A Real Options Approach to Evaluating Investment in Solar Ready Buildings: Fid-Bau Portal

A Real Options Approach to Evaluating Investment in Solar Ready Buildings

Ashuri, B. / Kashani, H.

Sustainable building technologies such as Photovoltaics (PV) have promising features for energy saving and greenhouse gas (GHG) emissions reduction in the building sector. Nevertheless, adopting these technologies generally requires substantial initial investments. Moreover, the market for these technologies is often very vibrant from the technological and economic standpoints. Therefore, investors typically find it more attractive to delay investment on the PV technologies. They can alternatively prepare "Solar Ready Buildings" that can easily adopt PV technologies later in future; when their prices are lower, energy price are higher, or stricter environmental regulations are in place. In such cases, the decision makers should be equipped with proper financial valuation models in order to avoid over- and under-investment. We apply Real Options Theory to evaluate the investment solar ready buildings. Our proposed investment analysis model uses experience curve concept to model the changes in price and efficiency of the PV technologies over time. It also has an energy price modeling component that characterizes the uncertainty about future retail price of energy as a stochastic process. Finally, the model incorporates the information concerning specific policy and regulatory instruments that may affect the investment value. Using our model investors' financial risk profiles of investment in the "fixed" Solar Building and "flexible" Solar Ready Buildings will be developed. Also, for solar ready buildings, the model determines whether the PV panels should be installed and, if yes, how much should be invested. Finally, by utilizing the proposed model, the optimal time for installing the PV panels can be identified.