Abstract: In order to realize sustainable development and to reduce the greenhouse gas emission, China needs to promote the development of renewable energy, which is highly related to the incentive policies. Therefore, in order to investigate the effects of different incentive policies and to optimize the incentive polices, a real option approach is applied to evaluate the renewable energy policies in China:The economics of renewable energy projects in China are firstly studied, corresponding assumptions are proposed, and then real option models are established and solved. The expected execution time and the optimal incentive values with respect to technological levels are also obtained. Then, solar photovoltaic (PV) projects are used as a case study. The results show that:(1) incentive policies are necessary for the development of solar PV projects, however, the current or previous incentive policies exceeds the optimal incentive values; (2) more attractive basic incentive policies should be promulgated if there is a technological progress in the solar industry; (3) from the perspective of the government expenditure, policy effects and technological impacts, the feed-in tariff is the most effective policy, but the corresponding government expenditure is also very large; the price premium policy is also a very effective policy, and the corresponding government expenditure is smaller than that of the feed-in tariff policy; the cost-recovery policy is less attractive than the feed-in tariff and the price premium policy.

Key words: real option, incentive policy, execution time, technological progress, renewable energy project