In this paper, we develop a multi-factor real options model for a two-stage investment problem, where a coal-fired power plant is later retrofitted with carbon capture and storage (CCS). A capture-ready power plant with lower retrofit costs is compared with a conventional one and higher CCS retrofit costs. The stochastic variables considered are the price of electricity, the price of CO2 permits, the costs of CO2 capture, transporting and storage (CTS), and CCS retrofit investment costs. Fuel costs are disregarded due to the constant boiler size in the case of a retrofit, resulting in constant fuel consumption but lower electricity output of the retrofitted plant. Two retrofit options that reduce the power plant’s net efficiency from 46% to 30% and 35%, respectively, and an integrated CCS power plant with an efficiency of 38.5% are investigated. In a numerical simulation with realistic parameterization, we find a low probability for a retrofit even after fifteen to twenty years, caused by the high uncertainty and the adverse impact of the electricity price and the CO2 permit price. This renders the capture-ready option unattractive, and calls for investments in conventional coal-fired power plants with later CCS investments at higher costs than in the case of a capture-ready pre-installation.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price excludes VAT (USA)
Tax calculation will be finalised during checkout.
IEA GHG: CO2 capture ready plants. IEA Greenhouse Gas R&D Programme, OECD/IEA. Paris, France (2007)
McDonald, R., Siegel, D.: The value of waiting to invest. Q. J. Econ. 101, 707–727 (1986)
Hu, Y., Øksendal, B.: Optimal time to invest when the price processes are geometric Brownian motions. Finance Stoch. 2(3), 295–310 (1998)
Olsen, T.E., Stensland, G.: On optimal timing of investment when cost components are additive and follow geometric diffusions. J. Econ. Dyn. Control 16(1), 39–51 (1992)
Adkins, R., Paxon, D.: The effect of depreciation allowances on the stochastic replacement decision. In: Proceedings of the Real Options Conference, Rio de Janeiro, June 20, 2008
Gahungu, J., Smeers, Y.: Multi-assets real options. Université catholique de Louvain, Center for Operations Research and Econometrics (CORE), September (2009)
Fleten, S.-E., Näsäkkälä, E.: Gas-fired power plants: Investment timing, operating flexibility and CO2 capture. Energy Econ. 32, 805–816 (2010)
Heydari, S., Ovenden, N., Siddiqui, A.: Real options analysis of investment in carbon capture and sequestration technology. Comput. Manag. Sci. 7, 1–30 (2010)
Abadie, L.M., González-Eguino, M., Chamorro, J.M.: Optimal abandonment of coal-fired stations in the EU. BC3 Working paper, Basque Centre for Climate Change (BC3), Bilbao, Spain, vol. 07 (2010)
Bohm, M.C., Herzog, H.J., Parsons, J.E., Sekar, R.C.: Capture-ready coal plants–options, technologies and economics. Int. J. Greenhouse Gas Control 1(1), 113–120 (2007)
Sekar, R.C., Parsons, J.E., Herzog, H.J., Jacoby, H.D.: Future carbon regulations and current investments in alternative coal-fired power plant designs. Energy Policy 35, 1064–1074 (2007)
Donaghy, K.P., Kaza, N.: The value of waiting: A primer on option value for planners. In: ACSP Conference, Ft. Worth, TX, November 9–12 (2006)
Etheridge, A.: A Course in Financial Calculus. Cambridge University Press, Cambridge (2002)
Rohlfs, W., Madlener, R.: Cost effectiveness of carbon capture-ready coal power plants with delayed retrofit. FCN Working Paper No. 7/2010, Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University, Aachen, Germany (2010)
IPCC: Transport of CO2. Special Report on Carbon Dioxide Capture and Storage. Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge (2005). Chap. 4
Tanaka, N.: CO2 capture and storage: a key carbon abatement option. OECD/IEA, Paris, France (2008)
Schreier, W., Boon, G., Kubacz, V.: Post-combustion capture plants—concept and plant integration. VGB Powertech 89(12), 47–51 (2009)
Daskalakis, G., Markellos, R.N.: Are electricity risk premia affected by emission allowance prices? Evidence from the EEX, Nord Pool and Powernext. Energy Policy 37(7), 2594–2604 (2009)
VGB PowerTech e.V.: Konzeptstudie Referenzkraftwerk Nordrhein-Westfalen (2004)
About this article
Cite this article
Rohlfs, W., Madlener, R. Valuation of CCS-ready coal-fired power plants: a multi-dimensional real options approach. Energy Syst 2, 243–261 (2011). https://doi.org/10.1007/s12667-011-0034-9