Do smart grid innovations affect real estate market values?

To date photovoltaic energy systems have been widely installed on homes in Europe and all over the world. In Europe and in Italy investments in domestic photovoltaic power plants (PV) were boosted by generous feed-in tariffs that made these investments extremely attractive for small private investors, such as homeowners. It is commonly agreed that the greater the building energy efficiency, the greater the property market value. It is of paramount importance to determine the value that PV systems may add to home sale transactions. The aim of the paper is to investigate whether Smart Grids (SGs) innovation can increase market values due to higher production and consumption flexibility. SGs give de facto producers and consumers, the opportunity to be active in the energy market and strategically decide their optimal production/consumption pattern. In this paper, we provide a model based on the real option theory to determine the value of this flexibility and the related market value increase. We model the homeowner decision to invest in a solar home with a PV plant and connect to an SG by comparison to the decision to invest in a solar home not connected to an SG. 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. Results of simulations, performed according to zonal prices’ trend and volatility in the North and South of Italy, show that in the North and in the South, being connected to an SG increases by about 5-10% the PV investment’s value and this quota increases as energy savings and flexibility increase. The greater the flexibility, the greater the property market value.