A Basic Study on Optimal Investment of Power Sources Considering Environmental Measures

—An Economic Evaluation of CCS through a Real Option Approach—

Abstract

This paper focuses on economic evaluations of a coal-fired thermal power station with a carbon dioxide capture and storage unit (CCS) by which an existing coal-fired thermal power station (COAL) is replaced. Decision makers decide to construct CCS considering both of contrary elements; one is waiting more favorable conditions such as a higher value of carbon credits which CCS has, another is reducing opportunity costs due to delay of construction of CCS. New methods using a real option approach are proposed. Firstly we calculate an economic value of CCS as an American coal option with dividend considering carbon emission costs of COAL as opportunity costs. Secondly we evaluate construction time of CCS using binominal decision tree taking into account the options. Numerical examples show that a real option value of CCS is from 28% to 44% of sales revenue, which are higher than net present values due to a value on waiting for more favorable conditions. And they also show that an earlier construction is exercised and the value becomes lower, the more challenging the benchmark of carbon emissions is or the higher the change rate of maintenance cost of COAL becomes. An effect of a lifetime of power stations is also analyzed.