Getting ready for carbon capture and storage by issuing capture options
A capture option is an option contract where the option holder can exercise a contract to retrofit an existing fossil fuel plant to capture carbon dioxide (rm CO 2) on or before a fixed date. We suggest that new thermal power plants, particularly those in developing countries, consider issuing capture options at the design stage, because the sellers—the owners of newly built thermal power plants—may then invest in making these plants rm CO 2 capture ready (CCR) to optimise returns from selling capture options. In a detailed case study on a 600 MW ultrasupercritical pulverised coal-fired power unit a potential storage site in Guangdong, China, the value of a capture option and CCR investment is evaluated using the backward deduction option pricing method through a stochastic cash flow model with Monte-Carlo simulations. If the power plant is retrofittable without CCR investment, then for an 8% discount rate the value of a capture option is US 11 million before CCR investment. Investing US 3.8 million in CCR increases the value of the capture option by an estimated US 12 million. Perhaps more important from a policy point of view, CCR investment can reduce the odds of early closure by 20% and also increase the chance of retrofitting to capture by 43%. If the power plant is not retrofittable in the absence of CCR design modifications, CCR investment to avoid ‘carbon lock-in’ is not only important for climate policy but is also economic from an investment point of view. We also conduct sensitivity analyses on a range of key assumptions to test the robustness of the findings.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
When requesting a correction, please mention this item's handle: RePEc:pio:envira:v:42:y:2010:i:6:p:1286-1307. 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: (Neil Hammond)
If references are entirely missing, you can add them using this form.