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A barrier options approach to modeling project failure: The case of hydrogen fuel infrastructure

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  • Engelen, Peter-Jan
  • Kool, Clemens
  • Li, Ye

Abstract

Hydrogen fuel cell vehicles have the potential to contribute to a sustainable transport system with zero tailpipe emissions. This requires the construction of a network of fuel stations, a long-term, expensive and highly uncertain investment. We contribute to the literature by including a knock-out barrier option in an n-fold compound real option model to take account of immediate project failure in a multi-stage sequential investment project. Our model allows to explicitly incorporate the default possibility of large-scale energy infrastructure projects. In our case study of hydrogen infrastructure development, 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.

Suggested Citation

  • Engelen, Peter-Jan & Kool, Clemens & Li, Ye, 2016. "A barrier options approach to modeling project failure: The case of hydrogen fuel infrastructure," Resource and Energy Economics, Elsevier, vol. 43(C), pages 33-56.
  • Handle: RePEc:eee:resene:v:43:y:2016:i:c:p:33-56
    DOI: 10.1016/j.reseneeco.2015.10.001
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    Cited by:

    1. repec:eee:resene:v:49:y:2017:i:c:p:33-47 is not listed on IDEAS
    2. 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.

    More about this item

    Keywords

    Sustainable energy; Investment uncertainty; Barrier option; Compound real option; Investment failure; Multi-stage investment;

    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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