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Evaluating investments in integrated biofuel production - factoring in uncertainty through real options analysis
Luleå University of Technology, Department of Engineering Sciences and Mathematics, Energy Science. (Energy Systems Analysis)ORCID iD: 0000-0002-5662-570X
RISE Research Institutes of Sweden, Bioeconomy.ORCID iD: 0000-0003-1820-0505
Luleå University of Technology, Department of Engineering Sciences and Mathematics, Energy Science. (Energy Systems analysis)
Luleå University of Technology, Department of Engineering Sciences and Mathematics, Energy Science. (Energy Systems Analysis)
2019 (English)In: PROCEEDINGS OF ECOS 2019 / [ed] Wojciech Stanek, Paweł Gładysz, Sebastian Werle, Wojciech Adamczyk, 2019, p. 1921-1932Conference paper, Published paper (Refereed)
Abstract [en]

In the endeavour to reduce CO2 emissions from the transport sector, biofuels from forest industry by-products are key. The adaptation of forest-based biorefinery technologies has so far been low which can partly be attributed to uncertainties in the form of policy instability, market prices, and technology costs. These uncertainties in combination with technology learning, which can be expected to reduce future investment costs, could make it favourable to postpone an investment decision. When applying real options theory, it is recognised that there is an opportunity cost associated with the decision to invest, since the option to wait for more favourable market conditions to occur is forfeited. In traditional discounted cash flow analysis, the impact of uncertainty and the value of reducing it (e.g. by waiting), is usually not taken into consideration. This paper uses a real options framework that incorporates the option to postpone an investment to reduce market uncertainties and wait for technology learning to occur. The focus is to investigate how the usage of an investment decision rule based on real options analysis affects technology choice, the economic performance, and when in time it is favourable to invest in pulp mill integrated biofuel production, compared with using a decision rule based on traditional discounted cash flow analysis. As an illustrative case study we examine a pulp mill which has the option, but not the obligation, to invest in either of two different biofuel production technologies that both use the pulp mill by-product black liquor as feedstock: (1) black liquor gasification followed by fuel synthesis, and (2) membrane separation of lignin followed by hydrodeoxygenation. With the usage of the real options framework and the inclusion of the uncertainties regarding future market prices and investment costs, the decision to invest is made later, compared with using traditional cash flow analysis. The usage of real options also reduces the likeliness of a net loss occurring if an investment is made, as well as increases the expected economic returns, showing the added economic value of flexibility in the face of uncertain future conditions.

Place, publisher, year, edition, pages
2019. p. 1921-1932
Keywords [en]
Integrated biofuel production, Techno-economic analysis, Uncertainty, Real options, Pulp mill
National Category
Bioenergy
Research subject
Energy Engineering
Identifiers
URN: urn:nbn:se:ltu:diva-75818OAI: oai:DiVA.org:ltu-75818DiVA, id: diva2:1348038
Conference
THE 32ND INTERNATIONAL CONFERENCE ONEFFICIENCY, COST, OPTIMIZATION, SIMULATION AND ENVIRONMENTAL IMPACT OF ENERGY SYSTEMS JUNE 23-28, 2019, WROCLAW, POLAND
Available from: 2019-09-03 Created: 2019-09-03 Last updated: 2019-09-06

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CiteExportLink to record
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