This paper applies the real option approach (ROA) to analyze the economic viability of residential solar photovoltaic (PV) investment in the Philippines. From the point of view of a household (HH) owner, this approach evaluates the option values and optimal timing of investment to compare the attractiveness of investing in solar PV over continuing to use electricity from the grid. This further analyzes how various investment schemes and electricity prices uncertainty affect investment decisions. Results find that residential solar PV investment is profitable for all HH types investigated and that earlier investment in solar PV reduces the risk of opportunity loss from postponing the investment. Among the investment schemes analyzed, the distribution of solar PV cost in 5- or 10-year period without initial down payment shows to be the best investment strategy. The results are robust with various HH types investigated and with sensitivity in electricity prices.
Keywords residential solar PV, energy investment, real options, Monte Carlo simulation, dynamic optimization, investment strategy