Is it a good time to develop commercial photovoltaic systems on farmland? An American-style option with crop price risk

Byungil Kim, Changyoon Kim, SangUk Han, JuHyun Bae and Jaehoon Jung

Renewable and Sustainable Energy Reviews, 2020, vol. 125, issue C

Abstract: Photovoltaic systems require large swaths of land that are currently being used for other purposes, such as farming. One option for developing large photovoltaic systems is converting farms that are currently economically unviable into commercial photovoltaic systems. However, this may not always be an economically rational decision as crop prices have the potential to increase over time. Fluctuations in farm income due to changes in crop prices can alter the optimal choice of whether to continue farming or to convert farmland into commercial photovoltaic systems. This study attempts to resolve this issue by proposing a real options framework to value farm production when crop prices are uncertain. By integrating uncertainty into the decision-making process, the value of keeping unprofitable farms operating prior to developing the area into a commercial photovoltaic system is assessed. This helps decision makers understand the extent to which potential income from developing a photovoltaic system should be greater than potential income from farming when deciding on investing in a photovoltaic system. A case study is conducted to examine this framework and to calculate the net present value of a farm in South Korea. The results indicate that although the money lost from continuing to farm is substantial, farmers should defer conversion to a commercial photovoltaic system until a sufficient drop in crop prices occurs. When applying this strategy, the farmer can gain an additional 100% of expected revenue simply by deferring the development decision until having better information on the market prices of crops.

Keywords: Solar; Photovoltaic; Real options; Life cycle cost; Farmland; Agriculture (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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DOI: 10.1016/j.rser.2020.109827

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