Exploring the Value of the Option of Postponing an Investment Decision for a Coal-Fired Power Plant in Need of Meeting Air Emissions Standards

Abstract

Inflexible performance or technology standards targeting CO2 emissions reductions from extant coal power plants would force investors to either retrofit units with CO2 emissions control equipment or retire them. However, at present neither retrofit nor replacement technologies are ideal. Investments happening today will reduce demand for breakthrough electricity generation technologies that may be just a few years away from becoming an alternative. What if rather than being compelled to make an immediate decision (i.e. to retrofit or replace) power plant owners could pay a fee to have the option of postponing the investment decision for a few years? If a breakthrough technology becomes commercially available during the waiting period, investors would have the option of using it and this would lower the overall levelized cost of electricity and cumulative emissions over the lifetime of the plant. This project explores the value that investors should be willing to pay for the option of postponing their investment decision.