Dynamic (Mis)allocation of Investments in Solar Energy

Because they differ in terms of technology, size, and location, solar photovoltaic installations exhibit very heterogeneous levelized costs of producing electricity. Therefore, the present value cost of meeting a given trajectory of annual solar energy production depends on which projects are commissioned when: the observed sequence of investment decisions need not be cost-efficient. We propose a methodology to assess the magnitude of dynamic misallocation by comparing the present value cost of realized investments to a counterfactual optimal sequence of investments. Applying our methodology to France between 2005 and 2021, we find that the observed trajectory of annual solar output could have been produced at a present value cost about 30% lower than its realized value. Our optimized counterfactual suggests that investments in residential solar should have on average been postponed by seven years, while investments in medium- and large-scale installations should have occurred three to four years earlier.