Do Smart Grids Increase Real Estate Market Values?

Purpose –Buildings energy efficiency is generally considered in terms of energy consumption, costs and GHG emissions reduction in line with the 2020 goals. It is commonly agreed that the greater the building energy efficiency, the greater the property market value. To increase energy efficiency, deep retrofitting was set in place and simultaneously photovoltaic power plants (PV) were installed, boosted through feed-in-tariffs that made them extremely attractive for both institutional and small private investors. Nonetheless Government incentives and regulations were not able to foster consumers to substantially change their energy consumption patterns. In this scenario overall cost-savings by PV-generation systems would only have a marginal impact on real estate market values, if the energy consumption pattern of the household does not match the most beneficial generation pattern and energy management is not properly performed. Aim of the paper is to investigate whether Smart Grids can increase market values due to higher production and consumption flexibility. Smart grids give de facto producers and consumers, the opportunity to be active in the market and strategically decide their optimal production/consumption pattern. We provide a model based on the real option theory to determine the value of this flexibility and the related market value increase. Design/Methodology/Approach – We model the homeowner decision to invest in a PV plant and connect to a Smart Grid. We determine the property potential market value increase due to the opportunity to perform active energy management given by smart grids and we compare this value increase to the PV plant value per se. To capture the value of managerial flexibility we implement a real option approach. Findings – The paper provides a theoretical framework to model the owner’s decision to invest in a PV plant, to be integrated in a smart grid, and determines the real estate market value increase. The greater the flexibility the greater the market value Research limitations/implications – Interesting policy implications might be driven from the model implementation. It might be derived the optimal mix between building energy retrofitting and energy market participation that increases property values in a smart grid scenario. Originality/values – The novelty of the paper lies in the attempt to define energy efficiency also in terms of flexible energy management and its implications in the energy market.