Land-use dilemma: Evaluating the transition from crops to solar PV plants using a real options approach

Abstract

The growing demand for renewable energy sources, particularly solar photovoltaic (PV) technology, poses a significant challenge to agricultural land use, creating a conflict over land allocation critical for food production and energy generation. This study addresses this issue by proposing a real options model to evaluate the timing of PV plant installation on agricultural land, incorporating uncertainties related to electricity prices and PV technology costs. This methodology has the advantage of incorporating flexibility in decision-making and the consideration of irreversibility, making it especially suitable for analyzing land-use changes. The model is applied to a case study in Spain, analyzing 134 crop types across 15 regions, to estimate the optimal timing for farmers to switch from traditional agriculture to solar PV installations. The findings indicate that the cost of PV technology is the primary driver of this transition, with the model predicting that PV installations will become more profitable than agriculture within the next 20 years, particularly in southern Spain, where higher solar irradiance accelerates the process. Furthermore, the study highlights the need for differentiated regulatory policies, with stricter measures recommended for regions with higher land-use change risk. This research contributes to the literature by providing a tool for assessing land-use conflicts between agriculture and renewable energy, offering insights for policymakers, investors, and academics.

The authors acknowledge the support and funding from ANID-Subdireccion de Capital Humano/Doctorado Nacional/2021–21210320, Conicyt-Fondecyt 1221943, Conicyt-FONDAP 1522A0006 (SERC Chile), MCIU/AEI&ERDF-EU PID2022-140546OB-I00 and Departament de Recerca i Universitat de la Generalitat de Catalunya 2021SGR00355.