar film market with strong
volatility, is not mature in current times, which increased investment
uncertainty in solar photovoltaic industry.
3.1.2. Market risk
Market risk refers to the uncertainty of future profit brought by
variation of various market factors. This article will analyze the market
risk of renewable energy from two aspects: enterprises’ internal and
external environmental factors. For the external environment, market
risks include the market access barriers, market competitiveness and
market growth potential. License, approval and industry standard is
the common market access barriers. Specifically, for renewable energy
projects, its market access barriers refer to the restrictive measures
enacted by government, including permit, license, approval, etc., on
development and utilization of renewable energy. From the internal
perspective, market risks involve the company's financial risk, service
quality and marketing capabilities. For renewable energy projects,
Factors affecting financial risk mainly include the financial situation
of the enterprise, the sources of project fund, financing channel as well
as the reasonableness of the fund utilization. Risk assessment of
traditional investment project also takes the financial risk as important
evaluation content. This article lists several investment evaluation
indicators, such as forecast of future financial situation, financing
proposals, fund operation, profitability and so on.
Take solar photovoltaic industry for example. From market risk
perspective, there is significant investment risk for China's solar
industry. At present, the development of China's solar industry is
highly dependent on imports of raw materials and exports of finished
products, which is very vulnerable to external market volatility, such as
international political environment, national policies or industry
standards. The incomplete industry chain has brought huge negative
impact on the development of solar industry.
3.1.3. Policy risks
Political risk refers to the possible losses brought by the changes,
including the uncertain of access policy, price policy, and industry
regulation, occurring at the national level in renewable energy invest-
ment projects. In order to increase the competitiveness and promote
the development of renewable energy, incentive policies such as R & D
funding, tax breaks, subsidies, quota system, tradable green certificates
are developed and implemented from supply-side and demand-side in
developed countries, including US, EU, Japan and others.
Industry trend and Enterprise's business decision-making are
inevitably influenced by the orientation of the government's industrial
policy. Although China's renewable energy industry has made signifi-
cant progress, the big gap still exists compared with some developed
countries with good development status, and it has far failed to meet
the demand of low-carbon economy development. Currently, the key
factor restricting the development of renewable energy in China is the
insufficient of effective incentive policies. In addition, because of the
immaturity of China's renewable energy development, policies adjust-
ment may occur in short period, which will bring policy risk and
X. Liu, M. Zeng
Fig. 1. Causal loop diagrams of renewable energy investment risk.
significant uncertainty to investors, even cause material losses.
3.2. Investment risk model based on system dynamics
3.2.1. Causal loop diagrams of renewable energy investment risk
The renewable energy industry is a complex dynamic system with
intricate relationships among its subsystems and elements, so it can be
seen as a closed and complicated self-adaptive system, system theory
could be employed to analyze its risks. According to its own character-
istics, development status, market economy principles, and industry
regulator, after defining system boundary, system dynamics feedback
model of renewable energy industry risk has been established based on
the feedback principle of system dynamics in Fig. 1.
3.2.2. Model
As to the above analysis of renewable energy investment risk, it is
known that renewable energy investment risk comes mainly from the
uncertainty of policy, market and technology factors. The interaction
among different factors can be reflected through renewable energy
system dynamics causal loop diagram. Therefore, using system dy-
namics theory in renewable energy investment risk analysis can over-
come traditional evaluation methods’ shortcoming, and make the
evaluation more scientific and reasonable. Based upon the principles
of system dynamics, this paper established renewable energy invest-
ment risk assessment model consisting of three sub-models, including
policy risk calculation model, market risk calculation model and
technical risk calculation model.
Rrenewable = Rpolicy *ωpolicy + Rmarket *ωmarket + Rtechnology *ωtechnology
Where, Rrenewable、Rpolicy、Rmarket、Rtechnology represents re-
newable energy investment risk, policy risk, market risk and technology
risk; ωpolicy 、 ωmarket 、 ωtechnology are the influence weight of policy risk,
market risk, technology risk.
3.2.3. Policy risk estimation
Renewable energy development needs the support of relevant
policies due to the characteristics of the industry. Incentive policies
Renewable and Sustainable Energy Reviews 73 (2017) 782–788
can promote the development of renewable energy while balancing
economic development and environmental protection. Since the last
century, the United States, Japan and other countries have carried out
a series of incentive policies in R & D, investment, production, con-
sumption and other aspects of renewable energy, which have been
proven effective for the development of renewable energy. However,
incentive policies may also bring investment risks, the irrationality and
uncontinuity of policy probably lead to the problems of inadequate
incentives for investors, which in turn causes them to be reluctant to
invest, and eventually may result in the stagnation of renewable energy
projects development. Take the development of renewable energy in
the Netherlands for example, the government conducted a number of
policy adjustment in the short term, which made investors reluctant to
invest in renewable energy generation projects due to the lack of
unstable investment return expectations, and hindered its renewable
energy industry development. In view of these, the paper, fully
considering feed-in policy, tariff policy, industrial policy, and regula-
tory policies, introduces a delay function, sets up policy risk calculation
model, the specific formula is as follows:
Rpolicy = Pint egrate *r int egrate + PPelectricity *rPelectricity + Pindustry *rindustry
+ Pregulate *rregulate (2)
wind solar biomass
Pint egrate = Pint egrate *ϕwind + Pint egrate *ϕsolar + Pint egrate *ϕ biomass
+ DELAY(Rrenewable , T ) (3)
PPelectricity = PPwind *φwind + PPsolar *φsolar + PPbiomass *φ biomass
electricity electricity electricity
(1) − Psubsidy *φsubsidy + DELAY(Rrenewable , T ) (4)
where Pint egrate , PPelectricity , Pindustry , Pregulate denotes the impact of feed-in
policy, tariff policy, industrial policy and industry regulation policy
respectively; r int egrate , rPelectricity , rindustry , rregulate denotes the risk influence
coefficient of feed-in policy, tariff policy, industrial policy and industry
wind solar biomass
regulation policy respectively; Pint egrate , Pint egrate , Pint egrate denotes the
policy risk affected by wind power feed-in policy, solar power feed-in
policy, biomass power feed-in policy respectively; ϕwind 、 ϕsolar 、 ϕ biomass
denotes the risk influence coefficient of wind power feed-in policy, solar
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X. Liu, M. Zeng Renewable and Sustainable Energy Reviews 73 (2017) 782–788

power feed-in policy, biomass power feed-in policy respectively; refers to the receivable turnover ratio; Cstrategy 、Cenv 、Pint egrate 、
egrate 、 Copponent denotes competitive strategy, competitiveness of
DELAY() refers to the delayed function; T refers to the delayed cycle; standard
Pint
PPwind
electricity
、 PPsolar
electricity
、 PPbiomass
electricity
、 Psubsidy , the impact of wind power tariff, environmental protection, tariff, tariff standards, competitors strength
power tariff, biomass power tariff and renewable energy tariff addi- respectively; Mrequest 、 Mcapacity 、 Mpotential 、 Mmarketing denotes market
tional subsidy; φwind 、φsolar 、φ biomass 、φsubsidy denotes the risk influence demand, market capacity, market potential and marketing capabilities
coefficient of wind power tariff, power tariff, biomass power tariff and respectively.
renewable energy tariff additional subsidy respectively; Where Pindustry add reduce
Sowe = INTEG (Sowe − Sowe ) (15)
and Pregulate are obtained from the excel sheet through lookup ().
Sowe 、 add
Sowe 、 reduce
denotes owner's equity, owner's equity increased
Sowe
3.2.4. Market risk estimation and owner's equity decreased respectively. INTEG () is the integral
As to the above analysis of market risk, the uncertainty of market function.
access, competitiveness, growth, etc. can bring risk for renewable
energy investment. In addition, the fluctuations of market risk resulted 3.2.5. Technical risk estimation
from financing, operation, and funding liquidity may also cause The maturity of technology and the capability of endogenous R & D
financial risk. In view of this, in order to measure market risk, the concern the success and profit of the renewable energy projects. Similar
calculation model was established by means of the principles of system to other industries, the renewable energy industry also faces many
dynamics, which is calculated as follows: technical risks. If a new technology can’t meet the requirement of
com advancements and maturity, it may not achieve the expected perfor-
Rmarket = Rfinance *ϕfinance + Radmit *ϕadmit − Crenewable *ϕrenewalbe
mance or apply on a mass basis, which is likely to cause the failure of
gro
− Grenewalbe *ϕrenewalbe (5) the whole project, and the losses of investors eventually. In view of
these, technical risk calculation model has been established in the
Rfinance = Rfinancing ϕfinancing + Renvironment ϕenvironment + Roperate ϕoperate paper, considering the advancement and maturity of technology, and
+ Rliquidity ϕliquidity the capability of R & D. The specific formula is as follows:
(6)
Rtechnology = 10 − (Tmature *ϕmature + Tadvanced *ϕadvanced + Tresearch *ϕresearch )
Rfinancing = Rcredit ϕcredit + Rlaw ϕlaw + Renv ϕenv + Rfinancial ϕfinancial
(16)
+ DELAY (Rrenewable , T ) (7) Tresearch = Tcore − Tfungible (17)
policy policy socity socity nature nature
Renvironment = Renv ϕenv + Renv ϕenv + Renv ϕenv (8) Tmature 、 Tadvanced 、 Tresearch denotes the maturity of technology, the
liability liability
advancement of technology and the capability of R & D respectively;
Roperate = IF THEN ELSE(rasset − Cprofit < 0, 0, rasset − Cprofit ) (9) ϕmature 、 ϕadvanced 、 ϕresearch respectively denotes the influence coefficient
Rliquidity = Rshort ϕshort + Rcap ϕcap of technology maturity, technology advancement and R & D capability;
(10)
Tcore 、 Tfungible refers to the core technology and the alternative
Rcap = IF THEN ELSE(rrec > = 3, 0, 10/ rrec ) (11) technologies.

Radmit = Dmarket *ϕ Dmarket + Dconstruct *ϕ Dconstruct + DELAY (Rrenewable , T ) 4. Cases analysis

(12)
standard
4.1. Parameter determination
Crenewable = Cstrategy + Cenv + IF THEN ELSE(Pint egrate ≤ Pint egrate, 0
standard Taking wind power projects in recent years as examples. These
, Pint egrate − Pint egrate ) − Copponent (13)
projects are located in a region with abundant wind power, where its
Grenewalbe = Mrequest + Mcapacity + Mpotential + Mmarketing (14) prevailing wind direction is stable, and effective time for wind energy is
long. Specifically speaking, annual effective time for wind energy is
Rfinance , Radmit , Crenewable , Grenewalbe denotes financial risks, market access
nearly 8000 h with an average wind speed of 6.6 m/s. Wind power
risk, competitiveness and market growth capacity respectively; ϕfinance ,
density is reached National Standard of 4–7, and the development
com
ϕadmit , ϕrenewalbe gro
, ϕrenewalbe denotes the influence coefficient of financial
potential is about 3 million kilowatts. In recent years, the average
risks, market access risk, competitiveness and market growth capacity
development size of wind power project in this region is 77,500 kW, of
respectively; Rfinancing ,Renvironment ,Roperate ,Rliquidity denotes financing risk,
which the highest is 199,500 kW, 7 projects are above 100,000 kW the
environmental investment risk, operational risk and funding liquidity
others are 49,500 kW. For the investment amount, the highest is up to
risk respectively; ϕfinancing 、 ϕenvironment 、 ϕoperate 、 ϕliquidity denotes the
influence coefficient of financing risk, environmental investment risk, 1.9 billion yuan, the lowest is400 million yuan, and the average unit
operation risk and funding liquidity risk respectively; Rcredit 、 Rlaw 、 cost is about 9.9357 million yuan/MWh. Among them, average unit
Renv 、 Rfinancial denotes credit risk, legal risk, environmental risk, and cost with the investment scale of more than 150,000 kW is low, about
financial risks respectively; ϕcredit 、 ϕlaw 、 ϕenv 、 ϕfinancial denotes the 9.3 million yuan/MW, while average unit cost for investment scale of
influence coefficient of credit risk, legal risk, environmental risk, and 49,500 kW is as much as 13,262,800 yuan/MW. In this region, wind
financial risks respectively; Renv policy
、Renvsocity
、Renv
nature
denotes macro-poli- power benchmark price is 0.54 yuan/ kWh, additional tariff subsidy is
tical environmental risks, social environmental risks and natural 0.001 yuan/kWh from 2006 to July 2008, 0.002 yuan/kWh from July
environmental risks respectively; ϕenv policy
、 ϕenv
socity
、denotes the influence 2008 to November 2009, 0.008 yuan /kWh from November 2009 to
coefficient of macro-political environmental risks, social environmental September 2013, 0.01 yuan / kWh from September 2013 to now.
risks and natural environmental risks respectively; rasset liability
、 Cprofit Income tax is exempted in the first three years, for the next four years
denotes assets-liability ratio and operation risks respectively; of 12.5%, then 15% in the following four years. The long-term loan
IF THEN ELSE() refers to the select function; Rshort 、 Rcap refers to interest rate is 7.2%. Risk value interval is set [0,10] in this paper.
the short-term liquidity risk and capital turnover risk; ϕshort 、ϕcap refers
to the influence coefficient of short-term liquidity risk and capital 4.2. Baseline scenario simulation
turnover risk; Dmarket 、 Dconstruct refers to the difficulties of market access
and construction access; ϕ Dmarket 、ϕ Dconstruct refers to the influence Based on the numerical examples, the risk evaluation model is
coefficient of difficulties of market access and construction access; rrec simulated with VENSIM to explore the variation of renewable energy

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X. Liu, M. Zeng Renewable and Sustainable Energy Reviews 73 (2017) 782–788

Fig. 2. Baseline scenario simulation results.

Fig. 5. Comparison analysis policy risk with minute scene.

Fig. 3. Baseline scenario simulation results of renewable energy investment risk.

Fig. 6. Comparison analysis technical risk with minute scene.

thchnology risk exist in the early stage of the project, which seems to
result from the fact that renewable energy belongs to strategic
emerging industries. On the one hand, grid-connected technology for
renewable energy is not mature, once the technical problems arise, the
Fig. 4. Comparison analysis market risk with minute scene.
project development will be impaired, even unable to continue. On the
other hand, owing to the large amount of investment in renewable
investment risk under the given constraints during a simulation run of
energy and the high generation cost, policy support from government is
10 years. In order to confirm scientificly the relationship between each
necessary for renewable energy development. Therefore, policy risk
sub-risk factor and investment risk factors, expert scoring method is
and technology risk are the main uncertainties to be considered for
introduced to modify investment risk factors, and get the d influence
renewable energy investment. However, with the development of the
degree of various factors, then obtain the quantitative degree of policy
renewable energy industry, technology will become more and more
risk, technology risk and market risk impact on renewable energy
mature with R & D and innovation, which makes technology risk
investment risk. For qualitative variables and missing values, their
decline continually. In addition, with the improvement of incentive
initial value was estimated according to research status and expert
policy, investment risk can be reduced to a certain degree. Therefore, in
advice. In this paper, the simulation of three major risks for renewable
the late simulation range, market risk becomes the main risk for
energy investment is carried out, and the simulation results shown in
renewable energy investment.
Figs. 2 and 3.
From Fig. 2, policy risk and technology risk show a decreasing trend
within the simulation range, while market risk is volatile over time. 4.3. Multiple scenarios simulation
From Fig. 3, the renewable energy investment risk is slowly decline
within the simulation range. 4.3.1. Scenario simulation analysis for installed cost reduction
According to the above simulation analysis, higher policy risk and With the rapid development of wind power, the installed cost of

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X. Liu, M. Zeng
wind power has declined significantly. For example, the Danish wind
power, according to the assessment of wind turbines inside Denmark
made by research institutions, the cost per kilowatt of wind power
decreased from 15.8 Eurocent/kWh in 1981 to 5.7 Eurocent/kWh
in1995, declined by two-thirds. In view of this, it assumes that the
installed cost continues to decline with industry development and
technology progress. Through simulation, the market risk of wind
power investment is lower than the baseline scenario, which means
that the decrease of installed cost makes the renewable energy
investment risk reduced, as shown in Fig. 4.
4.3.2. Scenario simulation analysis for additional tariff subsidies
increasing
From the baseline scenario simulation, we know that policy risk is a
major investment risk for renewable energy project. Investment
enthusiasm is boosted by incentive investment policy, industrial policy
and regulatory policy, which is conducive to guarantee investors’
income and promote the development of renewable energy industry.
Based on this background, it assumes that additional tariff subsidy
continues to increase, and then to analyze the variation of policy risk
for renewable energy project. As can be seen from results of VENSIM
simulation in Fig. 5, with the increase of additional tariff subsidy,
policy risk decreased.
4.3.3. Scenario simulation analysis for technical progress
Operating costs will be reduced by increasing R & D investment and
enhancing R & D capabilities, which is beneficial to improve the market
competitiveness of renewable energy companies. Under the technology
progress scenario, based on the System Dynamics Model, technology
risk in wind power projects investment is keeping decline, as shown in
Fig. 6. This is mainly because, technology progress enhance the
competitiveness of wind power in power market and reduce investment
risk caused by technical uncertainty factors.
5. Conclusion
The investment environment for renewable energy projects is
complex, various kinds of risk factors with complicated relationships
exist in these investment projects, in which the impact of each risk on
renewable energy investment is also different. While the traditional
analysis method didn’t consider the interaction among different risk
factors on account of lacking systematic analysis concept when
evaluating risk for renewable energy investment. Based on this back-
ground, System Dynamics Theory is introduced to research renewable
energy investment risk in this paper to overcome the defects of
traditional method, which can help us analyze the system structure
and dynamics behavior of renewable energy investment risks.
Renewable energy investment risks have been divided into three
kinds of subdirectory risk: technology risk, market risk and policy risk
in this paper. Causal loop diagram for renewable energy investment
risk has been established considering the characteristics of renewable
energy investments activities. On the basis of causal loop diagram,
evaluation model using system dynamics theory is established to
analysis renewable energy investment risk. Finally, a numerical
example simulation has been presented with VENSIM software, and
then baseline scenario simulation analysis is executed to verify the
validity of the model.
The simulation results show, first, that policy risk is the main risk
for renewable energy investments in the early stage. With the con-
788
Renewable and Sustainable Energy Reviews 73 (2017) 782–788
tinuous technology advancements and incentive policies improvement,
market risk becomes the main risk for the renewable energy invest-
ment. Secondly, that market risk of renewable energy investment
decreased because of the decline of installed costs. In addition,
technology progress reduced technical risks and the increasing of
additional tariff subsidy reduced policy risk, which all reduced the risk
of renewable energy investment.
There are many uncertainties in renewable energy investment. This
article only consider three important risk factors, scholars can analyze
and evaluate for other risk factors in the future. In addition, scholars
can study the process management of renewable energy investment
risk in depth, including how to control risk, and how to establish a
scientific management method for mitigating risks. The study related to
these aspects can help investors and managers to manage risk, reduce
losses, which also is beneficial to the development of the renewable
energy industry.
Acknowledgments
This work was supported by the Key Projects in the National
Science & Technology Pillar Program of China (2015BAA06B03).
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