Real options analysis for smart grid: The role of information technology and public policy

Document Type

Conference Paper

Abstract

Smart cities depend on smart grid for resilient energy delivery and improved energy efficiencies. This paper employs the real option approach (ROA) to study the investment decision of information technology innovation in the case of smart grid adoption under uncertainty. We argue that investing in smart grid is analogous to having the option rights in a financial (American) call option. We propose a model taking the smart grid cost as primary decision variable to identify the optimal first time to adopt smart grid. We conclude that unless government provide sufficient financial support, certain projects would not be economically feasible. The study illustrated the use of ROA an important tool for simulate the impact of public policy on the adoption of the smart grid technology, and provided policy recommendations.

Publication Title

ACM International Conference Proceeding Series

Publication Date

5-27-2015

Volume

27-30-May-2015

First Page

266

Last Page

275

ISBN

9781450336000

DOI

10.1145/2757401.2757429

Keywords

Information Technology, Investment under Uncertainty, Public Policy, Real Options Theory, Smart Grid

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