THREE-STEP SEQUENTIAL COMPOUND REAL OPTIONS METHOD FOR ELECTRICITY CAPACITY EXPANSION

• Mantombi Bashe University of the Witwatersrand https://orcid.org/0000-0001-7192-8189
• Mercy Shuma-Iwisi University of the Witwatersrand https://orcid.org/0000-0002-8879-2369
• Michael Anton Van Wyk University of the Witwatersrand https://orcid.org/0000-0002-4519-1475

DOI:

https://doi.org/10.7166/34-1-2687

Keywords:

American call options, sequential compound real options, electricity, defer, investment project

Abstract

A three-step sequential compound real options (SCRO) method is developed and applied to the South African technology for fluidised bed combustion with carbon capture and storage (FBCwCCS). The objective of this paper is to address the plan’s implementation when electricity demand is uncertain. The SCRO results are compared with the net present value (NPV) approach. The data for both the SRCO and the NPV is extracted from the mixed integer two-stage stochastic programming results. Negative NPV results indicate that the investment for the FBCwCCS should be rejected. The SCRO results suggest that decision-makers can exercise the option to invest if the start-up costs are less than or equal to R130 million, or otherwise defer the FBCwCCS investment projects. The industry lags behind in implementing the real option models; the same is expected with the SCRO models.