Valuing Hydrogen-based Infrastructure Investment with Multiple Sources of Uncertainty: An application to Transportation System in Netherlands

The shift from a fossil-fuel to a hydrogen based transportation system requires sufficient supporting infrastructures. This paper develops a real option model to investigate the value of this investment opportunity which is able to handle the multiple uncertainties from market, political and technological aspects. The uncertain market and political uncertain factors will be transformed into a project value function which is incorporated with Geometric Brownian Motion and Jump process. Unlike the conventional jump-diffusion model, the jump in our model is designed as strictly positive to account for any favorable policy to support hydrogen fuel-cell and will only work on the drift term for a direct contribution to the underlying value. With explicit discounting of the risk of technical failure at each phase, stochastic project variation is an input of the real option framework and the sequential nature of hydrogen infrastructure investment will be interpreted as a chain of expanded call options. Moreover, we include the learning effect that will induce the cost reduction into the valuation. It appears that the early stage of infrastructure adoptions has a significant strategic value for the locked in future investment opportunities, which are dominated by the increasing power of push from technical learning, political impact and market uncertainty. However, this significance may most likely be offset due to a lower chance of investment in each stage successive of moving towards commercialization.