An Investment Feasibility Analysis of CCS Retrofit Based on a Two-Stage Compound Real Options Model

Herui Cui, Tian Zhao and Ruirui Wu
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Herui Cui: Department of Economics and Management, North China Electric Power University, Huadian Road No. 689, Baoding 071003, China
Tian Zhao: Department of Economics and Management, North China Electric Power University, Huadian Road No. 689, Baoding 071003, China
Ruirui Wu: Department of Economics and Management, North China Electric Power University, Huadian Road No. 689, Baoding 071003, China

Energies, 2018, vol. 11, issue 7, 1-19

Abstract: Carbon capture and storage (CCS) technology is an attractive technique to help power enterprises with carbon emission reduction. In this paper, a two-stage CCS retrofit investment in an existing coal-fired power plant in China including the first stage (demonstration project) and second stage (commercial operation) is taken as a case to decide when and whether to invest. Distinguished from previous models, a binomial lattice compound real options model including the options to defer and expand is established. Further, the accounting approaches to certified emission reductions (CERs) based on the thermodynamics principle are first proposed concerning this model. We find the total invest value under compound options model is less than zero, although greater than that by NPV method. The results indicate carbon prices and subsidy policy, respectively, play a dominating role in initiating the CCS investment at the first and second stage. The growth in government subsidy at the first stage has obviously greater effects on decreasing critical carbon trading prices. Besides, the minimum critical carbon price is 87.09 RMB/ton with full subsidy, greater than the current price (56 RMB/ton). This also illustrates it is not the optimal occasion to invest in a CCS retrofit project for power enterprises.

Keywords: carbon capture and storage (CCS); compound real options; investment evaluation; power enterprise (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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