Application of Real Options Approach to Analyse Economic Efficiency of Power Plant with CCS Installation under Uncertainty

Abstract

The main goal of this article is to build a decision model for an investment involving the addition of a CCS (Carbon dioxide Capture and Storage) installation in an existing conventional power plant. The application of CCS systems in coal and gas power plants involves large capital expenditures and an increase in operating costs. The lack of upgrade modernisation and environmentally friendly investments in this type of power plant generates the additional costs of the purchase of emission allowances. An analysis of the impact of the addition of a CCS installation to an existing coal power plant on the costs of electricity generation is presented. Based on the accessible technical and economic data, a concept has been framed and an original decision-making model has been developed for an investment consisting in constructing a CCS installation in an existing power plant. A novelty of the paper is the presented proprietary decision-making model in conditions of uncertainty using the real options approach. Stochastic state variables are included in the model: the price of the CO2 emission allowance, the unit costs of capturing, transporting, storing and stockpiling CO2 and the unit costs of electricity generation. It is assumed that the time curves of the state variables are described by equations of geometric Brownian motions. The values of standard deviations in the equations are measures of uncertainty. The value of the retrofit option is defined as the maximum value from the expected net present value. From the dynamic optimisation equation, resulting from Bellman’s principle of optimality, it results that the retrofit option must satisfy the differential equation. The calculations were made for a specific, commercially applicable case of CCS technology in order to present the model’s capabilities. The analyses’ results and conclusions are presented.

Multidimensional Risk-Based Real Options Valuation for Low-Carbon Cogeneration Pathways

“…The economic incentive for retrofitting CCS technology on existing coal and natural gas power plants was analysed by Sowinski [24] using real options approach. Two uncertain factors were considered in this study: the cost of CO 2 emissions and the price of electricity.…”

“…Electricity price was assumed to be deterministic. Sowinski (2022) [24] emission allowance and the cost of electricity generation as uncertain factors 2 Valuation of addition of CCS installation to an existing coal power plants considering price of CO…”

What China’s Environmental Policy Means for PV Solar, Electric Vehicles, and Carbon Capture and Storage Technologies

“…Carbon capture and storage (CCS) consists of a series of technologies that allow the capturing, transporting, and storing of captured carbon [72]. This method can retain up to 90 percent of the emitted carbon dioxide and store it in geological media.…”