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Optimal Power Generation Investment: Impact of Technology Choices and Existing Portfolios for Deploying Low-Carbon Coal Technologies

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  • Rohlfs, Wilko

    (RWTH Aachen University)

  • Madlener, Reinhard

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

Abstract

In this paper we identify optimal strategies for the investment in power generation assets. The investments are characterized by multiple available technologies whose economic value is driven by a technology-specific combination of several underlying assets, such as the price of fuel, electricity, and CO2. The correlation between the development of those underlying assets allows for diversification and thus to reduce the overall risk by holding a portfolio of different technologies. This yields an investor-dependent strategy for the deployment of new energy generation assets. The modeling framework developed is based on stochastic real options analysis that enables to account for the additional value of waiting which arises from uncertain commodity price development. In the presentation, we increase the model’s complexity stepwise, in order to depict the influences of various aspects, as for instance the interaction of technologies, value of waiting, or modification of an existing power plant portfolio. We find that including the value of waiting in the decision process not only delays the investment but also leads to an asymmetric risk distribution which features a much lower probability for losses. In addition, the results where the value of waiting is incorporated are more robust with respect to a variation of the investor’s risk- and time-preferences compared to the results gained with the classical net present value model. Finally, we investigate the required market conditions needed for the deployment of carbon capture and storage (CCS) technologies. We find that a carbon dioxide price of 60 e/tCO2 and an electricity price of 70 e/MWh is required in the year 2015 in order to reach a probability of at least 50% for the deployment of CCS in 2022.

Suggested Citation

  • Rohlfs, Wilko & Madlener, Reinhard, 2013. "Optimal Power Generation Investment: Impact of Technology Choices and Existing Portfolios for Deploying Low-Carbon Coal Technologies," FCN Working Papers 12/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    • Handle: RePEc:ris:fcnwpa:2013_012
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    References listed on IDEAS

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    1. Rohlfs, Wilko & Madlener, Reinhard, 2010. "Valuation of CCS-Ready Coal-Fired Power Plants: A Multi-Dimensional Real Options Approach," FCN Working Papers 7/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    2. Richard Bellman, 1957. "On a Dynamic Programming Approach to the Caterer Problem--I," Management Science, INFORMS, vol. 3(3), pages 270-278, April.
    3. Andrea Gamba & Lenos Trigeorgis, 2007. "An Improved Binomial Lattice Method for Multi-Dimensional Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(5), pages 453-475.
    4. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Assessment of clean-coal strategies: The questionable merits of carbon capture-readiness," Energy, Elsevier, vol. 52(C), pages 27-36.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    6. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    7. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
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    Cited by:

    1. Andreas Voss and Reinhard Madlener, 2017. "Auction Schemes, Bidding Strategies and the Cost-Optimal Level of Promoting Renewable Electricity in Germany," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    2. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

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    Keywords

    CCS; Real options; Retrofit; Renewable energies;
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