Solar power investment under uncertainty : a real option approach

University essay from SLU/Dept. of Economics

Abstract: In this thesis a real option model is adopted in order to evaluate the profitability and timing of investment in solar power generation in Sweden. Investment in solar power is viewed as a call option. The real option pricing model used in this research is based on a binomial framework with discrete time intervals, illustrating the evolution of the value of a potential investment for the installation of solar panels on a commercial rooftop. The empirical analysis in this thesis is built using price data from Statistics Sweden and case-study data provided by the Swedish solar power company Save-by-Solar Sweden AB. The evolution of the electricity price in Sweden is modeled as a stochastic process. A sensitivity analysis concerning several crucial parameters is undertaken in order to investigate their impact on the considered investment project and draw conclusions about the investment potential under different economic scenarios. In this respect, variables considered are volatility, investment cost, discount rate and the level of subsidies supporting investment in solar power generation. The changed variables are the volatility, the investment cost, discount rate and the level of subsidies. The results illustrate the importance of volatility in the electricity price, for the determination of project value and investment timing. The results have also implications for the definition of optimal subsidies for the stimulation of investment in solar power.

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