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Real options analysis of investment in carbon captureand sequestration technology
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences. University College London.
2012 (English)In: Computational Management Science, ISSN 1619-697X, E-ISSN 1619-6988, Vol. 9, no 1, 109-138 p.Article in journal (Refereed) Published
Abstract [en]

Among a comprehensive scope of mitigation measures for climate change, CO2 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, CO2, 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 CO2 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 CO2 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 CO2 price volatility.

Place, publisher, year, edition, pages
Springer-Verlag New York, 2012. Vol. 9, no 1, 109-138 p.
Keyword [en]
Real options analysis - CCS - Geometric Brownian motion - Mutually exclusive options
National Category
Information Science
Research subject
Computer and Systems Sciences
Identifiers
URN: urn:nbn:se:su:diva-53095DOI: 10.1007/s10287-010-0124-5OAI: oai:DiVA.org:su-53095DiVA: diva2:389813
Available from: 2011-01-20 Created: 2011-01-20 Last updated: 2017-12-11Bibliographically approved

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Publisher's full texthttp://dx.doi.org/10.1007/s10287-010-0124-5

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