How to promote the widespread commercial adoption of photovoltaic microgrids under investment uncertainty? A real options analysis in China

Microgrids can integrate the production and consumption process of renewable energy and realize the sustainable development of power systems. However, it remains difficult to promote the widespread commercial adoption of photovoltaic microgrids due to high costs. This study develops a real options model for it to assess peak-valley electricity prices and electricity price subsidies under the uncertainties in the initial investment dynamic. The adjustment mechanism is also established in the real options model to analyze the tendency of incentive policies changing with uncertainty. The results demonstrate that the optimal electricity price subsidies of 31 provinces in China range from 0.30 RMB/kWh to 1.05 RMB/kWh, and the optimal rates of peak-valley price range from 3.09 to 6.32. On this basis, we conduct a sensitivity analysis of optimal electricity price subsidy and peak-valley price rate and find that the threshold goes down significantly as the cost goes down. However, rapid cost variations and fluctuations make developers hesitate to invest, which will seriously hinder the widespread commercial adoption of PV microgrids. This study extends the understanding of participants' strategies in a dynamic framework by analyzing the impacts of uncertainty on investment decisions. We suggest developers pay attention to the changes in the market and reduce investment risks by signing option contracts. A stable investment market corresponds to smaller peak-valley price rates and less electricity price subsidies. The policymaker should provide flexible and efficient incentives depending on the application scenario. It is also suggested that in areas lacking solar resources, the government should not only speed up the establishment of peak-valley electricity prices but also provide long-term subsidies.(c) 2022 Institution of Chemical Engineers. Published by Elsevier Ltd. All rights reserved.

Automated summary

This study develops a real options model to assess peak-valley electricity prices and electricity price subsidies for photovoltaic microgrids. The results show that optimal subsidies range from 0.30 RMB/kWh to 1.05 RMB/kWh, and optimal peak-valley price rates range from 3.09 to 6.32. Rapid cost variations hinder commercial adoption of PV microgrids.