Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation

Grid-connected solar photovoltaic (PV) systems play a critical role in addressing Nigeria’s persistent electricity shortages. However, investment decisions in these systems are often constrained by high tariffs, substantial upfront costs, and significant policy and market uncertainties. Such uncertainties are not well captured by conventional valuation techniques, particularly the Net Present Value (NPV) method, which assumes deterministic cash flows and overlooks managerial flexibility. To address these limitations, this study applies Real Options Analysis (ROA) to evaluate a 16.8 kWp solar PV system installed in a Nigerian government organisation, explicitly quantifying the value of deferring the investment under uncertainty using a binomial lattice framework. Project volatility (σ = 0.3098) was estimated through Monte Carlo simulation incorporating stochastic variations in electricity tariffs, energy yield, and operating costs. The results indicate that while the traditional NPV is positive at N=17.24 million, the option to defer adds an additional N=25.78 million, yielding an Expanded NPV (ENPV) of N=43.01 million-representing a 149% improvement over the static valuation. This substantial flexibility premium demonstrates that exclusive reliance on deterministic NPV significantly undervalues renewable energy investments in volatile environments. The findings highlight the importance of integrating uncertainty and strategic timing into project appraisal, especially in developing countries like Nigeria where regulatory, financial, and market risks are pronounced. The study offers a replicable decision-support framework for investors and underscores the need for stable and supportive renewable energy policies to enhance the adoption of solar PV technologies.

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Publication Details

Journal
Science Journal of Applied Mathematics and Statistics
Published
2026-01-15
DOI
https://doi.org/10.11648/j.sjams.20261401.13
Primary Topic
Capital Investment and Risk Analysis
Type
article
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article

Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation

Jethro Olorunfemi Idowu, Ini Adinya
Science Journal of Applied Mathematics and Statistics
Capital Investment and Risk Analysis
article

Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation

Jethro Olorunfemi Idowu, Ini Adinya
article en

Abstract

Grid-connected solar photovoltaic (PV) systems play a critical role in addressing Nigeria’s persistent electricity shortages. However, investment decisions in these systems are often constrained by high tariffs, substantial upfront costs, and significant policy and market uncertainties. Such uncertainties are not well captured by conventional valuation techniques, particularly the Net Present Value (NPV) method, which assumes deterministic cash flows and overlooks managerial flexibility. To address these limitations, this study applies Real Options Analysis (ROA) to evaluate a 16.8 kWp solar PV system installed in a Nigerian government organisation, explicitly quantifying the value of deferring the investment under uncertainty using a binomial lattice framework. Project volatility (σ = 0.3098) was estimated through Monte Carlo simulation incorporating stochastic variations in electricity tariffs, energy yield, and operating costs. The results indicate that while the traditional NPV is positive at N=17.24 million, the option to defer adds an additional N=25.78 million, yielding an Expanded NPV (ENPV) of N=43.01 million-representing a 149% improvement over the static valuation. This substantial flexibility premium demonstrates that exclusive reliance on deterministic NPV significantly undervalues renewable energy investments in volatile environments. The findings highlight the importance of integrating uncertainty and strategic timing into project appraisal, especially in developing countries like Nigeria where regulatory, financial, and market risks are pronounced. The study offers a replicable decision-support framework for investors and underscores the need for stable and supportive renewable energy policies to enhance the adoption of solar PV technologies.

Science Journal of Applied Mathematics and StatisticsVol. 14(1)
University of Ibadan (NG)
Openalex Percentile: Top 85%
Capital Investment and Risk Analysis
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