Real Option Valuation Methodology for Household-Scale Renewable Energy Systems

Abstract

The installation of household-scale renewable energy (RE) assets including the likes of solar home systems, micro-wind turbines, pico-hydro systems, biomass space heaters and improved cook-stoves, offers householders various benefits. These include the possibility of working longer hours, enhancing the efficiency of production processes, improving the quality of life, and of gaining greater control over their immediate environment. In several settings, artisans pursuing the same vocation work from homes located in clusters. Consequent to procuring and deploying the RE asset, the community of individual investors bestows upon itself the option to derive incremental money incomes. This is subject to each member’s access to working-capital credit and raw material,skill levels and levels of effort, productivity, and more. This paper argues that householders assess the option to derive incremental incomes and go on to makethe investment decision in RE micro-infrastructure based on the estimated value of such options. The model so developed is applied to a community of silk weavers in southern India to estimate the premiumsthatinvestors pay to opt into derivingincremental incomes. This study could estimate that by installing a Solar Home System, a weaver could derive an economic benefit of 17.36% and an intangible benefit of 82.64% of the amount invested into the asset.