Work

Real option approach to solar PV investment amid uncertainties and land opportunity costs

Year: 2025

Type: article

Abstract: We analyze the optimal investment decision for a solar PV plant under uncertainty, focusing on land use change. The model considers opportunity costs from land use and volatility in electricity prices and technology costs. Using a real options approach and the Bellman equation, it identifies the optimal investment timing, assuming both price and cost follow a geometric Brownian motion. An expression for the critical investment ratio is derived, estimating the time to reach this optimal value. Results show that incorporating uncertainty delays land use change decisions, promoting a more conservative strategy and offering greater flexibility than the traditional NPV approach.

Source: Sustainable Futures

DOI: 10.1016/j.sftr.2025.101031

Authors: Joaquín Lazo, Elisa Trujillo-Baute, David Watts

Institutions: Pontificia Universidad Católica de Chile, Universitat de Lleida

Language: English

Topic: Capital Investment and Risk Analysis

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Affordable and clean energy, Climate action, Industry, innovation and infrastructure

Open Access status: gold

Estimated APC paid: $2,340