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Using Fuzzy Real Options Valuation for Assessing Investments in NGCC and CCS Energy Conversion Technology

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Author Info

  • Kraemer, Christian

    ()
    (Institut für Elektrische Anlagen und Energiewirtschaft)

  • Madlener, Reinhard

    ()
    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

Abstract

In this paper we study the relative advantage of investing in a natural gas combined-cycle (NGCC) power plant versus a coal-fired power plant with and without carbon capture and storage (CCS) technology. For the investment analysis under uncertainty, we apply fuzzy real options theory. Three different price scenarios for fuel input and CO2 emission permits are taken into consideration. For the assumptions made, we find evidence that the NGCC and (to a lesser degree) the conventional hard coal-fired power plant are the most cost-effective options, followed by the two CCS technologies ‘Oxyfuel’ and ‘Pre-combustion’. In contrast, due to high specific investment costs and significant losses in conversion efficiency, the third CCS option ‘Post-combustion’ remains uneconomical. The sensitivity analysis reveals that already at moderate cost reductions, ‘Pre-combustion’ and ‘Oxyfuel’ both become economically viable and, at sufficiently low CO2 permit prices or interest rates, even the preferred options.

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Bibliographic Info

Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 3/2009.

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Length: 25 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:ris:fcnwpa:2009_003

Note: FCN Working Paper No. 3/2009
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Web page: http://www.eonerc.rwth-aachen.de/fcn
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Related research

Keywords: Real options analysis; Fuzzy sets; NGCC; Coal combustion; CCS;

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References

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  1. Collan, Mikael, 2008. "New Method for Real Option Valuation Using Fuzzy Numbers," Working Papers, IAMSR, Ã…bo Akademi 466, IAMSR, Ã…bo Akademi.
  2. Carlo Alberto Magni, 2009. "A fuzzy expert system for solving real-option decision processes," PROYECCIONES FINANCIERAS Y VALORACION 005677, MASTER CONSULTORES.
  3. Geoffrey Rothwell, 2006. "A Real Options Approach to Evaluating New Nuclear Power Plants," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 87-54.
  4. Scott Mathews & Vinay Datar & Blake Johnson, 2007. "A Practical Method for Valuing Real Options: The Boeing Approach," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 19(2), pages 95-104.
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Citations

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Cited by:
  1. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Optimal Power Generation Investment: Impact of Technology Choices and Existing Portfolios for Deploying Low-Carbon Coal Technologies," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 12/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  2. Bruns, Stephan B. & Gross, Christian, 2013. "What if energy time series are not independent? Implications for energy-GDP causality analysis," Energy Economics, Elsevier, Elsevier, vol. 40(C), pages 753-759.
  3. Sorda, Giovanni & Madlener, Reinhard, 2012. "Cost-Effectiveness of Lignocellulose Biorefineries and their Impact on the Deciduous Wood Markets in Germany," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 8/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  4. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  5. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Preferences for Adopting Residential Heating Systems: A Discrete Choice Analysis for Germany," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 9/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  6. Kraas, Birk & Schroedter-Homscheidt, Marion & Pulvermüller, Benedikt & Madlener, Reinhard, 2011. "Economic Assessment of a Concentrating Solar Power Forecasting System for Participation in the Spanish Electricity Market," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 12/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  7. Achtnicht, Martin & Madlener, Reinhard, 2014. "Factors influencing German house owners' preferences on energy retrofits," Energy Policy, Elsevier, vol. 68(C), pages 254-263.
  8. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  9. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  10. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Motivation to Adopt a Residential Heating System: A Principal-Component Analysis," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 17/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Jan 2013.
  11. Hackbarth, André & Madlener, Reinhard, 2011. "Consumer Preferences for Alternative Fuel Vehicles: A Discrete Choice Analysis," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 20/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  12. Palmer, Johannes & Sorda, Giovanni & Madlener, Reinhard, 2013. "Modeling the Diffusion of Residential Photovoltaic Systems in Italy: An Agent-based Simulation," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 9/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  13. Michelsen , Carl Christian & Madlener, Reinhard, 2013. "Switching from Fossil Fuel to Renewables in Residential Heating Systems: An Empirical Study of Homeowners’ Decisions in Germany," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 14/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  14. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  15. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  16. Hackbarth, André & Madlener, Reinhard, 2013. "Willingness-to-Pay for Alternative Fuel Vehicle Characteristics: A Stated Choice Study for Germany," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 20/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  17. Ghosh, Gaurav & Shortle, James, 2012. "Managing Pollution Risk through Emissions Trading," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 1/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  18. Rohlfs, Wilko & Madlener, Reinhard, 2012. "Assessment of Clean-Coal Strategies: The Questionable Merits of Carbon Capture-Readiness," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 18/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  19. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.

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