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Deferring real options with solar renewable energy certificates

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  • Zhang, Hanyu
  • Assereto, Martina
  • Byrne, Julie

Abstract

This study evaluates investment in a utility-scale solar power plant using a real-options approach (ROA). Although ROAs have been widely applied in the literature, the deferring option for a utility-scale power plant has not been fully examined, especially within the context of the unique subsidy program of solar renewable energy certificates (SRECs) in the USA. Using data from one of the most developed solar electricity markets in New Jersey, we incorporate the time-varying volatility of electricity prices and bounded SREC prices in real-options valuation. Our results show that deferring real options generates significant value for the project that the traditional discount cash flow approach ignores. It is thus optimal to postpone the investment in more than 70% of cases. In addition, we demonstrate that debt financing is crucial for renewable energy investments.

Suggested Citation

  • Zhang, Hanyu & Assereto, Martina & Byrne, Julie, 2023. "Deferring real options with solar renewable energy certificates," Global Finance Journal, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:glofin:v:55:y:2023:i:c:s1044028322000977
    DOI: 10.1016/j.gfj.2022.100795
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    More about this item

    Keywords

    Least-squares Monte Carlo simulation; Real-options approach; Solar photovoltaic investment;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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