A real options approach to assessing the cost savings potential of renewable energy adoption among SMEs in Ghana

ABSTRACT

Small and Medium Scale Enterprises (SMEs) are integral to economic development. However, they face significant challenges within their operations, of which access to an affordable power supply is profound. Self-generation options have the potential to curtail these challenges to an extent, but SMEs need to choose options that provide significant cost savings. This study proposes a simulation-based real options model using secondary data to evaluate the cost savings potential for SMEs in switching from conventional power generating sources to renewable energy based on three main scenarios: using renewable energy as a backup; a complete transition to renewable energy generation; and a partial transition to renewable energy sources. The results show that using renewable energy as backup sources of energy does not provide significant cost savings to the SME. However, a complete or a partial transition from conventional to renewable energy resources offers substantial cost savings for the SME over the life of the renewable energy technology. SMEs must consider capacity factors of renewable energy technologies, tariffs for conventional power supply, system reliability of conventional systems, and the investment costs for renewable energy generation as critical determining factors for renewable energy investments. Successful integration of renewable energy by SMEs also requires policy support towards educating SMEs on its importance and technical requirements.

Key policy insights

• Renewable energy integration can allow SMEs to make substantial savings in their power consumption costs.

• SMEs must be mindful of an approach towards investing in renewable energy technologies so that it also maximises their gains in renewable energy integration.

• Government policy must focus on creating an enabling environment for SMEs to reap the benefits of renewable energy integration.

Keywords:

• Renewable energy
• Real options analysis
• Small and Medium Scale Enterprises (SMEs)
• Solar PVs

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 GhP is Ghana pesewas. In Ghana’s currency conversion, 100 Ghana pesewas make 1 Ghana cedi (i.e., Ghp100 = GHS1)

2 Average exchange rate in as at the time of the paper (US$ 1 = GHS5.64)