The Deferring Real Option with Solar Renewable Energy Certificates

In this study, we evaluated investment in a utility-scale solar power plant using a real-option approach (ROA). Despite the fact that ROAs have been widely applied in the literature, the deferring option for a utility-scale power plant has not been fully examined, especially in the context of the unique subsidy program of solar renewable energy certificates (SREC) in the U.S. Using data from one of the most developed solar electricity markets in the state of New Jersey, we incorporated the time-varying volatility of electricity prices and bounded SREC prices in the real-option valuation. Our results showed that the deferring real option generated significant value for the project, ignored by the traditional discount cash flow approach, and that it was optimal to postpone the investment in over 70% of cases. In addition, we demonstrated that debt financing is crucial for renewable energy investments