Valuation of CCS investment in China's coal‐fired power plants based on a compound real options model

Abstract

AbstractA two‐stage compound real options model is proposed to evaluate carbon capture and storage (CCS) investment decision making from the perspective of coal‐fired power plants, considering the phased nature of CCS technology. A newly built coal‐fired power plant is used as a case study for the application of the compound real options model. The results indicate that the compound real options approach has an advantage over both the traditional net present value (NPV) and single‐option method when handling multistage investments. Although the present carbon price level is not high enough to encourage CCS investment, the critical carbon price will decrease when considering the upside potential inherent in the CCS investment. Further analyses indicate that the timing of the second phase of a CCS project and other factors will also affect the critical carbon price and the value of a CCS investment. These findings will be useful for decision making associated with CCS investment, and related policy making in an uncertain environment. © 2018 Society of Chemical Industry and John Wiley & Sons, Ltd.