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Real options analysis of investment in carbon capture and sequestration technology

Heydari, S; Ovenden, N; Siddiqui, A; (2012) Real options analysis of investment in carbon capture and sequestration technology. Computational Management Science , 9 (1) 109 - 138. 10.1007/s10287-010-0124-5.

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Abstract

Amonga comprehensive scope of mitigationmeasures 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.

Type:Article
Title:Real options analysis of investment in carbon capture and sequestration technology
DOI:10.1007/s10287-010-0124-5
Publisher version:http://dx.doi.org/10.1007/s10287-010-0124-5
Additional information:10.1007/s10287-010-0124-5 affiliation: University College London Department of Statistical Science London UK
Keywords:Business and Economics, Real options analysis, CCS, Geometric Brownian motion, Mutually exclusive options
UCL classification:UCL > School of BEAMS > Faculty of Maths and Physical Sciences > Mathematics
UCL > School of BEAMS > Faculty of Maths and Physical Sciences > Statistical Science

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