The Value of Product Flexibility in Nuclear Hydrogen ... · April 16-19, 2007 The Value of Product...

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

Current U.S. Hydrogen Markets• Oil refining (4.1M tonnes H2). • Ammonia (2.6M tonnes H2).• [Canadian oil sands (0.5M tonnes H2)]. • Methanol

(0.4M tonnes H2).• Chemical, metal,

food, etc. (0.1M tonnes H2). Methanol

Ammonia

Oil - captive

Oil - merchant


An Evolving Hydrogen Economy

Each market will have different hydrogen needs. Alternative technologies must compete in each market.

Near-term markets

Fertilizers

Refining

Mid-term markets

Coal Liquefaction

Tar Sands

Long-term markets

Remote Power

Transportation


• Almost all H2 today comes from steam reforming of CH4.– Costs rising with natural gas prices. — >750oC. — CO2 emissions.

• Low-temperature water electrolysis.– Energy intensive (i.e., costly). — Production decoupled from heat source.– Precious-metal catalysts.

• Thermochemical cycles.– 550oC - 2000oC.

• High-temperature steam electrolysis.– Solid-oxide fuel cell technology. — Durability?

• Solar hydrogen.– Direct solar production: photo-electrochemical cells; artificial photosynthesis. – Biomass as feedstock.

• Other options under investigation:– Biological/biomimetic hydrogen production.– Coal gasification.– Direct ceramic-membrane separation of water.

Hydrogen Production Options


Nuclear Hydrogen Production Plant Configuration Options

• Multiple energy products.– Dedicated H2 vs. hydrogen plus electricity.

• Plant size.– Large-scale vs. modular/distributed.

• Flexibility of changing product output rate in co-generation.– Load following on either electricity or hydrogen

rate without changing the reactor power.

• Direct vs. indirect heating of the electricity production cycle (if electricity is produced).

• Parallel vs. series arrangement of heat loads.– Heat transfer to the H2 production process at

the exit of the reactor or the turbine.

Implications for– Efficiency– Cost– Location

requirementfor the specific technology in a specific market.


Electricity (and Hydrogen) Costs Can Vary Widely

Natural gas prices vary by 500%

California electricity prices vary by 3000%

Source: Platts

• There’s great promise in taking advantage of price fluctuations.

• But price variations are not predictable.

• A hydrogen production system based on off-peak (low-price) electricity would have to be flexible enough to adapt to changing market conditions.


Investment Decisions• Several plant configurations are being considered for nuclear H2

production.– Electrochemical cycles.– Thermochemical cycles.

How does an investor decide?

• 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.


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


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.


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).


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:

Electricity Price - GBM

Pric

e [$

/MW

h]

Time [year]

0

50

100

150

200

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Year:

=Mean,85%,15% Perc =95%,5%

H2 Price - GBM

Pric

e [$

/kg]

Time [year]

0

3

6

9

12

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Year:

=Mean,85%,15% Perc =95%,5%


Analysis of Nuclear H2 Technologies• The model is used to analyze three potential nuclear H2 technologies:

• Levelized cost, pure hydrogen production:

$2.26/kgSI - HTGR$2.51/kgHTE – HTGR$2.91/kgHPE – ALWR

ANL model

Hydrogen Production Process Nuclear Reactor Type Cogeneration of Hydrogen and Electricity?

High-pressure, low-temperature water electrolysis (HPE)

Advanced Light Water Reactor (ALWR)

Yes

High-temperature steam electrolysis (HTE)

High-Temperature Gas-Cooled Reactor (HTGR)

Yes

High-temperature sulfur-iodine cycle (SI)

High-Temperature Gas-Cooled Reactor (HTGR)

No


Results – Expected Profits• Price assumptions for GBM (subjective)

– Average electricity price: 50 $/MWh.– Average H2 price: 3 $/kg.– Electricity and H2 price volatilities: 20 %/year.– Electricity and H2 price correlation: 0.5.

• Expected lifetime profits with real options analysis (GBM):

Flexibility adds substantial value to production technologies.Stochastic analysis is needed to capture the full option value of flexibility.

860SI-HTGR, Inflexible870HTE-HTGR, Flexible530HTE-HTGR, Inflexible770HPE-ALWR, Flexible96HPE-ALWR, Inflexible

Expected Profit (M$)

$670M

$340M


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


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 [%

]


-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

$]


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 [%

]



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

$]


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


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

timing, on-site H2 storage).

The Value of Product Flexibility in Nuclear Hydrogen ... · April 16-19, 2007 The Value of Product...

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