IDEAS home Printed from https://ideas.repec.org/a/sae/envira/v42y2010i6p1286-1307.html
   My bibliography  Save this article

Getting Ready for Carbon Capture and Storage by Issuing Capture Options

Author

Listed:
  • Xi Liang
  • David Reiner
  • Jon Gibbins
  • Jia Li

Abstract

A capture option is an option contract where the option holder can exercise a contract to retrofit an existing fossil fuel plant to capture carbon dioxide (CO 2 ) on or before a fixed date. We suggest that new thermal power plants, particularly those in developing countries, consider issuing capture options at the design stage, because the sellers—the owners of newly built thermal power plants—may then invest in making these plants CO 2 capture ready (CCR) to optimise returns from selling capture options. In a detailed case study on a 600 MW ultrasupercritical pulverised coal-fired power unit a potential storage site in Guangdong, China, the value of a capture option and CCR investment is evaluated using the backward deduction option pricing method through a stochastic cash flow model with Monte-Carlo simulations. If the power plant is retrofittable without CCR investment, then for an 8% discount rate the value of a capture option is US $11 million before CCR investment. Investing US $3.8 million in CCR increases the value of the capture option by an estimated US $12 million. Perhaps more important from a policy point of view, CCR investment can reduce the odds of early closure by 20% and also increase the chance of retrofitting to capture by 43%. If the power plant is not retrofittable in the absence of CCR design modifications, CCR investment to avoid ‘carbon lock-in’ is not only important for climate policy but is also economic from an investment point of view. We also conduct sensitivity analyses on a range of key assumptions to test the robustness of the findings.

Suggested Citation

  • Xi Liang & David Reiner & Jon Gibbins & Jia Li, 2010. "Getting Ready for Carbon Capture and Storage by Issuing Capture Options," Environment and Planning A, , vol. 42(6), pages 1286-1307, June.
  • Handle: RePEc:sae:envira:v:42:y:2010:i:6:p:1286-1307
    DOI: 10.1068/a42417
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1068/a42417
    Download Restriction: no

    File URL: https://libkey.io/10.1068/a42417?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Szolgayova, Jana & Fuss, Sabine & Obersteiner, Michael, 2008. "Assessing the effects of CO2 price caps on electricity investments--A real options analysis," Energy Policy, Elsevier, vol. 36(10), pages 3974-3981, October.
    2. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
    3. Abadie, Luis M. & Chamorro, José M., 2008. "European CO2 prices and carbon capture investments," Energy Economics, Elsevier, vol. 30(6), pages 2992-3015, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Jia & Liang, Xi & Cockerill, Tim, 2011. "Getting ready for carbon capture and storage through a ‘CCS (Carbon Capture and Storage) Ready Hub’: A case study of Shenzhen city in Guangdong province, China," Energy, Elsevier, vol. 36(10), pages 5916-5924.
    2. Ha-Duong, Minh & Nguyen-Trinh, Hoang Anh, 2017. "Two scenarios for carbon capture and storage in Vietnam," Energy Policy, Elsevier, vol. 110(C), pages 559-569.
    3. Xi Liang & Hengwei Liu & David Reiner, 2014. "Strategies for Financing Large-scale Carbon Capture and Storage Power Plants in China," Cambridge Working Papers in Economics 1430, Faculty of Economics, University of Cambridge.
    4. Li, Jia & Liang, Xi & Cockerill, Tim & Gibbins, Jon & Reiner, David, 2012. "Opportunities and barriers for implementing CO2 capture ready designs: A case study of stakeholder perceptions in Guangdong, China," Energy Policy, Elsevier, vol. 45(C), pages 243-251.
    5. Valentina Kashintseva & Wadim Strielkowski & Justas Streimikis & Tatiana Veynbender, 2018. "Consumer Attitudes towards Industrial CO 2 Capture and Storage Products and Technologies," Energies, MDPI, vol. 11(10), pages 1-14, October.
    6. Li, Jia & Tharakan, Pradeep & Macdonald, Douglas & Liang, Xi, 2013. "Technological, economic and financial prospects of carbon dioxide capture in the cement industry," Energy Policy, Elsevier, vol. 61(C), pages 1377-1387.
    7. Luisito Bertinelli & Amer Tabakovic & Luca Marchiori & Benteng Zou, 2015. "Transboundary Pollution Abatement: The Impact of Unilateral Commitment in Differential Games," DEM Discussion Paper Series 15-02, Department of Economics at the University of Luxembourg.
    8. Minh Ha-Duong & Hoang Anh Nguyen Trinh, 2017. "Two scenarios for carbon capture and storage in Vietnam," CIRED Working Papers hal-01550029, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhang, Mingming & Tang, Yamei & Liu, Liyun & Zhou, Dequn, 2022. "Optimal investment portfolio strategies for power enterprises under multi-policy scenarios of renewable energy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 154(C).
    2. Janne Kettunen, Derek W. Bunn and William Blyth & Derek W. Bunn & William Blyth, 2011. "Investment Propensities under Carbon Policy Uncertainty," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 77-118.
    3. Audrey Laude & Christian Jonen, 2011. "Biomass and CCS: The influence of the learning effect," Working Papers halshs-00829779, HAL.
    4. Lee, Shun-Chung & Shih, Li-Hsing, 2010. "Renewable energy policy evaluation using real option model -- The case of Taiwan," Energy Economics, Elsevier, vol. 32(Supplemen), pages 67-78, September.
    5. Brauneis, Alexander & Mestel, Roland & Palan, Stefan, 2013. "Inducing low-carbon investment in the electric power industry through a price floor for emissions trading," Energy Policy, Elsevier, vol. 53(C), pages 190-204.
    6. Laude, Audrey & Jonen, Christian, 2013. "Biomass and CCS: The influence of technical change," Energy Policy, Elsevier, vol. 60(C), pages 916-924.
    7. Ioannou, Anastasia & Angus, Andrew & Brennan, Feargal, 2017. "Risk-based methods for sustainable energy system planning: A review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 74(C), pages 602-615.
    8. Xiping Wang & Hongdou Zhang, 2018. "Valuation of CCS investment in China's coal‐fired power plants based on a compound real options model," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 8(5), pages 978-988, October.
    9. Hervé-Mignucci, Morgan, 2011. "Rôle du signal prix du carbone sur les décisions d'investissement des entreprises," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8200 edited by Keppler, Jan Horst.
    10. Mo, Jianlei & Cui, Lianbiao & Duan, Hongbo, 2021. "Quantifying the implied risk for newly-built coal plant to become stranded asset by carbon pricing," Energy Economics, Elsevier, vol. 99(C).
    11. Abadie, Luis M. & Chamorro, José M., 2009. "Income risk of EU coal-fired power plants after Kyoto," Energy Policy, Elsevier, vol. 37(12), pages 5304-5316, December.
    12. Thomas Aspinall & Adrian Gepp & Geoff Harris & Simone Kelly & Colette Southam & Bruce Vanstone, 2021. "Estimation of a term structure model of carbon prices through state space methods: The European Union emissions trading scheme," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3797-3819, June.
    13. Xiping Wang & Shaoyuan Qie, 2018. "Study on the investment timing of carbon capture and storage under different business modes," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 8(4), pages 639-649, August.
    14. Kern, Florian & Gaede, James & Meadowcroft, James & Watson, Jim, 2016. "The political economy of carbon capture and storage: An analysis of two demonstration projects," Technological Forecasting and Social Change, Elsevier, vol. 102(C), pages 250-260.
    15. Zhu, Lei & Fan, Ying, 2013. "Modelling the investment in carbon capture retrofits of pulverized coal-fired plants," Energy, Elsevier, vol. 57(C), pages 66-75.
    16. Cheng, Ching-Tsung & Lo, Shang-Lien & Lin, Tyrone T., 2011. "Applying real options analysis to assess cleaner energy development strategies," Energy Policy, Elsevier, vol. 39(10), pages 5929-5938, October.
    17. Koch, Nicolas & Reuter, Wolf Heinrich & Fuss, Sabine & Grosjean, Godefroy, 2017. "Permits vs. offsets under investment uncertainty," Resource and Energy Economics, Elsevier, vol. 49(C), pages 33-47.
    18. Zhang, Xian & Wang, Xingwei & Chen, Jiajun & Xie, Xi & Wang, Ke & Wei, Yiming, 2014. "A novel modeling based real option approach for CCS investment evaluation under multiple uncertainties," Applied Energy, Elsevier, vol. 113(C), pages 1059-1067.
    19. Spiecker, S. & Eickholt, V. & Weber, C., 2014. "The impact of carbon capture and storage on a decarbonized German power market," Energy Economics, Elsevier, vol. 43(C), pages 166-177.
    20. Stephan Spiecker & Volker Eickholt, 2013. "The Impact Of Carbon Capture And Storage On A Decarbonized German Power Market," EWL Working Papers 1304, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Oct 2013.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:envira:v:42:y:2010:i:6:p:1286-1307. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.