Analyzing the Business Case for Hydrogen-Fuel Infrastructure Investments with Endogenous Demand in The Netherlands: A Real Options Approach

Ye Li,Clemens Kool,Peter-Jan Engelen

doi:10.3390/su12135424

Ye Li, Clemens Kool + Show 1 more

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https://doi.org/10.3390/su12135424

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Abstract

This paper explicitly incorporated the impact that realized investments in new transportation infrastructure have on adoption speed in a real option framework for taking sustainable investment decisions under uncertainty and analyzed the consequences of this dependence for optimal business investment strategies. We used a modified Generalized Bass Model to shape the adoption diffusion process and incorporate this approach into an N-fold compound real option framework. We applied the combined model to the case study of the introduction of hydrogen fuel stations for hydrogen cars in the Netherlands. We performed a scenario analysis for six different transportation infrastructure investment strategies combined with four different parameterizations. The results show the risk of ignoring the potential interaction between the adoption process and the speed with which the required transportation infrastructure will become available. This may lead to suboptimal decisions with respect to the optimal timing of corporate investment spending, as well as with respect to the assessment of the overall feasibility of the project.

Highlights

Real option modeling has become an increasingly popular approach for the valuation of large infrastructural projects as well as the valuation of innovative business projects in technology-intensive industries in recent decades [1]
Real option modelling is a novel approach that is well suited for this as it takes into account the simultaneous existence of uncertainty, irreversibility of investment, and some freedom on the timing of the investment [17]
It incorporates the value of waiting and operational flexibility in the investment decision-making—even with a negative net present value (NPV) the project still may be profitable at a later point in time

Summary

Introduction

Real option modeling has become an increasingly popular approach for the valuation of large infrastructural projects as well as the valuation of innovative business projects in technology-intensive industries in recent decades [1]. Real option modelling is a novel approach that is well suited for this as it takes into account the simultaneous existence of uncertainty, irreversibility of investment, and some freedom on the timing of the investment [17]. As such, it incorporates the value of waiting and operational flexibility in the investment decision-making—even with a negative NPV the project still may be profitable at a later point in time. To operationalize the real option approach—or the NPV method for that matter—assumptions have to be made about the future demand for the new product or technology and the speed at which adoption will take place. Future demand is modelled exogenously and independently from the availability of the necessary infrastructure, see for instance [18] for the case of hydrogen investment

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