Real Options Valuation of Photovoltaic Investments: A case from Turkey

Or, Bartu
Bilgin, Gözde
Akçay, Emre Caner
Dikmen, İrem
Birgönül, M. Talat
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Renewable and Sustainable Energy Reviews
Investments in renewable energy resources have become inevitable due to increasing energy demand and energy prices, diminishing non-renewable energy resources, and the outgrowth of carbon footprints. Photovoltaic (PV) systems offer high solar energy potential in sustainable energy production whereas their high initial costs necessitate critical strategic valuation of investments. Valuation with conventional methods has been challenging due to existence of uncertainties such as fluctuating PV panel prices, changing meteorological conditions with certain effects on power generation, and governmental policies on energy market regulations. This study aims to propose a real options approach to valuation of residential rooftop PV system investments considering these uncertainties and demonstrate benefits of this approach with an application on the residential PV investment decisions in Turkey. The proposed method, Real Options Valuation (ROV) with Least-Squares Monte Carlo Simulation (LSMC) considers the deferral option of the investor by utilizing stochastic simulations, the discounted cash flow method, linear regression, and backward dynamic programming and thus evaluates the effects of uncertainties on financial attractiveness of residential PV investments. The case study findings proved that ROV with LSMC having a 7-years deferral option supported the investment decision with realizable cost-effective options while “NPV method” resulted in an infeasible investment. Scenario analysis was also conducted to explore policy options that can be used to promote solar energy investments in Turkey. This study has a potential to have practical contributions for investors as well as implications for policy-makers.
Published by Renewable and Sustainable Energy Reviews;; Bartu Or, M. Talat Birgonul, Department of Civil Engineering, Middle East Technical University, Universiteler Mahallesi, Dumlupinar Bulvari No:1 Cankaya, Ankara, 06800, Turkey; Gozde Bilgin, Department of Civil Engineering, Baskent University, Baglica Kampusu, Fatih Sultan Mahallesi, Ankara, 06790, Turkey; Emre Caner Akcay, Department of Civil Engineering, Atilim University, Kizilcasar Mahallesi, Ankara, 06830, Turkey; Irem Dikmen, School of Construction Management and Engineering, University of Reading, Whiteknights Campus RG6 6BU Berkshire, Reading, UK.
Government incentives; Least-squares Monte Carlo simulation (LSMC) ;Photovoltaic (PV) investments; Real Options Valuation (ROV); Residential buildings; Solar energy