A real options approach to valuation of photovoltaic power investments on rooftops of residential areas in Turkey

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Bartu Or Master Thesis Final.pdf

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2023-1-24

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Or, Bartu

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Diminishing non-renewable energy resources, increasing energy prices, and the outgrowth of carbon footprints have made investments in renewable energy resources indispensable. Power generation through renewable solar energy can be made through state-of-art photovoltaic (PV) systems. Although PV systems on residential rooftops offer great solar energy potential, initial costs are considerably high, and there exist such uncertainties as fluctuating PV panel prices, changing meteorological conditions affecting power-generation-processes, and governmental demeanors, related to energy market regulations, prices, and fees. The economic feasibility of such investments is generally determined using Net Present Value (NPV). Considering the high initial costs, uncertain, yet increasing annual costs, and high inflation rates, it is apparent that NPV assessment would not favor the investment under the now-or-never enforcement of the method. In this study, the Real Options Valuation (ROV) with Least Square Monte Carlo Simulation (LSMC) method is proposed for evaluating the residential PV investment decisions in Turkey. Respectively, a PV investment on a household roof in Kocaeli, Turkey, is assessed using both methods; “NPV” and “ROV with LSMC having a seven-year deferral option.” Consequently, it is demonstrated that while the NPV method results in an infeasible investment, the ROV with LSMC method supports the investment by giving the investor realizable cost-effective options; since it also considers the deferral of the investment in time - by utilizing stochastic simulations, the discounted cash flow method, linear regression, and backward dynamic programming - and thus evaluates the effects of future uncertainties on the potential future opportunities in residential PV investment. Based on the findings, the probable government incentives easing and promoting solar energy generation in Turkey are investigated.

Subject Keywords

Residential photovoltaic investments, Turkey, Real options valuation (ROV), Least square Monte Carlo simulation (LSMC), Government incentives

URI

https://hdl.handle.net/11511/102008

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Graduate School of Natural and Applied Sciences, Thesis

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Citation Formats

B. Or, “A real options approach to valuation of photovoltaic power investments on rooftops of residential areas in Turkey,” M.S. - Master of Science, Middle East Technical University, 2023.