Investing in Photovoltaics in a Smart Grid Context: the Prosumer's Perspective

In Italy - and in the Countries concerned with GHG emissions reduction - the last decade was characterized by a large development of distributed generation power plants. Private investments have been heavily boosted by monetary incentives, such as guaranteed feed-in tariffs, especially in the photovoltaic sector. These incentives, on the one hand, allowed for developing photovoltaic technology faster and guaranteed payoffs for huge initial investments, but on the other hand they determined new critical issues for the design and management of the overall energy system and the electric grid due to the presence of discontinuous sources. Contingent problems that currently affect local grids (e.g. inefficiency, congestion rents, power outages, etc.) might be solved by the implementation of a “smarter” electric grid. Smart grids represent de facto the evolution of electrical grids and their implementation is challenging the electric market organization and management. The main feature of smarts grid is the great increase in 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 scheme. The paper provides a theoretical framework to model the prosumer’s decision to invest in a photovoltaic power plant, assuming it is integrated in a smart grid. To capture the value of managerial flexibility, a real option approach is implemented.