Optimal Investment Strategies in Power Generation Assets: The Role of Technological Choice and Existing Portfolios in the Deployment of Low-carbon Technologies

Abstract In this paper we identify optimal strategies for investment in power generation units. The economic value of the investment options is driven by a technology-specific combination of several underlying prices, such as the price of fuel, electricity, and CO2. The correlation between those underlyings allows investors to diversify and thus reduce the overall risk by holding a portfolio of different technologies. This yields an investor-dependent strategy for the deployment of new energy generation units. The modeling framework developed is based on stochastic real options analysis that enables to account for the additional value of waiting, which arises from uncertain commodity price development. In the presentation, we increase the model's complexity stepwise, in order to depict the influences of various aspects, as for instance the interaction of technologies, value of waiting, or modification of an existing power plant portfolio. Including the value of waiting in the decision process does not only delay the investment but also leads to an asymmetric risk distribution, which features a much lower probability for losses. In addition, the results where the value of waiting has been incorporated are more robust with respect to a variation of the discount rate compared to the results gained with the classical net present value model. Finally, we investigate the required market conditions needed for the deployment of carbon capture and storage (CCS) technologies. We find that a carbon dioxide price of 35 €/ t CO 2 and an electricity price of 70 €/MWh are required in the year 2015 in order to reach a probability of at least 50% for the deployment of CCS in 2020.

[1]  Reinhard Madlener,et al.  Assessment of Clean-Coal Strategies: The Questionable Merits of Carbon Capture-Readiness , 2013 .

[2]  Anders Hansson,et al.  Expert opinions on carbon dioxide capture and storage—A framing of uncertainties and possibilities , 2009 .

[3]  Jaroslava Hlouskova,et al.  An Integrated CVaR and Real Options Approach to Investments in the Energy Sector , 2007 .

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

[5]  R. Madlener,et al.  Investment Decisions Under Uncertainty: CCS Competing with Green Energy Technologies☆ , 2013 .

[6]  Lenos Trigeorgis,et al.  An Improved Binomial Lattice Method for Multi‐Dimensional Options , 2007 .

[7]  D. Bunn,et al.  Evaluating the power investment options with uncertainty in climate policy , 2008 .

[8]  R. Madlener,et al.  Multi-commodity real options analysis of power plant investments: discounting endogenous risk structures , 2011 .

[9]  John Gale,et al.  OVERALL ENVIRONMENTAL IMPACTS OF CCS TECHNOLOGIES-A LIFE CYCLE APPROACH , 2012 .

[10]  Stein-Erik Fleten,et al.  Optimal Investment Strategies in Decentralized Renewable Power Generation Under Uncertainty , 2006 .

[11]  José M. Chamorro,et al.  Valuing uncertain cash flows from investments that enhance energy efficiency. , 2013, Journal of environmental management.

[12]  Matthias Finkenrath,et al.  Cost and Performance of Carbon Dioxide Capture from Power Generation , 2011 .

[13]  John Mortimer.  Return To Oz , 2008 .

[14]  Glyn A. Holton.  Value at Risk: Theory and Practice , 2003 .

[15]  Geoffrey P. Hammond,et al.  Techno-economic appraisal of fossil-fuelled power generation systems with carbon dioxide capture and , 2011 .

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

[17]  Sean T. McCoy,et al.  The Economics of CO2 Transport by Pipeline and Storage in Saline Aquifers and Oil Reservoirs , 2008 .

[18]  André Caillé.  Deciding the Future: Energy Policy Scenarios to 2050 , 2007 .

[19]  R. Bellman.  Dynamic programming. , 1957, Science.

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

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

[22]  Reinhard Madlener,et al.  Investment in New Power Generation Under Uncertainty: Benefits of CHP vs. Condensing Plants in a Copula-Based Analysis , 2010 .

[23]  John Davison,et al.  Performance and costs of power plants with capture and storage of CO2 , 2007 .

[24]  Edward S. Rubin,et al.  Understanding the pitfalls of CCS cost estimates , 2012 .

[25]  Y. Smeers,et al.  Multi-assets real options , 2009 .

[26]  Harry M. Markowitz,et al.  Foundations of Portfolio Theory , 1991 .

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

[28]  Amany von Oehsen,et al.  Langfristszenarien und Strategien für den Ausbau der erneuerbaren Energien in Deutschland bei Berücksichtigung der Entwicklung in Europa und global , 2012 .

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

[30]  Edward S. Rubin,et al.  The outlook for improved carbon capture technology , 2012 .

[31]  Martin Pehnt,et al.  Life cycle assessment of carbon dioxide capture and storage from lignite power plants , 2009 .