Study On CCS Investment Decision-Making Based On Real Options For China's Coal-Fired Power Plants

The excessive emissions of carbon dioxide and other greenhouse gases contributing to climate change has become the focus of worldwide attention. China ranks the first place in terms of the global carbon dioxide emissions, in which the carbon dioxide emissions from coal-fired power plants accounted for 32% of the total emissions. Carbon Capture and Storage(CCS) is a new emission reduction technology, the most prominent advantage is the ability to achieve the "near zero" emissions in fossil energy use, which is important for the countries like China mainly depends on coal resources. Thus the CCS technology is the key of reducing carbon dioxide emissions for coal-fired power plants currently. However, CCS investment have great uncertainties, in order to avoid the traditional evaluation methods ignore the uncertainty value in project investment, this paper introduce real options methods into CCS investment decision evaluation of coal-fired power plant.Based on the theory of real options, this paper establishes a quad-tree model and a multistage compound real option model that can be used to evaluate the CCS investment of coal-fired power plant considering four uncertain factors: carbon prices, fossil fuel prices, the cost of investment and government subsidies. An existing typical supercritical pulverized coal-fired plant is taken as a case study to illustrate the proposed model, calculating the value of the project under the real options method, and comparing with that under the traditional net present value(NPV) method. Then we discuss the impacts of different government subsidy levels and carbon price on the investment in CCS retrofitting, and calculate the critical carbon price of investing under different government subsidies.Several consequences are obtained. Firstly, the true value of CCS investment is underrated under the rule of traditional NPV method. The real options approach is more appropriate for decision-making when handling uncertainty because it can capture the value of flexibility which the NPV method neglected. Secondly, the carbon price in current carbon trading market can not reach the critical condition of CCS investment no matter how much is the government subsidy. It means that the current trading environment is not positive enough to attract investment in CCS. Thirdly, government subsidy has direct impact on CCS investment, increasing government subsidy has significant effect on reducing critical carbon price and delay investment option value, but rising compound real option value. These conclusions provide theoretical foundation for decision-making of CCS investment and related policy-making.