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€/tCO2 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.