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

Peter-Jan Engelen, Clemens Kool and Ye Li

Resource and Energy Economics, 2016, vol. 43, issue C, 33-56

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.

Keywords: Sustainable energy; Investment uncertainty; Barrier option; Compound real option; Investment failure; Multi-stage investment (search for similar items in EconPapers)
JEL-codes: G32 O32 Q42 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: A Barrier Options Approach to Modeling Project Failure: The Case of Hydrogen Fuel Infrastructure (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:43:y:2016:i:c:p:33-56

DOI: 10.1016/j.reseneeco.2015.10.001

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