Computational Management Science

, Volume 9, Issue 1, pp 109–138

Real options analysis of investment in carbon capture and sequestration technology

Authors

    • Department of Statistical ScienceUniversity College London
  • Nick Ovenden
    • Department of MathematicsUniversity College London
  • Afzal Siddiqui
    • Department of Statistical ScienceUniversity College London
    • Department of Computer and Systems SciencesStockholm University/KTH
Original Paper

DOI: 10.1007/s10287-010-0124-5

Cite this article as:
Heydari, S., Ovenden, N. & Siddiqui, A. Comput Manag Sci (2012) 9: 109. doi:10.1007/s10287-010-0124-5

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.

Keywords

Real options analysis CCS Geometric Brownian motion Mutually exclusive options

Copyright information

© Springer-Verlag 2010