When Do Households Invest in Solar Photovoltaics? An Application of Prospect Theory

TL;DR

This paper models household investment in residential solar PV using Prospect Theory, revealing that investment timing depends on profitability and its change relative to the status quo, influenced by loss aversion.

Contribution

It introduces a behavioral model based on Prospect Theory to explain residential PV investment dynamics, highlighting the role of profitability changes and loss aversion.

Findings

Model reproduces PV adoption dynamics with few assumptions

Investment influenced by profitability and its change over time

Loss aversion significantly impacts investment timing

Abstract

While investments in renewable energy sources (RES) are incentivized around the world, the policy tools that do so are still poorly understood, leading to costly misadjustments in many cases. As a case study, the deployment dynamics of residential solar photovoltaics (PV) invoked by the German feed-in tariff legislation are investigated. Here we report a model showing that the question of when people invest in residential PV systems is found to be not only determined by profitability, but also by profitability's change compared to the status quo. This finding is interpreted in the light of loss aversion, a concept developed in Kahneman and Tversky's Prospect Theory. The model is able to reproduce most of the dynamics of the uptake with only a few financial and behavioral assumptions