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Using Fuzzy Real Options Valuation for Assessing Investments in NGCC and CCS Energy Conversion Technology

  • Kraemer, Christian


    (Institut für Elektrische Anlagen und Energiewirtschaft)

  • Madlener, Reinhard


    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

In this paper we study the relative advantage of investing in a natural gas combined-cycle (NGCC) power plant versus a coal-fired power plant with and without carbon capture and storage (CCS) technology. For the investment analysis under uncertainty, we apply fuzzy real options theory. Three different price scenarios for fuel input and CO2 emission permits are taken into consideration. For the assumptions made, we find evidence that the NGCC and (to a lesser degree) the conventional hard coal-fired power plant are the most cost-effective options, followed by the two CCS technologies ‘Oxyfuel’ and ‘Pre-combustion’. In contrast, due to high specific investment costs and significant losses in conversion efficiency, the third CCS option ‘Post-combustion’ remains uneconomical. The sensitivity analysis reveals that already at moderate cost reductions, ‘Pre-combustion’ and ‘Oxyfuel’ both become economically viable and, at sufficiently low CO2 permit prices or interest rates, even the preferred options.

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Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 3/2009.

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Length: 25 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:ris:fcnwpa:2009_003
Note: FCN Working Paper No. 3/2009
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  1. Collan, Mikael, 2008. "New Method for Real Option Valuation Using Fuzzy Numbers," Working Papers 466, IAMSR, Åbo Akademi.
  2. Geoffrey Rothwell, 2006. "A Real Options Approach to Evaluating New Nuclear Power Plants," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 87-54.
  3. Scott Mathews & Vinay Datar & Blake Johnson, 2007. "A Practical Method for Valuing Real Options: The Boeing Approach," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(2), pages 95-104.
  4. Carlo Alberto Magni, 2009. "A fuzzy expert system for solving real-option decision processes," PROYECCIONES FINANCIERAS Y VALORACION 005677, MASTER CONSULTORES.
  5. Collan, Mikael & Fullér, Robert & József, Mezei, 2008. "A Fuzzy Pay-off Method for Real Option Valuation," MPRA Paper 13601, University Library of Munich, Germany.
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