Real option approach to solar PV investment amid uncertainties and land opportunity costs

The transition to renewable energy requires careful consideration of land-use trade-offs, particularly when repurposing agricultural land for solar photovoltaic (PV) projects. This study develops a real options (RO) framework to determine the optimal timing for investing in a solar PV plant under un...

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Autores: Lazo, Joaquín, Trujillo-Baute, Elisa, Watts, David
Tipo de recurso: artículo
Estado:Versión publicada
Fecha de publicación:2025
País:España
Institución:Universitat de Lleida (UdL)
Repositorio:Repositori Obert UdL
OAI Identifier:oai:repositori.udl.cat:10459.1/468745
Acceso en línea:https://doi.org/10.1016/j.sftr.2025.101031
https://hdl.handle.net/10459.1/468745
Access Level:acceso abierto
Palabra clave:Photovoltaic
Real options
Defer option
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spelling Real option approach to solar PV investment amid uncertainties and land opportunity costsLazo, JoaquínTrujillo-Baute, ElisaWatts, DavidPhotovoltaicReal optionsDefer optionThe transition to renewable energy requires careful consideration of land-use trade-offs, particularly when repurposing agricultural land for solar photovoltaic (PV) projects. This study develops a real options (RO) framework to determine the optimal timing for investing in a solar PV plant under uncertainty, explicitly incorporating the opportunity cost of land conversion and the stochastic evolution of electricity prices and technology costs. Using the Bellman equation, we model the investment decision as an American-style option, where firms can defer installation until economic conditions become optimal. Both electricity prices and investment costs are assumed to follow geometric Brownian motion (GBM), allowing us to derive an analytical expression for the critical investment threshold and estimate the expected time to reach this optimal ratio. Our results show that uncertainty delays investment decisions, encouraging a more conservative and risk-aware adoption of PV technology. This delay is particularly relevant for policymakers, as it suggests that traditional subsidy schemes based on static NPV calculations may be insufficient to accelerate adoption. Instead, policies that explicitly account for market volatility and future technological cost reductions are needed to incentivize timely investments. Furthermore, for regions aiming to regulate PV expansion on agricultural land, our framework provides insights into how regulatory interventions—such as land-use restrictions or incentives for dual-use solar-agriculture projects—can strategically influence adoption timelines. By integrating financial uncertainty and land-use dynamics, this study offers a robust decision-making tool for investors and policymakers navigating the trade-offs between energy transition and sustainable land management.The authors acknowledge the support and funding from ANID-Subdireccion ´ de Capital Humano/Doctorado Nacional/2021–21210320, Conicyt-Fondecyt 1221943, Conicyt-FONDAP 1522A0006 (SERC Chile), MCIU/AEI&ERDF-EU PID2022–140546OB-I00 and Departament de Recerca i Universitat de la Generalitat de Catalunya 2021SGR00355.Elsevier2025info:eu-repo/semantics/articleinfo:eu-repo/semantics/publishedVersionhttps://doi.org/10.1016/j.sftr.2025.101031https://hdl.handle.net/10459.1/468745reponame:Repositori Obert UdL instname:Universitat de Lleida (UdL)Inglésinfo:eu-repo/grantAgreement/AEI/Plan Estatal de Investigación Científica y Técnica y de Innovación 2021-2023/PID2022-140546OB-I00Reproducció del document publicat a https://doi.org/10.1016/j.sftr.2025.101031Sustainable Futures, 2025, 101031cc-by-nd-nd (c) Joaquín Lazo, Elisa Trujillo Baute, David Watts, 2025Attribution-NonCommercial-NoDerivatives 4.0 Internationalinfo:eu-repo/semantics/openAccesshttp://creativecommons.org/licenses/by-nc-nd/4.0/oai:repositori.udl.cat:10459.1/4687452026-06-24T12:42:17Z
dc.title.none.fl_str_mv Real option approach to solar PV investment amid uncertainties and land opportunity costs
title Real option approach to solar PV investment amid uncertainties and land opportunity costs
spellingShingle Real option approach to solar PV investment amid uncertainties and land opportunity costs
Lazo, Joaquín
Photovoltaic
Real options
Defer option
title_short Real option approach to solar PV investment amid uncertainties and land opportunity costs
title_full Real option approach to solar PV investment amid uncertainties and land opportunity costs
title_fullStr Real option approach to solar PV investment amid uncertainties and land opportunity costs
title_full_unstemmed Real option approach to solar PV investment amid uncertainties and land opportunity costs
title_sort Real option approach to solar PV investment amid uncertainties and land opportunity costs
dc.creator.none.fl_str_mv Lazo, Joaquín
Trujillo-Baute, Elisa
Watts, David
author Lazo, Joaquín
author_facet Lazo, Joaquín
Trujillo-Baute, Elisa
Watts, David
author_role author
author2 Trujillo-Baute, Elisa
Watts, David
author2_role author
author
dc.subject.none.fl_str_mv Photovoltaic
Real options
Defer option
topic Photovoltaic
Real options
Defer option
description The transition to renewable energy requires careful consideration of land-use trade-offs, particularly when repurposing agricultural land for solar photovoltaic (PV) projects. This study develops a real options (RO) framework to determine the optimal timing for investing in a solar PV plant under uncertainty, explicitly incorporating the opportunity cost of land conversion and the stochastic evolution of electricity prices and technology costs. Using the Bellman equation, we model the investment decision as an American-style option, where firms can defer installation until economic conditions become optimal. Both electricity prices and investment costs are assumed to follow geometric Brownian motion (GBM), allowing us to derive an analytical expression for the critical investment threshold and estimate the expected time to reach this optimal ratio. Our results show that uncertainty delays investment decisions, encouraging a more conservative and risk-aware adoption of PV technology. This delay is particularly relevant for policymakers, as it suggests that traditional subsidy schemes based on static NPV calculations may be insufficient to accelerate adoption. Instead, policies that explicitly account for market volatility and future technological cost reductions are needed to incentivize timely investments. Furthermore, for regions aiming to regulate PV expansion on agricultural land, our framework provides insights into how regulatory interventions—such as land-use restrictions or incentives for dual-use solar-agriculture projects—can strategically influence adoption timelines. By integrating financial uncertainty and land-use dynamics, this study offers a robust decision-making tool for investors and policymakers navigating the trade-offs between energy transition and sustainable land management.
publishDate 2025
dc.date.none.fl_str_mv 2025
dc.type.none.fl_str_mv info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
format article
status_str publishedVersion
dc.identifier.none.fl_str_mv https://doi.org/10.1016/j.sftr.2025.101031
https://hdl.handle.net/10459.1/468745
url https://doi.org/10.1016/j.sftr.2025.101031
https://hdl.handle.net/10459.1/468745
dc.language.none.fl_str_mv Inglés
language_invalid_str_mv Inglés
dc.relation.none.fl_str_mv info:eu-repo/grantAgreement/AEI/Plan Estatal de Investigación Científica y Técnica y de Innovación 2021-2023/PID2022-140546OB-I00
Reproducció del document publicat a https://doi.org/10.1016/j.sftr.2025.101031
Sustainable Futures, 2025, 101031
dc.rights.none.fl_str_mv cc-by-nd-nd (c) Joaquín Lazo, Elisa Trujillo Baute, David Watts, 2025
Attribution-NonCommercial-NoDerivatives 4.0 International
info:eu-repo/semantics/openAccess
http://creativecommons.org/licenses/by-nc-nd/4.0/
rights_invalid_str_mv cc-by-nd-nd (c) Joaquín Lazo, Elisa Trujillo Baute, David Watts, 2025
Attribution-NonCommercial-NoDerivatives 4.0 International
http://creativecommons.org/licenses/by-nc-nd/4.0/
eu_rights_str_mv openAccess
dc.publisher.none.fl_str_mv Elsevier
publisher.none.fl_str_mv Elsevier
dc.source.none.fl_str_mv reponame:Repositori Obert UdL
instname:Universitat de Lleida (UdL)
instname_str Universitat de Lleida (UdL)
reponame_str Repositori Obert UdL
collection Repositori Obert UdL
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repository.mail.fl_str_mv
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