A real options approach to evaluating the profitability of photovoltaic based mini-grids in Bangladesh

Conventional NPV analysis often reveals that the price of electricity produced by solar energy technology is significantly higher than that produced by fossil fuel using power plants. In the context of Bangladesh, this difference becomes more marked because the government of Bangladesh subsidizes the grid electricity, offering it to consumers at a cost below the cost of production. As a result, any commercial venture to supply solar powered energy must find its markets only in off grid areas where the government transmission system has not reached. However, finance theory tells us that an investment must be evaluated not only the basis of its costs and returns, but also on the basis of its risk. The risk of a given PV based power plant project to supply a town or village can be evaluated using the real options method. This reveals that the options inherent in the installment and operations of a PV grid lower its cost to make it more competitive with electricity.