Mobilizing private funds for carbon capture and storage: An exploratory field study in the Netherlands

Abstract Investors have typically been hesitant to commit resources to the decarbonization of energy production as CCS investments combine large up-front investment outlays, a long planning horizon, different sources of uncertainty and irreversibility of the capital expenditure. The real option literature offers a vast amount of models to handle investment decisions in such a context. This exploratory study conducts structured interviews with a number of investors in the Netherlands to understand how CCS investment decisions are actually made. The interviews were based on stylized, but realistic business cases in which important real option characteristics are deliberately embedded. Our objective was to analyze whether these options were recognized and whether the decisions of those investors are in line with real option theory. We find that real option models may predict outcomes more or less adequately at the macro level, but do not (fully) describe the micro level behavior of investors. We develop some tentative recommendations for policymakers who want to promote the private funding of CCS projects and formulate the outline for follow-up research to confirm the preliminary findings of this exploratory study.

[1]  K. Arrow,et al.  Environmental Preservation, Uncertainty, and Irreversibility , 1974 .

[2]  Geert Verbong,et al.  istorical variation in the capital costs of natural gas , carbon dioxide and ydrogen pipelines and implications for future infrastructure , 2011 .

[3]  Eduardo S. Schwartz,et al.  Evaluating Natural Resource Investments , 1985 .

[4]  C. Henry.  Investment Decisions Under Uncertainty: The "Irreversibility Effect." , 1974 .

[5]  Peter-Jan Engelen,et al.  Criminal Behavior: A Real Option Approach With an Application to Restricting Illegal Insider Trading , 2004 .

[6]  Jan M. Nordbotten,et al.  A methodology to estimate maximum probable leakage along old wells in a geological sequestration operation , 2012 .

[7]  Thomas R. Lindlof.  Qualitative Communication Research Methods , 1994 .

[8]  A. Dixit.  Entry and Exit Decisions under Uncertainty , 1989, Journal of Political Economy.

[9]  S. Nickell.  The investment decisions of firms , 1979 .

[10]  Afzal Siddiqui,et al.  Real options analysis of investment in carbon capture and sequestration technology , 2012, Comput. Manag. Sci..

[11]  Onno Lint,et al.  An Option Approach to the New Product Development Process: a case study at Philips Electronics , 2001 .

[12]  Michael Siegrist,et al.  Public acceptance of CCS system elements: A conjoint measurement , 2012 .

[13]  Matthew Leach,et al.  Valuing flexible operation of power plants with CO2 capture , 2009 .

[14]  J. Hull.  Options, Futures, and Other Derivatives , 1989 .

[15]  Bennaceur Kamel,et al.  Energy technology modelling of major carbon abatement options , 2009 .

[16]  Dr Jon Gibbins.  Carbon Capture and Storage , 2005 .

[17]  Elisabeth Dütschke,et al.  Communicating CCS: Applying communications theory to public perceptions of carbon capture and storage , 2011 .

[18]  André Faaij,et al.  Informed and uninformed public opinions on CO2 capture and storage technologies in the Netherlands , 2009 .

[19]  Eduardo S. Schwartz,et al.  Investment Under Uncertainty. , 1994 .

[20]  Lenos Trigeorgis,et al.  MAKING USE OF REAL OPTIONS SIMPLE: AN OVERVIEW AND APPLICATIONS IN FLEXIBLE/MODULAR DECISION MAKING , 2005 .

[21]  D. Bunn,et al.  Investment risks under uncertain climate change policy , 2007 .

[22]  E. Ofek,et al.  Investor Valuation of the Abandonment Option , 1995 .

[23]  R. Pindyck.  Uncertainty and Exhaustible Resource Markets , 1980, Journal of Political Economy.

[24]  Filip Johnsson,et al.  Pathways for the European electricity supply system to 2050—The role of CCS to meet stringent CO2 reduction targets , 2010 .

[25]  J. Tobin.  A General Equilibrium Approach to Monetary Theory , 1969 .

[26]  Tony Oliver,et al.  Clean fossil-fuelled power generation , 2008 .

[27]  Raul Guerrero.  The Case for Real Options Made Simple , 2007 .

[28]  G. Barbose.  Reading the Tea Leaves: How Utilities in the West Are Managing Carbon Regulatory Risk in their Resource Plans , 2008 .

[29]  Thomas Zellweger,et al.  Time Horizon, Costs of Equity Capital, and Generic Investment Strategies of Firms , 2007 .

[30]  Andrew B. Abel.  Optimal Investment under Uncertainty , 1983 .

[31]  Danny Miller,et al.  Why Do Some Family Businesses Out–Compete? Governance, Long–Term Orientations, and Sustainable Capability , 2006 .

[32]  S. Fuss,et al.  Impact of climate policy uncertainty on the adoption of electricity generating technologies , 2009 .

[33]  R. McDonald,et al.  The Value of Waiting to Invest , 1982 .

[34]  D. Siegel,et al.  Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases , 1988 .

[35]  W. A. Sahlman,et al.  The structure and governance of venture-capital organizations , 1990 .

[36]  A. Parry.  Handbook of Qualitative Research , 2002 .

[37]  D. Jorgenson.  Capital Theory and Investment Behavior , 1963 .

[38]  Peta Ashworth,et al.  From research to action: now we have to move on CCS communication , 2010 .

[39]  P. E. Grohnheit,et al.  CCS in the North Sea region: A comparison on the cost-effectiveness of storing CO2 in the Utsira formation at regional and national scales , 2011 .

[40]  Stephen A. Ross,et al.  Waiting to Invest: Investment and Uncertainty , 1992 .

[41]  Mads Greaker,et al.  Carbon capture and storage technologies in the European power market , 2011 .

[42]  Ton Wildenborg,et al.  Screening CO2 storage options in the Netherlands , 2009 .

[43]  H. Meersman,et al.  Investment, Uncertainty and Irreversibility: Evidence from Belgian Accounting Data , 2002 .

[44]  F. Black,et al.  The Pricing of Options and Corporate Liabilities , 1973, Journal of Political Economy.

[45]  Bengt Kriström,et al.  Uncertainty and Climate Change , 2002 .

[46]  E. Prescott,et al.  Investment Under Uncertainty , 1971 .

[47]  Jon Gibbins,et al.  Initial evaluation of the impact of post-combustion capture of carbon dioxide on supercritical pulverised coal power plant part load performance , 2007 .

[48]  Luis M. Abadie,et al.  European CO2 prices and carbon capture investments , 2008 .

[49]  Michael E. Webber,et al.  Turning CO2 Capture On and Off in Response to Electric Grid Demand: A Baseline Analysis of Emissions and Economics , 2010 .

[50]  Julien Berthiaud,et al.  CO2 maritime transportation , 2010 .

[51]  Danny Cassimon,et al.  The valuation of a NDA using a 6-fold compound option , 2004 .

[52]  Danny Cassimon,et al.  Compound Real Option Valuation with Phase-Specific Volatility: A Multi-Phase Mobile Payments Case Study , 2010 .

[53]  Diane M. Lander,et al.  A BETTER UNDERSTANDING OF WHY NPV UNDERVALUES MANAGERIAL FLEXIBILITY , 2002 .

[54]  J. Gibbins,et al.  Carbon Capture and Storage , 2008 .

[55]  David W. Keith,et al.  Carbon Capture Retrofits and the Cost of Regulatory Uncertainty , 2007, The Energy Journal.

[56]  W. Blyth,et al.  Modeling Investment Risks and Uncertainties with Real Options Approach , 2007 .

[57]  Bart W. Terwel,et al.  Going beyond the properties of CO2 capture and storage (CCS) technology: How trust in stakeholders affects public acceptance of CCS , 2011 .

[58]  M. Statman,et al.  Project Termination Announcements and the Market Value of the Firm , 1989 .

[59]  Danny Cassimon,et al.  Incorporating Technical Risk in Compound Real Option Models to Value a Pharmaceutical R&D Licensing Opportunity , 2010 .

[60]  S. Fuss,et al.  Investment under market and climate policy uncertainty , 2008 .

[61]  Wenji Zhou,et al.  Uncertainty modeling of CCS investment strategy in China’s power sector , 2010 .

[62]  Michael Obersteiner,et al.  Assessing the effects of CO2 price caps on electricity investments—A real options analysis , 2008 .