Using Real Options Thinking to Value Investment Flexibility in Carbon Capture and Utilization Projects: A Review

Abstract

Carbon capture and utilization (CCU) is one of the key technologies that may help to reduce industrial emissions. However, the deployment of CCU is hampered by various barriers, including high levels of technical, policy and market uncertainty. The real options theory (ROT) provides a method to account for these uncertainties and introduce flexibility in the investment decision by allowing decisions to be changed in response to the evolution of uncertainties. ROT is already being applied frequently in the evaluation of renewable energy or carbon capture and storage (CCS) projects, e.g., addressing the uncertainty in the price of CO2. However, ROT has only found a few applications in the CCU literature to date. Therefore, this paper investigates the specific types of uncertainty that arise with the utilization of CO2, identifies the types of real options present in CCU projects and discusses the applied valuation techniques. Research gaps are identified in the CCU literature and recommendations are made to fill these gaps. The investment decision sequence for CCU projects is shown, together with the uncertainties and flexibility options in the CCU projects. This review can support the real options-based evaluations of the investment decisions in CCU projects to allow for flexibility and uncertainty.

Value Analysis Based on Investment in the New Energy Industry

“…In the conclusion, LONGI's share price trend is good. Meanwhile, to reflect the unit risk-adjusted fund yield, it is necessary to calculate the Sharpe ratio using the Sharpe model [9][10], when the Sharpe ratio is positive, it can indicate that the average net value growth rate of the fund exceeds the risk-free rate during the measurement period, namely the investment fund is better than the bank deposit at this time. Finally, the Sharpe ratio of all three stocks is slightly greater than 0, which shows that it has investment value.…”

Co2 Storage or Utilization? A Real Options Analysis Under Market and Technological Uncertainty

“…The uncertainties and risks of the real-world setting are typically neglected in this type of assessment. To include those uncertainties and risks, there is a growing stream of literature that analyzes investment decisions in CCS or CCU technologies in a dynamic framework, taking managerial flexibility into account (see Agaton (2021) and Lamberts-Van Assche and Compernolle (2022b) for an extensive review of real options applications in CCS and CCU respectively). Real options analysis presents a method to value flexibility in investment decisions, acknowledging the fact that decision-makers can delay investment decisions in practice (Dixit and Pindyck, 1994).…”

CO2 storage or utilization? A real options analysis under market and technological uncertainty

“…The uncertainties and risks of the real-world setting are typically neglected in this type of assessment. To include those uncertainties and risks, there is a growing stream of literature that analyzes investment decisions in CCS or CCU technologies in a dynamic framework, taking managerial flexibility into account (see Agaton (2021) and Lamberts-Van Assche and Compernolle (2022b) for an extensive review of real options applications in CCS and CCU respectively).…”

“…Real options analysis presents a method to value flexibility in investment decisions, acknowledging the fact that decision-makers can delay investment decisions in practice (Dixit and Pindyck, 1994). A literature review on real options analysis for CCU projects revealed that the CO 2 price is the most commonly included source of uncertainty in investment decisions for CCU projects (Lamberts-Van Assche and Compernolle, 2022b). The CO 2 price in the EU ETS can also be affected by policymakers, by changing the emissions cap and the number of emissions allowances issued.…”