Competitive equilibrium, investment runs, and renewable energy subsidies: A real options analysis

Foreseeable policy changes like a subsidy phaseout lead to competitive runs where a mass of investment suddenly occurs. We characterize this phenomenon, observed in several renewable energy markets, and provide a novel interpretation based on rational expectations of future entries. We show that the size of runs increases with the magnitude of the policy change and market uncertainty but decreases with policy uncertainty, and that runs are smaller when the policy change applies to both new and existing firms. Runs accelerate investment and lower welfare, with implications for the conduct of policy changes like subsidy phaseouts.