Getting ready for carbon capture and storage by issuing capture options

A capture option is an option contract where the option holder can exercise a contract to retrofit an existing fossil fuel plant to capture carbon dioxide (CO₂) on or before a fixed date. We suggest that new thermal power plants, particularly those in developing countries, consider issuing capture options at the design stage, because the sellers-the owners of newly built thermal power plants-may then invest in making these plants CO₂ capture ready (CCR) to optimise returns from selling capture options. In a detailed case study on a 600MW ultra supercritical pulverised coal-fired power unit a potential storage site in Guangdong, China, the value of a capture option and CCR investment is evaluated using the backward deduction option pricing method through a stochastic cash flow model with Monte-Carlo simulations. If the power plant is retrofittable without CCR investment, then for an 8% discount rate the value of a capture option is US $11 million before CCR investment. Investing US$3.8 million in CCR increases the value of the capture option by an estimated US $12 million. Perhaps more important from a policy point of view, CCR investment can reduce the odds of early closure by 20% and also increase the chance of retrofitting to capture by 43%. If the power plant is not retrofittable in the absence of CCR design modifications, CCR investment to avoid 'carbon lock-in' is not only important for climate policy but is also economic froman investment point of view. We also conduct sensitivity analyses on a range of key assumptions to test the robustness of the findings. © 2010 Pion Ltd and its Licensors.