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Co-firing coal with wood pellets for U.S. electricity generation: A real options analysis

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  • Xian, Hui
  • Colson, Gregory
  • Mei, Bin
  • Wetzstein, Michael E.

Abstract

In contrast to EU, U.S. electric utilities are not employing the bioenergy technology of co-firing wood pellets with coal. This difference in employment patterns is explored within a real options analysis (ROA) for possible U.S. utilization of wood pellets, considering fuel-price series from 2009 to 2014. For analysis, these series are divided into two sub-periods based on different market conditions: Infancy (2009–2011) and Substitution (2012–2014). ROA indicates co-firing wood pellets with coal is feasible considering adoption during wood pellets' infancy, under low discount rates, and long power-plant lifespans. A portfolio effect of employing multiple fuels underlies this result. However, co-firing is not currently economically feasible. The different adoption decisions are likely a consequence of recent cheap and abundant U.S. natural gas. For co-fired wood pellets to be feasible, government incentives and/or a market increase in natural gas prices appear necessary.

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  • Xian, Hui & Colson, Gregory & Mei, Bin & Wetzstein, Michael E., 2015. "Co-firing coal with wood pellets for U.S. electricity generation: A real options analysis," Energy Policy, Elsevier, vol. 81(C), pages 106-116.
  • Handle: RePEc:eee:enepol:v:81:y:2015:i:c:p:106-116
    DOI: 10.1016/j.enpol.2015.02.026
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    4. Xian, Hui & Colson, Gregory & Karali, Berna & Wetzstein, Michael, 2017. "Do nonrenewable-energy prices affect renewable-energy volatility? The case of wood pellets," Journal of Forest Economics, Elsevier, vol. 28(C), pages 42-48.
    5. Tan, Zhizhou & Zeng, Xianhai & Lin, Boqiang, 2023. "How do multiple policy incentives influence investors’ decisions on biomass co-firing combined with carbon capture and storage retrofit projects for coal-fired power plants?," Energy, Elsevier, vol. 278(PB).
    6. Caurla, Sylvain & Bertrand, Vincent & Delacote, Philippe & Le Cadre, Elodie, 2018. "Heat or power: How to increase the use of energy wood at the lowest cost?," Energy Economics, Elsevier, vol. 75(C), pages 85-103.
    7. Agaton, Casper, 2017. "Real Options Analysis of Renewable Energy Investment Scenarios in the Philippines," MPRA Paper 83478, University Library of Munich, Germany.
    8. Stutzman, Sarah & Weiland, Brandon & Preckel, Paul & Wetzstein, Michael, 2017. "Optimal replacement policies for an uncertain rejuvenated asset," International Journal of Production Economics, Elsevier, vol. 185(C), pages 21-33.
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    10. Weiland, Brandon & Sesmero, Juan Pablo & Preckel, Paul & Wetzstein, Michael E., 2017. "Can Wood Pellets Save Coal?," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258250, Agricultural and Applied Economics Association.
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