Solar Grid Parity dynamics in Italy: A real option approach

• We forecast the dynamics of both the Italian electricity prices and PV (photovoltaic) module costs.
• We calculate the “best time to invest” in a PV system using the Real Option approach.
• Option pricing can be used to incorporate financial risk into PV investment decision-making.

Over the past three years Italy has seen a rapid growth in the PV (photovoltaic) energy market, followed by an equally sudden decline when the government decided to reduce the incentives. This sharp change in the trend of the market calls into question the achievement of the so called Grid Parity and the possibility that the market is able to develop independently. The motivation of this paper is to evaluate the effects that uncertainties surrounding both the energy prices and PV module costs have on forecasting the dynamics of the Italian PV market. Using the Real Option approach we calculate “the best time to invest” in a PV system by a maximizing investor. We show that these sources of uncertainty can delay the optimal investment decision of several years compared to current Grid Parity forecasts, well describing the current market situation in Italy.