Investment Decisions Under Uncertainty: CCS Competing with Green Energy Technologies

Abstract

Investors in the electricity supply industry are spoilt for choice when considering capital-intensive investments in alternative power plants. Although such kind of decision-making problems can already be very complicated due to multiple financial risks, complexity rises further if there is the possibility that the investment can be postponed. This flexibility causes a so-called ‘value of waiting’ which is forfeited as soon as the investment is made (the “real option” is exercised). In our study with representative data for Europe/Germany, we use such a model in order to find the optimal investment decision in a situation where the electric utility has the choice between an IGCC power plant (with and without CCS), a combined gas and steam power plant with CCS, and an offshore wind farm. We compare the option value for the case that each technology is available individually, or in combination with other technologies. Finally, we consider the influence of subsidies for renewables, which can strongly promote the diffusion of renewable energy technologies and, therefore, reduce the value of CCS power plants.