A barrier options approach to modeling project failure: The case of hydrogen fuel infrastructure

⿢We include a knock-out barrier option in an n-fold compound real option model to allow for immediate project failure.⿢Our model explicitly incorporates the default possibility of large-scale energy infrastructure projects.⿢We present a case study of hydrogen infrastructure development for a sustain...

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Bibliographic Details
Published in:Resource and energy economics 2016-02, Vol.43, p.33-56
Main Authors: Engelen, Peter-Jan, Kool, Clemens, Li, Ye
Format: Article
Language:English
Subjects:
Barrier option
Barriers
Compound real option
Economics
Emissions control
Failure
Financing
Fuel cell vehicles
Hydrogen
Hydrogen fuels
Infrastructure
Investment
Investment failure
Investment uncertainty
Multi-stage investment
Project management
Real options analysis
Studies
Sustainability
Sustainable development
Sustainable energy
Valuation methods
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Summary:⿢We include a knock-out barrier option in an n-fold compound real option model to allow for immediate project failure.⿢Our model explicitly incorporates the default possibility of large-scale energy infrastructure projects.⿢We present a case study of hydrogen infrastructure development for a sustainable transport system.⿢We find no profitable business case for hydrogen as a sustainable transportation mode.⿢Tax support is needed to overcome the starting problems for hydrogen infrastructure development. Hydrogen fuel cell vehicles have the potential to contribute to a sustainable transport system with zero tailpipe emissions. This requires the construction of a network of fuel stations, a long-term, expensive and highly uncertain investment. We contribute to the literature by including a knock-out barrier option in an n-fold compound real option model to take account of immediate project failure in a multi-stage sequential investment project. Our model allows to explicitly incorporate the default possibility of large-scale energy infrastructure projects. In our case study of hydrogen infrastructure development, we find that even for the least conservative valuation method no profitable business case can be made for the development of hydrogen as a sustainable transportation mode. However, we do provide some suggestive scenarios that plausible tax schedules can be designed to overcome the starting problems for hydrogen infrastructure development.
ISSN:0928-7655
1873-0221
DOI:10.1016/j.reseneeco.2015.10.001