Retrofitting carbon capture and storage to natural gas-fired power plants: A real-options approach

This paper presents a real-options approach to assess the value of retrofitting carbon capture and storage technology to an existing natural gas-fired base-load power plant. Operating in a deregulated electricity market, a power plant owner seeks to decide whether to retrofit and at what techno-economic conditions to retrofit carbon capture and storage. The value of the plant is determined based on clean spark spread options. Two alternative carbon capture and storage technologies, post-combustion and oxy-fuel combustion, are evaluated. Price uncertainties of electricity and natural gas are modeled as mean-reverting processes. The plant is abided by the emission reduction policy of carbon tax or price. Results show that a plant owner would opt for retrofitting post-combustion technology to an existing power plant if the carbon price hits to at least 140 dollars per ton of carbon dioxide, and would select oxy-fuel combustion technology if the carbon price moves further to 185 dollars per ton of carbon dioxide or above. Since parameters of carbon capture and storage vary widely across the literature, sensitivity tests of the expected values to different costs, prices, and volatility parameters are also presented for an insightful comparative view of which carbon capture and storage technology to adopt at what techno-economic conditions.