Study on Coal Power Plant and Carbon Capture and Storage Investments based on Real Options Approach

Abstract

This paper explores carbon price and LNG price thresholds for investment in power plants and carbon capture and storage (CCS) systems in Japan based on real options approach. We consider the case of a firm having an aged coal power plant. There are five options for the replacement: i) coal power plant, ii) coal power plant w/ CCS, iii) capture ready (CR) coal power plant, iv) gas power plant, and v) gas power plant w/ CCS. The simulation results reveal that the area for the option of “waiting” is relatively large, which means that expected cost of keeping options open is lower than the expected cost of “investing right now.” One should not expect CCS diffusions in the short-term; however, capture ready (CR) coal power plant could be economically viable in a (narrow) range of carbon prices under uncertainty. These results bring a helpful contribution to the discussion on whether the Japanese government should support CCS diffusions, and if so which policies are the most effective ones.