Abstract
Solar energy investment represents currently a valid reason to support sustainable economic development. In fact, over the last few years, governments have applied different measures to incentivize private consumers and firms to use renewable energies. Photovoltaic (PV) projects are characterized by uncertainty due to meteorological conditions, the unpredictable behavior of government, and managerial flexibility. Since the Net Present Value (NPV) approach is not able to capture these uncertain factors, it was replaced with the Real Options Approach (ROA). The latter method manages to embed flexibility in PV investment using binomial trees. This paper valuates PV investment in all regional areas in Italy using an integrated approach between the discounted cash flows method and real option value, called Expanded Net Present Value (ENPV). We fit the probability of tax benefits into a binomial lattice model after analyzing the geographical position and weather conditions of all regional capitals of Italy. The results show that the cities with high irradiance/temperature have positive NPV and high investment values. On the other hand, while most cities have negative NPV, the inclusion of the flexibility in investment decisions gives additional value to the project, making the ENPV positive and implying an attractive investment opportunity with the possibility of delaying the project. We also propose a sensitivity analysis that shows how the real option value changes when incentive policies of the government become more attractive. This paper contributes to the existing literature in the way of considering financial, meteorological/geographical, and political factors to valuate PV investment.
Highlights
Renewable energy investment has become the frontier of science to reduce pollution and to develop more sustainable societies
We decided to assess the application of the Expanded Net Present Value (ENPV), which allows combining the value of flexibility represented by the real options approach with NPV
We show that when the public authority intervenes by granting tax benefits on maintenance costs, it can be advantageous for the manager do not abandon a project with a negative NPV, but to defer it and exercise it if the value of the underlying project grows over the time
Summary
Renewable energy investment has become the frontier of science to reduce pollution and to develop more sustainable societies. The second one is relative to the public’s role, namely the government could put into place measures to encourage the use of renewable energy (see [8,19]) For these reasons, we decided to assess the application of the Expanded Net Present Value (ENPV), which allows combining the value of flexibility represented by the real options approach with NPV (see [10,20]). Kim et al (2017) [21], who proposed a real options analysis framework as a tool to assess renewable energy investments in developing countries These latter, are characterized by high uncertainty due to rapidly changing technologies and host government conditions.
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