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

Jethro Olorunfemi Idowu; Ini Adinya

doi:doi:10.11648/j.sjams.20261401.13

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

Jethro Olorunfemi Idowu^*, Ini Adinya

Published in Science Journal of Applied Mathematics and Statistics (Volume 14, Issue 1)

Received: 5 November 2025 Accepted: 19 November 2025 Published: 15 January 2026

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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.

Published in	Science Journal of Applied Mathematics and Statistics (Volume 14, Issue 1)
DOI	10.11648/j.sjams.20261401.13
Page(s)	16-26
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2026. Published by Science Publishing Group

Keywords

Real Options Analysis, Solar PV, Investment Flexibility, Deferral Option, Binomial Lattice, Monte Carlo Simulation, Nigeria

References

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Idowu, J. O., Adinya, I. (2026). Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation. Science Journal of Applied Mathematics and Statistics, 14(1), 16-26. https://doi.org/10.11648/j.sjams.20261401.13

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ACS Style

Idowu, J. O.; Adinya, I. Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation. Sci. J. Appl. Math. Stat. 2026, 14(1), 16-26. doi: 10.11648/j.sjams.20261401.13

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AMA Style

Idowu JO, Adinya I. Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation. Sci J Appl Math Stat. 2026;14(1):16-26. doi: 10.11648/j.sjams.20261401.13

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@article{10.11648/j.sjams.20261401.13,
  author = {Jethro Olorunfemi Idowu and Ini Adinya},
  title = {Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation
},
  journal = {Science Journal of Applied Mathematics and Statistics},
  volume = {14},
  number = {1},
  pages = {16-26},
  doi = {10.11648/j.sjams.20261401.13},
  url = {https://doi.org/10.11648/j.sjams.20261401.13},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.sjams.20261401.13},
  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.
},
 year = {2026}
}

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TY  - JOUR
T1  - Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation

AU  - Jethro Olorunfemi Idowu
AU  - Ini Adinya
Y1  - 2026/01/15
PY  - 2026
N1  - https://doi.org/10.11648/j.sjams.20261401.13
DO  - 10.11648/j.sjams.20261401.13
T2  - Science Journal of Applied Mathematics and Statistics
JF  - Science Journal of Applied Mathematics and Statistics
JO  - Science Journal of Applied Mathematics and Statistics
SP  - 16
EP  - 26
PB  - Science Publishing Group
SN  - 2376-9513
UR  - https://doi.org/10.11648/j.sjams.20261401.13
AB  - 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.

VL  - 14
IS  - 1
ER  -

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Author Information

Jethro Olorunfemi Idowu

Department of Mathematics, University of Ibadan, Ibadan, Nigeria

Contact Email
Ini Adinya

Department of Mathematics, University of Ibadan, Ibadan, Nigeria

Contact Email

http://orcid.org/0000-0003-0168-8305

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APA Style

Idowu, J. O., Adinya, I. (2026). Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation. Science Journal of Applied Mathematics and Statistics, 14(1), 16-26. https://doi.org/10.11648/j.sjams.20261401.13

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ACS Style

Idowu, J. O.; Adinya, I. Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation. Sci. J. Appl. Math. Stat. 2026, 14(1), 16-26. doi: 10.11648/j.sjams.20261401.13

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AMA Style

Idowu JO, Adinya I. Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation. Sci J Appl Math Stat. 2026;14(1):16-26. doi: 10.11648/j.sjams.20261401.13

Copy | Download

@article{10.11648/j.sjams.20261401.13,
  author = {Jethro Olorunfemi Idowu and Ini Adinya},
  title = {Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation
},
  journal = {Science Journal of Applied Mathematics and Statistics},
  volume = {14},
  number = {1},
  pages = {16-26},
  doi = {10.11648/j.sjams.20261401.13},
  url = {https://doi.org/10.11648/j.sjams.20261401.13},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.sjams.20261401.13},
  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.
},
 year = {2026}
}

Copy | Download

TY  - JOUR
T1  - Real Option Valuation of a Photovoltaic System in a Nigerian Government Organisation

AU  - Jethro Olorunfemi Idowu
AU  - Ini Adinya
Y1  - 2026/01/15
PY  - 2026
N1  - https://doi.org/10.11648/j.sjams.20261401.13
DO  - 10.11648/j.sjams.20261401.13
T2  - Science Journal of Applied Mathematics and Statistics
JF  - Science Journal of Applied Mathematics and Statistics
JO  - Science Journal of Applied Mathematics and Statistics
SP  - 16
EP  - 26
PB  - Science Publishing Group
SN  - 2376-9513
UR  - https://doi.org/10.11648/j.sjams.20261401.13
AB  - 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.

VL  - 14
IS  - 1
ER  -

Copy | Download