A basic study of optimal investment of power sources considering environmental measures: Economic evaluation of CCS through a real options approach.

This paper proposes a novel method based on real options theory for economic evaluation of the replacement of an old coal-fired thermal power plant (COAL) with a coal-fired thermal power plant that includes a CCS (carbon dioxide capture and storage) unit. We calculate the real option value (ROV) of CCS as the value of an American call option with dividend, treating the increased carbon cost of COAL due to the delay of replacement as opportunity cost. The appropriate construction time of a CCS unit is evaluated by binominal decision tree analysis for option exercise. We calculate the change of project ROV and the appropriate construction time according to the difference in carbon emission benchmarks and the variation of the maintenance cost of COAL. The effect of power station lifetime is also analyzed. We conclude that flexibility in the timing of decision making increases the value of a project. We also found that CCS is an economically justifiable technology option under forthcoming restrictions on carbon emissions. © 2010 Wiley Periodicals, Inc. Electr Eng Jpn, 174(3): 9-17, 2011; Published online in Wiley Online Library (). DOI 10.1002/eej.21065 [ABSTRACT FROM AUTHOR]