Valuing Gas Power Plants With CO2 Capture and Tradable Quotas

We analyze investment in a gas fired power plant in a regime with tradable quotas for CO2 emissions and with an option to install CO2 capture technology. Such equipment is very costly and we find that high subsidies are required to entice the investors to install it, even when the captured CO2 can be sold for enhanced oil recovery. Investment valuation is based on market prices of long term prices of energy forward contracts. The plant�s operating flexibility and the investment delay opportunity under gas and electricity price uncertainty is taken into account. Based on prices from the Scandinavian electricity market and the UK natural gas market we find that the power plant investment should be delayed.