A real options approach to evaluating investment in solar ready buildings

A real options approach to evaluating investment in solar ready buildings

Ashuri, B.
Kashani, H.
Lu, J.

2011-06-20

Sustainable building technologies such as Photovoltaics (PV) have promising features for energy saving and greenhouse gas (GHG) emissions reduction in the building sector. Nevertheless, adopting these technologies generally requires substantial initial investments. Moreover, the market for these technologies is often very vibrant from the technological and economic standpoints. Therefore, investors typically find it more attractive to delay investment on the PV panels. Nevertheless, they can prepare “Solar Ready Buildings” that can easily adopt PV panels later in future at the optimal time; when their prices are lower, energy price are higher, or stricter environmental regulations are in place. The conventional valuation methods such as Net Present Value (NPV) are unable to identify the optimal timing for investing in the PV panels. Hence, in order to avoid over- and under-investment, the decision makers should be equipped with proper financial valuation models that help them identify the optimal investment timing. We apply Real Options Theory from finance/decision science to create an investment valuation framework for finding the optimal time for investing in PV technologies. Our proposed investment analysis model uses experience curve concept to model the changes in price and efficiency of the PV technologies over time. It also has an energy price modeling component that characterizes the uncertainty about future retail price of energy as a stochastic process. Finally, the model incorporates the information concerning specific policy and regulatory instruments that may affect the investment value. Using our mode, investors’ financial risk profiles of investment (i.e. Cumulative Distribution Function of the Investment Value) in the “fixed” Solar Building and “flexible” Solar Ready Buildings will be developed. This will determine the Financial Value (if any) of investing in the Solar ready building and identify the optimal time for installing the PV panels.

investment valuation
photovoltaics
real options

http://resolver.tudelft.nl/uuid:3ab6e0a1-0070-4b49-b103-b6f27bab0915

Conference proceedings

conference paper

(c) 2011 Ashuri, B.; Kashani, H.; Lu, J.