Pricing Hydrogen Infrastructure Investment with Barrier

First passage model specifies a credit default, when the underlying drops below a certain barrier. An investment failure often occurs unexpectedly and involves significant losses to the project value, which makes a great similarity to a default event preventing the investor paying back its debt. In this paper we aim to link the two theories, where an investment failure is determined through the evolution of firm’s underlying value. Once the asset value hits the lower barrier, it will result partial or complete failure. This paper will investigate whether a real option with barrier model can be used to count for investment opportunity with choice of failure, where the barrier of which may act as a lower bound for the underlying variation. We will apply on a case of hydrogen infrastructure investment in Netherlands and further determine the barrier through a pessimistic scenario. Sensitivity analysis shows where we set the barrier level have a strong impact on the option value, in addition to the aggregated volatility. Options valuation model are theory, and like all models, are more limited than the real world they attempt to represent. Together with scenario analysis that often used as analyzing alternative possible outcomes, it provides the additional down-side barrier and thus acts as an important tool for facilitating decision making in innovation projects.