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

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

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.

Suggested Citation

  • Kim, Byungil & Kim, Changyoon & Han, SangUk & Bae, JuHyun & Jung, Jaehoon, 2020. "Is it a good time to develop commercial photovoltaic systems on farmland? An American-style option with crop price risk," Renewable and Sustainable Energy Reviews, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:rensus:v:125:y:2020:i:c:s1364032120301222
    DOI: 10.1016/j.rser.2020.109827
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    2. Qüinny Soares Rocha & Rafaele Almeida Munis & Richardson Barbosa Gomes da Silva & Elí Wilfredo Zavaleta Aguilar & Danilo Simões, 2023. "Photovoltaic Solar Energy in Forest Nurseries: A Strategic Decision Based on Real Options Analysis," Sustainability, MDPI, vol. 15(5), pages 1-11, February.
    3. Mohd Ashraf Zainol Abidin & Muhammad Nasiruddin Mahyuddin & Muhammad Ammirrul Atiqi Mohd Zainuri, 2021. "Solar Photovoltaic Architecture and Agronomic Management in Agrivoltaic System: A Review," Sustainability, MDPI, vol. 13(14), pages 1-27, July.
    4. Varo-Martínez, M. & Fernández-Ahumada, L.M. & Ramírez-Faz, J.C. & Ruiz-Jiménez, R. & López-Luque, R., 2024. "Methodology for the estimation of cultivable space in photovoltaic installations with dual-axis trackers for their reconversion to agrivoltaic plants," Applied Energy, Elsevier, vol. 361(C).
    5. Junedi, M.M. & Ludin, N.A. & Hamid, N.H. & Kathleen, P.R. & Hasila, J. & Ahmad Affandi, N.A., 2022. "Environmental and economic performance assessment of integrated conventional solar photovoltaic and agrophotovoltaic systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 168(C).
    6. Wu, Haixia & Ge, Yan & Li, Jianping, 2023. "Uncertainty, time preference and households’ adoption of rooftop photovoltaic technology," Energy, Elsevier, vol. 276(C).
    7. Alexander V. Klokov & Egor Yu. Loktionov & Yuri V. Loktionov & Vladimir A. Panchenko & Elizaveta S. Sharaborova, 2023. "A Mini-Review of Current Activities and Future Trends in Agrivoltaics," Energies, MDPI, vol. 16(7), pages 1-18, March.

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