Real options analysis of investment in carbon capture and sequestration technology |
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Authors: | Somayeh Heydari Nick Ovenden Afzal Siddiqui |
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Institution: | 1. Department of Statistical Science, University College London, London, UK 2. Department of Mathematics, University College London, London, UK 3. Department of Computer and Systems Sciences, Stockholm University/KTH, Stockholm, Sweden
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Abstract: | 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. |
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