Does Exit-Timing Flexibility Pay? An Empirical Least-Squares Monte Carlo Assessment of Equity Divestment Timing for Utility-Scale Solar in the PJM Market

Abstract

Utility-scale solar equity in the PJM market carries a merchant tail once its power purchase agreement expires, and sponsors hold a valuable but under-quantified right to choose when to divest. This study measures whether flexible, state-contingent exit timing creates value relative to committing in advance to a single divestment date. A representative levered equity stake in a 100 MW-AC photovoltaic plant is simulated under the real-world measure, with revenue driven by a mean-reverting jump-diffusion power price calibrated to historical PJM day-ahead prices, an eroding capture ratio, and a fluctuating transaction-valuation environment. Four Bermudan-style exit nodes are evaluated—notice to proceed, commercial operation, and three and five years thereafter—alongside a passive hold-to-maturity benchmark. Least-squares Monte Carlo estimates the optimal stopping policy out of sample, and performance is compared using net present value, internal rate of return, multiple on invested capital, loss probability, and conditional value at risk. Under the calibrated low-price regime every committed exit date trails passive holding, yet the dynamic policy raises equity net present value above the best committed exit by about 3.6 percent of invested equity and above passive holding by 2.3 percent, while cutting the probability of loss to 39 percent. A variance-based global sensitivity analysis attributes most of this premium to the volatility of the transaction environment. The findings quantify how divestment flexibility supports capital rotation and resource-adequacy planning.