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A Barrier Options Approach to Modeling Project Failure: The Case of Hydrogen Fuel Infrastructure

Author

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  • Y. Li
  • P.J. Engelen
  • C.J.M. Kool

Abstract

In this paper, we contribute to the literature by including a knock-out barrier option in a compound real option model to take account of immediate project failure, a so-called sudden death. We apply the model to the case of hydrogen infrastructure development. In our case study, we find that even for the least conservative valuation method no profitable business case can be made for the development of hydrogen as a sustainable transportation mode. However, we do provide some suggestive scenarios that plausible tax schedules can be designed to overcome the starting problems for hydrogen infrastructure development. To the extent that sudden project failure would be predominantly caused by potential reversals in political support, a cheap way to make the development of hydrogen infrastructure – and other similar projects - more attractive would be to design credible long-term political commitments to this type of development.

Suggested Citation

  • Y. Li & P.J. Engelen & C.J.M. Kool, 2013. "A Barrier Options Approach to Modeling Project Failure: The Case of Hydrogen Fuel Infrastructure," Working Papers 13-01, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:1301
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    References listed on IDEAS

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    Cited by:

    1. Ye Li & Clemens Kool & Peter-Jan Engelen, 2020. "Analyzing the Business Case for Hydrogen-Fuel Infrastructure Investments with Endogenous Demand in The Netherlands: A Real Options Approach," Sustainability, MDPI, vol. 12(13), pages 1-22, July.
    2. Vidal Nunes, João Pedro & Ruas, João Pedro & Dias, José Carlos, 2020. "Early exercise boundaries for American-style knock-out options," European Journal of Operational Research, Elsevier, vol. 285(2), pages 753-766.
    3. Zhao, Tian & Liu, Zhixin & Jamasb, Tooraj, 2022. "Developing hydrogen refueling stations: An evolutionary game approach and the case of China," Energy Economics, Elsevier, vol. 115(C).
    4. 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.
    5. Ayman Awad & Hussein Abdel-Mawgoud & Salah Kamel & Abdalla A. Ibrahim & Francisco Jurado, 2021. "Developing a Hybrid Optimization Algorithm for Optimal Allocation of Renewable DGs in Distribution Network," Clean Technol., MDPI, vol. 3(2), pages 1-15, May.
    6. Tian Zhao & Zhixin Liu, 2023. "Investment Timing Analysis of Hydrogen-Refueling Stations and the Case of China: Independent or Co-Operative Investment?," Energies, MDPI, vol. 16(13), pages 1-17, June.
    7. Y. Li & C.J.M. Kool & P.J. Engelen, 2016. "Hydrogen-Fuel Infrastructure Investment with Endogenous Demand: A Real Options Approach," Working Papers 16-12, Utrecht School of Economics.

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    More about this item

    Keywords

    uncertainty; real option; barrier option; investment failure; hydrogen infrastructure investment;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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