Economic Viability and Flexibility of the South Pasopati Coal Project, Indonesia: A Real Options Approach Under Market Volatility and Carbon Pricing

Teguh Trijayanto and Dzikri Firmansyah Hakam ()
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Teguh Trijayanto: School of Business and Management, Institut Teknologi Bandung, Bandung 40132, Indonesia
Dzikri Firmansyah Hakam: School of Business and Management, Institut Teknologi Bandung, Bandung 40132, Indonesia

JRFM, 2025, vol. 18, issue 5, 1-19

Abstract: This study evaluates the economic viability of the South Pasopati Coal Project in Indonesia, addressing market volatility, carbon pricing policies, and the country’s energy transition towards Net Zero Emissions (NZE). Given Indonesia’s reliance on coal and the increasing global shift toward renewable energy, traditional valuation methods such as Discounted Cash Flow (DCF) may not adequately capture uncertainty and strategic flexibility. The study applies Real Options Valuation (ROV), integrating Monte Carlo Simulation (MCS) and Binomial Lattice Modeling, to assess project feasibility under various scenarios. The research compares three valuation scenarios: the base scenario (eastern route), an alternative scenario (western route), and a carbon pricing scenario. Results indicate that while the DCF method estimates a positive Net Present Value (NPV) for the base scenario, it fails to incorporate price volatility risks. The ROV method, however, captures managerial flexibility and provides a more robust valuation, showing an Expanded NPV (ENPV) that better reflects market uncertainties. Findings suggest that implementing ROV improves decision-making, particularly in volatile markets. The study underscores the necessity for Indonesia to adopt more flexible valuation frameworks to enhance investment decisions in the coal sector while aligning with international environmental standards.

Keywords: volatility; net zero emission (NZE); discounted cash flow (DCF); real options valuation (ROV) (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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