Getting Ready for Carbon Capture and Storage by Issuing Capture Options
David Reiner (),
Jon Gibbins and
Environment and Planning A, 2010, vol. 42, issue 6, 1286-1307
A capture option is an option contract where the option holder can exercise a contract to retrofit an existing fossil fuel plant to capture carbon dioxide (CO 2 ) on or before a fixed date. We suggest that new thermal power plants, particularly those in developing countries, consider issuing capture options at the design stage, because the sellersâ€”the owners of newly built thermal power plantsâ€”may then invest in making these plants CO 2 capture ready (CCR) to optimise returns from selling capture options. In a detailed case study on a 600 MW ultrasupercritical pulverised coal-fired power unit a potential storage site in Guangdong, China, the value of a capture option and CCR investment is evaluated using the backward deduction option pricing method through a stochastic cash flow model with Monte-Carlo simulations. If the power plant is retrofittable without CCR investment, then for an 8% discount rate the value of a capture option is US $11 million before CCR investment. Investing US $3.8 million in CCR increases the value of the capture option by an estimated US $12 million. Perhaps more important from a policy point of view, CCR investment can reduce the odds of early closure by 20% and also increase the chance of retrofitting to capture by 43%. If the power plant is not retrofittable in the absence of CCR design modifications, CCR investment to avoid â€˜carbon lock-inâ€™ is not only important for climate policy but is also economic from an investment point of view. We also conduct sensitivity analyses on a range of key assumptions to test the robustness of the findings.
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Persistent link: https://EconPapers.repec.org/RePEc:sae:envira:v:42:y:2010:i:6:p:1286-1307
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