Using real options to determine optimal funding strategies for CO2 capture, transport and storage projects in the European Union

Eckhause, Jeremy; Herold, Johannes

Using real options to determine optimal funding strategies for CO2 capture, transport and storage projects in the European Union

2014

Eckhause, Jeremy | Herold, Johannes

Several projects in the European Union (EU) are currently under development to implement the carbon capture, transport and storage (CCS) technology on a large scale and may be subject to public funding under EU support initiatives. These CCS projects may develop any combination of three types of operating levels: pilot, demonstration and full-scale, representing progressing levels of electric power generation capability. Several projects have commenced at the demonstration level, with full-scale commercial levels planned for approximately 2020.Taking the perspective of a funding agency, we employ a real options framework for determining an optimal project selection and funding strategy for the development of full-scale CCS plants. Specifically, we formulate and solve a stochastic dynamic program (SDP) for obtaining optimal funding solutions in order to achieve at least one successfully operating full-scale CCS plant by a target year. The model demonstrates the improved risk reduction by employing such a multi-stage competition. We then extend the model to consider two sensitivities: (1) the flexibility to spend that budget among the time periods and (2) optimizing the budget, but specifying each time period's allocation a priori. State size and runtimes of the SDP model are provided.

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