Valuing solar photovoltaics as an option for California electric utilities and regulators: An analysis and modification of the levelized cost-model for performing cost-comparison of central station electricity generators in California

Andreas Nicolet

Student thesis: Master thesis


This thesis analyses and modifies the existing levelized cost-model for comparing costs of central station electricity generators in California, and finds that the current framework, in itself, is not sufficient for comparing natural gas-fueled generators with renewable energy generators such as solar photovoltaic plants. By introducing the capital asset pricing model and real options theory from the world of finance, the existing model is modified to perform a cost-comparison between the solar photovoltaic- and gas-fueled generators that better accounts for the risk- and unique characteristics of solar photovoltaics, which are not included in current valuation methods. The model is then finally used to answer the question; of whether or not there can be an economic rationale behind a State-wide expansion of electrical transmission-grids, with the intent of stimulating future installations of solar photovoltaic plants. The thesis has two main findings. First, it is concluded that the current method for calculating levelized costs, potentially under-estimates costs of natural gas-plants with as much as 90%. The modified levelized cost-model thus suggests that the “gap” in costs between solar photovoltaic- and natural gas-plants is not as large as previously thought. Secondly, the new modified levelized cost-method is implemented into a real option context. By valuing solar photovoltaics as an option, or alternative, to gas-fueled generators in the future, an option value of $550,000 per megawatt of potentially installed capacity is found. Extrapolating this figure to value California‟ choice of installing renewable energy to comply with the State‟s own 33% Renewable Portfolio Standard-target yields an option value of almost $38 billion dollars. The result means that California State, assuming an average scenario, should invest no more than $38 billion on means to allow for future installations of solar photovoltaic plants. Although the final option value is derived through a rough extrapolation of individual utilities‟ option value, the results of the thesis show that there is a lot of immaterial value and risk in the energy industry, which is currently not being accounted for, due to a generalized framework for cost-comparison.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2010
Number of pages98