Use of real options in nuclear power plant valuation in the presence of uncertainty with CO2 emission credit

Abstract

The purpose of this study is to analyze the value of an investment in power generation assets that do not emit CO2, by using a real option model. This study evaluates the effects of future uncertainty on investment decision-making, by focusing on the uncertainty of CO2 emission credits [yen/t-CO2 in the fairly near future in Japan. Electric utilities are required to keep plans to prepare for various future uncertainties such as the price of CO2 emission credits. The real option approach can evaluate the option value of decision-making under uncertainty. This study examined the option value of a power plant [yen/KW] to evaluate the effects of an externality under uncertainty. The results showed that nuclear power would have the most value under the forthcoming CO2 emission limitations. In order to secure the effectiveness of measures against global warming, we should reconsider the roles of nuclear power plants in Japan. Finally, the real option model is shown to be an effective candidate for a decision-making support tool to deal with problems in energy environmental policy. © 2004 Taylor & Francis Group, LLC.