Adoption of residential solar power under uncertainty: Implications for renewable energy incentives. (November 2015)

• Record Type: Journal Article
• Authors: Bauner, Christoph; Crago, Christine L.
• Is Part Of: Energy policy. Volume 86(2015)
• Page Start: 27
• Page End: 35
• Publication Date: 2015-11
• Subjects: Solar PV -- Solar incentive policies -- Investment under uncertainty; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2015.06.009
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: Many 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. Abstract : Highlights: 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.