Valuation of CCS-ready coal-fired power plants: a multi-dimensional real options approach

In this paper, we develop a multi-factor real options model for a two-stage investment problem where a coal-fired power plant is later retrofitted with carbon capture and storage (CCS). A capture-ready power plant with lower retrofit costs is compared with a conventional one and higher CCS retrofit costs. The stochastic variables considered are the price of electricity, the price of CO2 permits, capturing, transporting and storing (CTS) costs and CCS retrofit investment costs. Fuel costs are disregarded due to the constant boiler size in case of a retrofit, resulting in constant fuel consumption but lower electricity output of the CCS plant. Two retrofit options that reduce the power plant’s net efficiency from 46% to 30% and 35%, respectively, and an integrated CCS power plant with an efficiency of 38.5% are investigated. In a numerical simulation with realistic parameterization, we find a low probability for a retrofit even after fifteen to twenty years, caused by the high uncertainty and the adverse impact of the electricity price and the CO2 permit price. This renders the capture-ready option unattractive and calls for investments in conventional coal-fired power plants with later CCS investments at higher costs than for the case of a capture ready pre-installation.