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The Economics of Gasification: A Market-Based Approach
Bilbao Bizkaia Kutxa, Gran Vía 30, 48009 Bilbao, Spain
Departamento Fundamentos del Análisis Económico I, University of the Basque Country, Av. Lehendakari Aguirre 83, 48015 Bilbao, Spain
* Author to whom correspondence should be addressed.
Received: 21 July 2009; in revised form: 20 August 2009 / Accepted: 21 August 2009 / Published: 25 August 2009
Abstract: This paper deals with the economics of gasification facilities in general and IGCC power plants in particular. Regarding the prospects of these systems, passing the technological test is one thing, passing the economic test can be quite another. In this respect, traditional valuations assume constant input and/or output prices. Since this is hardly realistic, we allow for uncertainty in prices. We naturally look at the markets where many of the products involved are regularly traded. Futures markets on commodities are particularly useful for valuing uncertain future cash flows. Thus, revenues and variable costs can be assessed by means of sound financial concepts and actual market data. On the other hand, these complex systems provide a number of flexibility options (e.g., to choose among several inputs, outputs, modes of operation, etc.). Typically, flexibility contributes significantly to the overall value of real assets. Indeed, maximization of the asset value requires the optimal exercise of any flexibility option available. Yet the economic value of flexibility is elusive, the more so under (price) uncertainty. And the right choice of input fuels and/or output products is a main concern for the facility managers. As a particular application, we deal with the valuation of input flexibility. We follow the Real Options approach. In addition to economic variables, we also address technical and environmental issues such as energy efficiency, utility performance characteristics and missions (note that carbon constraints are looming). Lastly, a brief introduction to some stochastic processes suitable for valuation purposes is provided.
Keywords: gasification; IGCC; flexibility; real options; futures markets; fossil fuels; emission allowances; stochastic processes
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Abadie, L.M.; Chamorro, J.M. The Economics of Gasification: A Market-Based Approach. Energies 2009, 2, 662-694.
Abadie LM, Chamorro JM. The Economics of Gasification: A Market-Based Approach. Energies. 2009; 2(3):662-694.
Abadie, Luis M.; Chamorro, José M. 2009. "The Economics of Gasification: A Market-Based Approach." Energies 2, no. 3: 662-694.