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Real Options Analysis for Land and Water Solar Deployment in Idle Areas of Agricultural Dam: A Case Study of South Korea

Author

Listed:
  • Seoungbeom Na

    (Department of Civil Engineering, Chosun University, Gwangju 61452, Korea
    These authors contributed equally to this work and should be considered as co-first authors.)

  • Kyeongseok Kim

    (Department of Civil & Environment Engineering, Wonkwang University, Iksan-si 54538, Jeonbuk, Korea
    These authors contributed equally to this work and should be considered as co-first authors.)

  • Woosik Jang

    (Department of Civil Engineering, Chosun University, Gwangju 61452, Korea)

  • Changgeun Lee

    (Department of Civil Engineering, Chosun University, Gwangju 61452, Korea)

Abstract

This study presents a real options-based framework for investment in land and water solar power projects in the idle areas of agricultural dams. The following four-step framework was verified through a case study conducted in South Korea: (1) select the location and size of the project; (2) define uncertainties in the project data (construction cost, O&M cost, sunshine hours, and mechanical efficiency) and market data (inflation, discount rate, risk-free interest rate, and electricity selling price); (3) estimate cash flow and project volatility to calculate the option value using a binomial tree model; and (4) make decisions regarding project investment. A case study was conducted for the Naju Agricultural Dam (NAD) project, which has a net present value of −6.67 million USD, but will have a profit of 38.17 million USD after an abandonment option is applied using the proposed framework. Our contributions provide a framework for evaluating the economic feasibility of installing solar projects in idle areas of agricultural dams and for improving the profitability of solar projects using the abandonment option. The proposed framework can assist investors in planning solar projects in idle areas of agricultural dams.

Suggested Citation

  • Seoungbeom Na & Kyeongseok Kim & Woosik Jang & Changgeun Lee, 2022. "Real Options Analysis for Land and Water Solar Deployment in Idle Areas of Agricultural Dam: A Case Study of South Korea," Sustainability, MDPI, vol. 14(4), pages 1-17, February.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:4:p:2297-:d:751959
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    References listed on IDEAS

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