Economic viability evaluation of a carbon capture and storage (CCS) hub investment in Indonesia based on real option approach

CCS can play a significant role in mitigating CO₂ emissions. However, investment in CCS remains challenging due to high costs and uncertainties that affect future revenues, such as carbon prices, operating costs, and CO₂ sequestration volumes. This study evaluates the viability of CCS hub development in Indonesia using Real Options Valuation (ROV) as an extension of the Discounted Cash Flow (DCF) method to capture volatility and the value of managerial flexibility through a binomial lattice model with multiphase sequential compound options. Three development scenarios are analyzed: one domestic sequestration case (Scenario 1) and two cross-border sequestration cases, with CO₂ originating from Singapore (Scenario 2) and Japan (Scenario 3). The DCF analysis yields negative Net Present Values (NPVs) of –US$968 million, –US$842 million, and –US$1785 million for Scenarios 1, 2, and 3, respectively. Scenario 1 is not viable due to a negative present value of the underlying asset. The ROV analysis using the defer option produces Expanded Net Present Values (ENPVs) of US$14 million for Scenario 2 and US$0.2 million for Scenario 3, while the combined defer-and-expand option generates ENPVs of US$238 million for Scenario 2 and US$12 million for Scenario 3. ROV results identify Scenario 2 as the most favorable development option. Two-way sensitivity analyses of this scenario highlight key areas for improving the ENPV. Although full government incentives reduce the critical carbon price, they remain insufficient to justify immediate investment. Overall, this study provides CCS stakeholders with insights into applying ROV within Indonesia’s regulatory context.