Using Fuzzy Real Options Valuation for Assessing Investments in NGCC and CCS Energy Conversion Technology

FCN Working Paper No. 3/2009

25 Pages Posted: 2 Sep 2014

Date Written: November 2009

Abstract

In this paper we study the relative advantage of investing in a natural gas combined cycle (NGCC) power plant versus a coal-fired power plant with and without carbon capture and storage (CCS) technology. For the investment analysis under uncertainty, we apply fuzzy real options theory. Three different price scenarios for fuel input and CO2 emission permits are taken into consideration. For the assumptions made, we find evidence that the NGCC and (to a lesser degree) the conventional hard coal-fired power plant are the most cost-effective options, followed by the two CCS technologies ‘Oxyfuel’ and ‘Pre-combustion’. In contrast, due to high specific investment costs and significant losses in conversion efficiency, the third CCS option ‘Post-combustion’ remains uneconomical. The sensitivity analysis reveals that already at moderate cost reductions, ‘Pre-combustion’ and ‘Oxyfuel’ both become economically viable and, at sufficiently low CO2 permit prices or interest rates, even the preferred options.

Keywords: Real options analysis, Fuzzy sets, NGCC, Coal combustion, CCS

JEL Classification: G11, Q42

Suggested Citation

Kraemer, Christian and Madlener, Reinhard, Using Fuzzy Real Options Valuation for Assessing Investments in NGCC and CCS Energy Conversion Technology (November 2009). FCN Working Paper No. 3/2009 . Available at SSRN: https://ssrn.com/abstract=2489844 or http://dx.doi.org/10.2139/ssrn.2489844

Christian Kraemer

RWTH Aachen University ( email )

Schinkelstraße 6
Aachen, 52062
Germany

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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