IDEAS home Printed from https://ideas.repec.org/a/eee/appene/v113y2014icp1059-1067.html
   My bibliography  Save this article

A novel modeling based real option approach for CCS investment evaluation under multiple uncertainties

Author

Listed:
  • Zhang, Xian
  • Wang, Xingwei
  • Chen, Jiajun
  • Xie, Xi
  • Wang, Ke
  • Wei, Yiming

Abstract

In this study, a trinomial tree modeling-based real option approach was developed to evaluate the investment in CCS retrofitting for two typical types of power plants from the perspective of power generation enterprises. A method based on the cumulative probability was proposed using trinomial decision tree calculations for the exercising of options in order to evaluate the optimal retrofit timing. Uncertainties in carbon prices, government incentives, annual running time, power plant lifetime, and technological improvements were considered. From the result, the cost saving effect of CCR pre-investment was apparent. When the current carbon price increased to 350.0RMB/ton CO2, a power plant with CCR pre-investment would execute CCS retrofitting immediately, while this value would have to increase to 371.8RMB/ton CO2 for the SC scenario. The two typical types of power plants were not optimal for immediate investment in CCS technology in the current market situation. Given a full government subsidy, the critical carbon prices for SC and SC+CCR were 239.2 and 230.0RMB/ton CO2, respectively, while the current carbon price in the voluntary emission reduction market was 3.5RMB/ton CO2. By introducing CO2 utilization technology, the critical carbon prices fell to 195.5 and 186.3RMB/ton CO2, but they were still not optimal for immediate investment. CCR pre-investment was conducive to CCS retrofitting deployment; this would be more significant when considering CO2 utilization technologies. The results indicated that a large gap existed between the carbon price needed for CCS retrofitting of both typical types of power plants and the current prices in the voluntary emission reduction market. Moreover, the results obtained could also provide useful information for the CCS policy-making of power enterprises in an uncertain environment.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:appene:v:113:y:2014:i:c:p:1059-1067
    DOI: 10.1016/j.apenergy.2013.08.047
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0306261913006910
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sanna, Aimaro & Dri, Marco & Hall, Matthew R. & Maroto-Valer, Mercedes, 2012. "Waste materials for carbon capture and storage by mineralisation (CCSM) – A UK perspective," Applied Energy, Elsevier, vol. 99(C), pages 545-554.
    2. Fuss, Sabine & Szolgayová, Jana, 2010. "Fuel price and technological uncertainty in a real options model for electricity planning," Applied Energy, Elsevier, vol. 87(9), pages 2938-2944, September.
    3. Zhang, Xian & Fan, Jing-Li & Wei, Yi-Ming, 2013. "Technology roadmap study on carbon capture, utilization and storage in China," Energy Policy, Elsevier, vol. 59(C), pages 536-550.
    4. Zhu, Lei & Fan, Ying, 2011. "A real options–based CCS investment evaluation model: Case study of China’s power generation sector," Applied Energy, Elsevier, vol. 88(12), pages 4320-4333.
    5. Li, H. & Yan, J., 2009. "Impacts of equations of state (EOS) and impurities on the volume calculation of CO2 mixtures in the applications of CO2 capture and storage (CCS) processes," Applied Energy, Elsevier, vol. 86(12), pages 2760-2770, December.
    6. Fuss, Sabine & Szolgayova, Jana & Obersteiner, Michael & Gusti, Mykola, 2008. "Investment under market and climate policy uncertainty," Applied Energy, Elsevier, vol. 85(8), pages 708-721, August.
    7. Eduardo S. Schwartz, 2004. "Patents and R&D as Real Options," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 33(1), pages 23-54, February.
    8. Margaret Insley, 2003. "On the option to invest in pollution control under a regime of tradable emissions allowances," Canadian Journal of Economics, Canadian Economics Association, vol. 36(4), pages 860-883, November.
    9. Middleton, Richard S. & Eccles, Jordan K., 2013. "The complex future of CO2 capture and storage: Variable electricity generation and fossil fuel power," Applied Energy, Elsevier, vol. 108(C), pages 66-73.
    10. Roddy, Dermot J., 2012. "Development of a CO2 network for industrial emissions," Applied Energy, Elsevier, vol. 91(1), pages 459-465.
    11. Viebahn, Peter & Daniel, Vallentin & Samuel, Höller, 2012. "Integrated assessment of carbon capture and storage (CCS) in the German power sector and comparison with the deployment of renewable energies," Applied Energy, Elsevier, vol. 97(C), pages 238-248.
    12. Li, Sheng & Sui, Jun & Jin, Hongguang & Zheng, Jianjiao, 2013. "Full chain energy performance for a combined cooling, heating and power system running with methanol and solar energy," Applied Energy, Elsevier, vol. 112(C), pages 673-681.
    13. Duan, Hong-Bo & Fan, Ying & Zhu, Lei, 2013. "What’s the most cost-effective policy of CO2 targeted reduction: An application of aggregated economic technological model with CCS?," Applied Energy, Elsevier, vol. 112(C), pages 866-875.
    14. Yang, Ming & Blyth, William & Bradley, Richard & Bunn, Derek & Clarke, Charlie & Wilson, Tom, 2008. "Evaluating the power investment options with uncertainty in climate policy," Energy Economics, Elsevier, vol. 30(4), pages 1933-1950, July.
    15. Li, Mu & Rao, Ashok D. & Scott Samuelsen, G., 2012. "Performance and costs of advanced sustainable central power plants with CCS and H2 co-production," Applied Energy, Elsevier, vol. 91(1), pages 43-50.
    16. Abadie, Luis M. & Chamorro, José M., 2008. "European CO2 prices and carbon capture investments," Energy Economics, Elsevier, vol. 30(6), pages 2992-3015, November.
    17. Zhou, Wenji & Zhu, Bing & Fuss, Sabine & Szolgayová, Jana & Obersteiner, Michael & Fei, Weiyang, 2010. "Uncertainty modeling of CCS investment strategy in China's power sector," Applied Energy, Elsevier, vol. 87(7), pages 2392-2400, July.
    18. Somayeh Heydari & Nick Ovenden & Afzal Siddiqui, 2012. "Real options analysis of investment in carbon capture and sequestration technology," Computational Management Science, Springer, vol. 9(1), pages 109-138, February.
    19. Murto, Pauli, 2007. "Timing of investment under technological and revenue-related uncertainties," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1473-1497, May.
    20. Ou, Xunmin & Xiaoyu, Yan & Zhang, Xiliang, 2011. "Life-cycle energy consumption and greenhouse gas emissions for electricity generation and supply in China," Applied Energy, Elsevier, vol. 88(1), pages 289-297, January.
    21. Weydahl, Torleif & Jamaluddin, Jamal & Seljeskog, Morten & Anantharaman, Rahul, 2013. "Pursuing the pre-combustion CCS route in oil refineries – The impact on fired heaters," Applied Energy, Elsevier, vol. 102(C), pages 833-839.
    22. Rammerstorfer, Margarethe & Eisl, Roland, 2011. "Carbon capture and storage—Investment strategies for the future?," Energy Policy, Elsevier, vol. 39(11), pages 7103-7111.
    23. 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.
    Full references (including those not matched with items on IDEAS)

    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:eee:appene:v:113:y:2014:i:c:p:1059-1067. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/description#description .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.