Adoption of Residential Solar Power Under Uncertainty: Implications for Renewable Energy Incentives

Many incentives at the state and federal level exist for household adoption of re- newable energy like solar photovoltaic (PV) panels. Although incentives make solar panels an attractive investment from a net present value perspective, the adoption rate is low, suggesting that households are either irrational or apply an abnormally high discount rate. Alternatively, households could be recognizing the benefit (option value) of waiting to reduce uncertainty in net benefits associated with investing in solar PV. We use the option value framework to examine the decision by households to invest in solar PV and quantify the option value multiplier and adoption rate over time for solar PV investments. We find that the option value multiplier is 1.8, which implies that the net present value of benefits from solar PV needs to be almost double the investment cost for investment to occur. Simulated adoption rates show that the adoption rate under the option value decision rule is significantly lower than that following a decision rule based on NPV, and is more consistent with the observed adoption rate of solar PV. Current policies that support the solar PV market are crucial to households' adoption decision. Our simulations show that without tax credits and rebates, the median time to adoption increases by 110% compared to the baseline.