Evaluation of two alternative carbon capture and storage technologies: A stochastic model

In this paper we evaluate two alternative CCS technologies at a coal-fired power plant from an investor's point of view. The first technology uses CO₂ for enhanced oil recovery (EOR) paired with storage in deep saline formations (DSF) and the second merely stores CO₂ in DSF. The paper updates and improves on an earlier publication by Tzimas et al. (2005). For projects of this type there are many sources of risk, three of which stand out: the price of electricity, the price of oil and the price of carbon allowances. In this paper we develop a general stochastic model that can be adapted to other projects such as enhanced gas recovery (EGR) or industrial plants that use CO₂ for either EOR or EGR with CCS. The model is calibrated with UK data and applied to help understand the conditions that generate the incentives needed for early investments in these technologies. Additionally, we analyse the risks of these investments. Investments with EOR and secondary DSF storage can only be profitable (NPV > 0) when there is a high long-term equilibrium price for oil of more than $56.38/barrel. When the investment decision can be made at any time, i.e. there is an option value, then the trigger value for optimal investment is significantly higher.