Adoption of residential solar power under uncertainty: Implications for renewable energy incentives

Abstract

We examine household adoption of solar PV using the option value framework. Uncertainty in benefits and costs leads to delay in investment timing. Discounted benefits from solar PV have to exceed investment cost by 60% to trigger investment. Policy incentives that reduce uncertainty in returns from solar PV are most effective. a b s t r a c tMany incentives at the state and federal level exist for household adoption of renewable energy like solar photovoltaic (PV) panels. Despite generous financial incentives the adoption rate is low. We use the option value framework, which takes into account the benefit of delaying investment in response to uncertainty, to examine the decision by households to invest in solar PV. Using a simulation model, we determine optimal adoption times, critical values of discounted benefits, and adoption rates over time for solar PV investments using data from Massachusetts. We find that the option value multiplier is 1.6, which implies that the discounted value of benefits from solar PV needs to exceed installation cost by 60% for investment to occur. Without any policies, median adoption time is eight years longer under the option value decision rule compared to the net present value decision rule where households equate discounted benefits to installation cost. Rebates and other financial incentives decrease adoption time, but their effect is attenuated if households apply the option value decision rule to solar PV investments. Results suggest that policies that reduce the uncertainty in returns from solar PV investments would be most effective at incentivizing adoption.

Examining the Key Drivers of Residential Solar Adoption in Upstate New York

“…However, stability in energy costs via solar installation is also an important benefit to adopters. Other work has found that reducing long term economic uncertainty is an important factor in solar adoption [14], and retail electric rates in an area can drive solar technology adoption [15]. Other research suggests the importance of non-economic factors that influence a prospective customer's decision to adopt solar technology.…”

An optimization approach to parallel generation solar PV investments in the U.S.: Two applications illustrate the case for tariff reform

“…Depreciation benefits are calculated for each year by figuring the allowable depreciation number, multiplying by the marginal tax rate, and discounting the benefit back into present value terms. The allowable depreciation benefit in a given year 1 A more recent and very interesting development in the field is the application of real options analysis to the optimal timing of PV investments (Bauner and Crago, 2013;Ansar and Sparks, 2009). This approach has not yet incorporated the complexities of tariff schedules, taxes, time-of-use, etc.…”

Solar Energy Potential and Time of Use Tariffs: a study case for Sao Luiz do Paraitinga

“…Solar energy use and time-of-use tariffs applied and available for low voltage consumers is already a reality in most European Countries [1][2][3][4][5][6]. In Brazil, despite of having one of the highest solar energy potential in the world, its use of solar energy is still incipient .…”