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Evaluating investments in integrated biofuel production - Factoring in uncertainty through real options analysis
Luleå University of Technology, Sweden.ORCID iD: 0000-0002-5662-570X
RISE - Research Institutes of Sweden (2017-2019). Luleå University of Technology, Sweden.ORCID iD: 0000-0003-1820-0505
Luleå University of Technology, Sweden; International Institute for Applied Systems Analysis, Laxenburg, Austria.
Luleå University of Technology, Sweden; International Institute for Applied Systems Analysis, Laxenburg, Austria.
2019 (English)In: ECOS 2019 - Proceedings of the 32nd International Conference on Efficiency, Cost, Optimization, Simulation and Environmental Impact of Energy Systems, Institute of Thermal Technology , 2019, p. 1911-1922Conference 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
Institute of Thermal Technology , 2019. p. 1911-1922
Keywords [en]
Integrated biofuel production, Pulp mill, Real options, Techno-economic analysis, Uncertainty
National Category
Natural Sciences
Identifiers
URN: urn:nbn:se:ri:diva-44397Scopus ID: 2-s2.0-85079635479ISBN: 9788361506515 (print)OAI: oai:DiVA.org:ri-44397DiVA, id: diva2:1412969
Conference
32nd International Conference on Efficiency, Cost, Optimization, Simulation and Environmental Impact of Energy Systems, ECOS 2019, 23 June 2019 through 28 June 2019
Note

Funding details: Energimyndigheten; Funding details: Svenska ForskningsrÃ¥det Formas; Funding text 1: The work has been carried out under the auspices of Forskarskola Energisystem financed by the Swedish Energy Agency. Financial support from Bio4Energy, a strategic research environment appointed by the Swedish government, and the Swedish Research Council Formas are also gratefullyacknowledged.

Available from: 2020-03-09 Created: 2020-03-09 Last updated: 2023-05-22Bibliographically approved

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Zetterholm, JonasMossberg, Johanna

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