Real options analysis of investment in carbon capture and sequestration technology

• Among a comprehensive scope of mitigation measures for climate change, CO 2 capture and sequestration (CCS) plays a potentially significant role in industrialised countries. In this paper, we develop an analytical real options model that values the choice between two emissions-reduction technologies available to a coal-fired power plant. Specifically, the plant owner may decide to invest in either full CCS (FCCS) or partial CCS (PCCS) retrofits given uncertain electricity, CO 2, and coal prices. We first assess the opportunity to upgrade to each technology independently by determining the option value of installing a CCS unit as a function of CO 2 and fuel prices. Next, we value the option of investing in either FCCS or PCCS technology. If the volatilities of the prices are low enough, then the investment region is dichotomous, which implies that for a given fuel price, retrofitting to the FCCS (PCCS) technology is optimal if the CO 2 price increases (decreases) sufficiently. The numerical examples provided in this paper using current market data suggest that neither retrofit is optimal immediately. Finally, we observe that the optimal stopping boundaries are highly sensitive to CO 2 price volatility.

Subject headings

TEKNIK OCH TEKNOLOGIER  -- Elektroteknik och elektronik -- Datorsystem (hsv//swe)

ENGINEERING AND TECHNOLOGY  -- Electrical Engineering, Electronic Engineering, Information Engineering -- Computer Systems (hsv//eng)

NATURVETENSKAP  -- Data- och informationsvetenskap -- Systemvetenskap, informationssystem och informatik (hsv//swe)

NATURAL SCIENCES  -- Computer and Information Sciences -- Information Systems (hsv//eng)

Keyword

CCS

Geometric Brownian motion

Mutually exclusive options

Real options analysis

Computer and systems science

data- och systemvetenskap

Publication and Content Type

ref (subject category)

art (subject category)