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Authors: Hanyu Zhang, Martina Assereto, Julie Byrne

Abstract: This study evaluates investment in a utility-scale (opens in a new window)solar power plant using a real-options approach (ROA). Although ROAs have been widely applied in the literature, the deferring option for a utility-scale power plant has not been fully examined, especially within the context of the unique subsidy program of solar renewable energy certificates (SRECs) in the (opens in a new window)USA. Using data from one of the most developed solar electricity markets in New Jersey, we incorporate the time-varying volatility of electricity prices and bounded SREC prices in real-options valuation. Our results show that deferring (opens in a new window)real options generates significant value for the project that the traditional discount cash flow approach ignores. It is thus optimal to postpone the investment in more than 70% of cases. In addition, we demonstrate that debt financing is crucial for renewable energy investments.