Epsilon Archive for Student Projects

Abstract

A real option model is developed to examine the crucial factors affecting the agricultural firms’ decision to quit the production and rent out the land to a company building a PV power plant. The public policies in support of investments in renewable energies have created the conditions for a market regarding investments in PV installations in agricultural areas.

The decision to switch offers to the agricultural firm and to society several economical, social and environmental benefits, representing sustainability. However, PV installations in agricultural areas require the allocation of a certain land area. By assigning a part of land to PV installations, thereby the area of land allocated to agricultural production decreases. Using a real option approach the trade-off between these two competing uses is studied. The real option approach is useful for the evaluation of decisions regarding PV installations since it takes into account the uncertainty regarding the agricultural commodities prices and the irreversibility of the decision taken by the agricultural firm.

The results illustrate how uncertainty and irreversibility are important factors and determine the decision of the agricultural firm to switch. These results have implications for the design and implementation of decision-making processes regarding PV installations and land allocation.