The Value of Product Flexibility in Nuclear Hydrogen Technologies: A Real Options Analysis Audun Botterud, Bilge Yıldız, Guenter Conzelmann, Mark C. Petri International Conference on Non-Electric Applications of Nuclear Power Oarai, Japan April 16-19, 2007
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The Value of Product Flexibility in Nuclear Hydrogen Technologies: A Real Options Analysis
Audun Botterud, Bilge Yıldız,Guenter Conzelmann,Mark C. Petri
International Conference on Non-Electric Applications of Nuclear PowerOarai, JapanApril 16-19, 2007
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 2
• Cost analysis is important, but– Levelized cost is not the only input factor for potential investors.– The cheapest plant may not be the most attractive investment alternative.
• Investments in these plants will be based on profitability assessments.– Future cash flows are exposed to a high degree of uncertainty.– Real options analysis is a convenient tool for this type of analysis.
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 8
Real Options Analysis• Developed for financial analysis of investments under uncertainty.
• Estimates the value of flexibility in future decisions regarding operations or investment.
• The option value of flexibility is not included in traditional Net Present Value (NPV) calculations.
Operational/InvestmentDecisions
StochasticDeterministic
DynamicFlexible
StaticInflexible
Uncertain Variables
Real Options
Static NPV
Operational/InvestmentDecisions
StochasticDeterministic
DynamicFlexible
StaticInflexible
Uncertain Variables
Real Options
Static NPV
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 9
A Model for Financial Assessment of Nuclear H2 Plants
• Cash flow analysis of nuclear hydrogen options.– Spreadsheet model calculates annual revenues and costs.– Revenue depends on H2 and electricity prices, which are uncertain.– Same cost structure as Technology Insight’s levelized cost analysis.– No additional capital cost for flexible co-generation plants.
• Demand and prices.– Three demand/price sub-periods within each year (low, medium, high).– A flexible plant can switch output product instantaneously between sub-
periods with no additional operational cost, producing either only H2 or only electricity.
– Electricity price varies within the three sub-periods, but the H2 price is constant.
– Prices do not include transmission and distribution costs.
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 10
A Model for Financial Assessment of Nuclear H2 Plants
• Two operational modes.1) Inflexible: Pure H2 production.2) Flexible: H2 or electricity, depending on what is more
profitable at any time.
• The value of flexibility in output product.– The difference in profits between flexible and inflexible
operations.– Not all nuclear H2 technologies have the switching
flexibility (e.g., SI – HTGR).
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 11
Uncertainty in Hydrogen and Electricity Prices• Two stochastic processes used to represent future prices (annual
average).– Geometric Brownian Motion (GBM). — Mean Reversion (MR).– Correlation between H2 and electricity prices is represented.
• Monte-Carlo simulations are used for discrete sampling of prices.– Example: GBM – 10,000 M-C iterations:
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 14
Rel
ativ
e Fr
eque
ncy
Profit [M$]
0.000
0.050
0.100
0.150
0.200
0.250
0.300Mean=528.4213
-4000 0 4000 8000 12000-4000 0 4000 8000 12000
5% 90% 5% >-1699.178 4427.79
Mean=528.4213
Results – Profit Distributions for HTE-HTGR
• Flexibility in output product– Increases upside of profit distribution and expected
profits.– Reduces downside of profit distribution.– Lowers risk for investor.
Inflexible (Mean = $530M) Flexible (Mean = $870M)
Rel
ativ
e Fr
eque
ncy
Profit [M$]
0.000
0.050
0.100
0.150
0.200
0.250
0.300Mean=872.0852
-4000 0 4000 8000 12000-4000 0 4000 8000 12000
5% 90% 5% >-1443.037 4780.804
Mean=872.0852
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 15
Results – Sensitivity Analysis: Mean PricesExpected profits Expected H2 production
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
1400.0
1600.0
30.0 40.0 50.0 60.0 70.0
Mean Electricity Price [$/MWh]
Expe
cted
Pro
fit [M
$]
HPE-ALWRHTE-HTGRSI-HTGR
0.0
20.0
40.0
60.0
80.0
100.0
120.0
30.0 40.0 50.0 60.0 70.0
Mean Electricity Price [$/MWh]
Rel
ativ
e H
ydro
gen
Prod
uctio
n [%
]
HPE-ALWRHTE-HTGRSI-HTGR
-500.0
0.0
500.0
1000.0
1500.0
2000.0
2500.0
2.0 2.5 3.0 3.5 4.0
Mean Hydrogen Price [$/kg]
Expe
cted
Pro
fit [M
$]
HPE-ALWRHTE-HTGRSI-HTGR
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2.0 2.5 3.0 3.5 4.0
Mean Hydrogen Price [$/kg]
Rel
ativ
e H
ydro
gen
Prod
uctio
n [%
]
HPE-ALWRHTE-HTGRSI-HTGR
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 16
Results – Sensitivity Analysis: Price CorrelationExpected profits Expected H2 production
• The value of flexible plants is higher for a low price correlation.
• The amount of H2 production increases with price correlation.
0
200
400
600
800
1000
1200
1400
-1 -0.5 0 0.5 1
Correlation Coefficient
Expe
cted
Pro
fit [M
$]
HPE-ALWRHTE-HTGRSI-HTGR
0
20
40
60
80
100
120
-1 -0.5 0 0.5 1
Correlation Coefficient
Rel
ativ
e H
ydro
gen
Prod
uctio
n [%
]
HPE-ALWR2HTE-HTGR2aSI-HTGR1
The Value of Product Flexibility in Nuclear Hydrogen TechnologiesApril 16-19, 2007 Presenter: Mark C. Petri Slide: 17
Conclusions and Future Work
• Main conclusions– In addition to cost estimates, it is important to consider profit opportunities
and risks.– Flexibility to switch between H2 and electricity can have substantial value
for a potential investor.– Assumptions about costs and price distributions are highly uncertain.– DOE should consider R&D efforts towards developing processes and
durable materials that can enable co-generation.
• Future work– Refinement of real options model (e.g. cost sensitivity analysis, switching
costs, firm H2 demand, intra-year variations in H2 price).– Extension of real options model (e.g. modular expansion, investment