In this paper, a real option model is developed to examine the critical factors affecting the decision to lease agricultural land to a company installing a PV power plant. Subsidies introduced by governments for the production of renewable energies have increased the investments in this sector. Since ground-based solar cells need land for energy production, then potential trade-off with agriculture in terms of land exists. The paper aims to discuss these issues.
The paper uses the real option approach in order to take into account for uncertainty and irreversibility of the farmer's decision.
By applying the model to the province of Bologna (Italy), the paper illustrates the possible land-use change scenarios in this area. The paper concludes by discussing the importance of PV energy production as a source of income for farmers and its implications from a social perspective.
The research is applied to the province of Bologna (Italy) where investments in ground-based solar cells are becoming quite common. The originality lies in the fact of considering the investment as irreversible, since it is a 20-year commitment from the farmers. The paper also takes into account the uncertainty in agricultural commodities' prices.
The authors wish to thank Jeroen van den Bergh, William Redekop, Chelsey Jo Huisman and Tinoush Jamali Jaghdani for helpful comments. In addition, the authors are thankful to Andrea Povellato and INEA for providing useful data. The usual disclaimer applies.
Gazheli, A. and Di Corato, L. (2013), "Land-use change and solar energy production: a real option approach", Agricultural Finance Review, Vol. 73 No. 3, pp. 507-525. https://doi.org/10.1108/AFR-05-2012-0024
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