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Abstract
Many incentives at the state and federal level exist for household adoption of re-
newable energy like solar photovoltaic (PV) panels. Although incentives make solar
panels an attractive investment from a net present value perspective, the adoption rate
is low, suggesting that households are either irrational or apply an abnormally high
discount rate. Alternatively, households could be recognizing the benefit (option value)
of waiting to reduce uncertainty in net benefits associated with investing in solar PV.
We use the option value framework to examine the decision by households to invest in
solar PV and quantify the option value multiplier and adoption rate over time for solar
PV investments. We find that the option value multiplier is 1.8, which implies that the
net present value of benefits from solar PV needs to be almost double the investment
cost for investment to occur. Simulated adoption rates show that the adoption rate
under the option value decision rule is significantly lower than that following a decision
rule based on NPV, and is more consistent with the observed adoption rate of solar PV.
Current policies that support the solar PV market are crucial to households' adoption
decision. Our simulations show that without tax credits and rebates, the median time
to adoption increases by 110% compared to the baseline.