Affiliations: Clark University, Worcester, MA, USA
Correspondence:
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Corresponding author: Shu Feng, Clark University, 950 Main Street, Worcester, MA, USA. E-mail:sfeng@clarku.edu
Abstract: The growth of smart grid technologies is already defining energy in the
21st century: smart cities depend on the smart grid for resilient
energy delivery and improved energy efficiency. Adopting the smart grid
under conditions of uncertainty demands focused attention and innovative
approaches. This paper employs the Real Options Approach (ROA) to study how
utilities make investment decisions regarding smart grid information
technology innovation, under conditions of investment uncertainty. We argue
that investing in the smart grid is analogous to having the option rights in
a call option in the US financial market. We propose a model in which the
smart grid cost is taken as the primary decision variable to identify the
optimal first time for utility suppliers to adopt the smart grid. This study
demonstrates that ROA can be an important tool for simulating the impact of
public policy on the adoption of the smart grid technology of electric
utilities.
Keywords: Smart grid, information technology, real options theory, investment under uncertainty, public policy
