An analysis of CCS investment under uncertainty

Abstract

Carbon capture and storage (CCS) is one of the most important measures for emission reductions due to the cost effectiveness and huge potentials. In general break even costs based on normal discounted cash flow (DCF) method are referred in a discussion on CCS diffusions. These evaluations with static and perfect foresight assumptions indicate that the break even costs for CCS diffusions are moderate, around US$35/ tCO2. In contrast it seems that an early large-scale commercialization of CCS is far from ideal due to technical, economical, social barriers and their uncertainties. In terms of economical aspect, carbon value and fuel price are very uncertain. In this study we focus on cost analysis of power plant replacement and CCS investment as a replacement for an aged coal plant. In this analysis carbon price and gas price are explicitly uncertain. Using a real options approach we found the threshold between “waiting” and “investment right now”. “Waiting” means that the firm continues to operate the aged coal plant, which has low thermal efficiency and high CO2 intensity. “Investment right now” means that the firm throws out another investment options. The results indicate that it requires substantially higher carbon prices, e.g., US$70/ tCO2, for CCS diffusions under uncertainty. The threshold for CCS investment is also affected by gas price. For example, in the middle range gas price (around US$10/GJ), the threshold can be over US$100/ tCO2. In addition possibility of free allocation based on absolute historical emissions (grandfathering) makes it more difficult to invest CCS. On the other hand existing (aged) coal plants have strong competitiveness under uncertainty. It seems that this is consistent with real situations in each country. Reducing uncertainty of climate policy is the key to an early CCS diffusion.

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