A Novel CO2-Based Real-Options Methodology to Integrate Uncertainty and Flexibility in Infrastructure Appraisal: An Illustrative Application in Offshore Energy Infrastructure

In infrastructure planning, it is critical to deal with uncertainties. Various methods incorporate uncertainty and design flexibility into infrastructure planning, primarily from an economic perspective, often disregarding the environmental dimension, including greenhouse gas emissions (hereafter, CO2-eq emissions). Methods accounting for CO2-eq emissions, such as life cycle assessment, typically overlook uncertainty and design flexibility. In this study, flexibility is conceptualized as infrastructure flexibility embedded in the design of the infrastructure itself. To address this gap in infrastructure project management, this article introduces a real options analysis (ROA) model to assess infrastructure design options for CO2-eq emissions, providing a decision-support framework to mitigate uncertainty throughout an infrastructure’s lifecycle. Without loss of generality, we tested the model with offshore energy infrastructure, evaluating the option to integrate battery energy storage systems (BESS) to mitigate wind energy curtailment. We adopt discounted CO2-eq emissions as a decision metric, recognizing the environmental impact of flexibility-driven infrastructure planning. The novel ROA model employs Monte Carlo simulations and optimized exercise thresholds to determine when and under what conditions BESS investments yield net carbon benefits. Robustness is assessed through sensitivity analyses across alternative curtailment dynamics, carbon intensity trajectories, and discounting assumptions, confirming the stability of the flexibility exercise threshold. By extending the ROA beyond economic valuation, this study presents a novel infrastructure project management framework that integrates flexibility into strategic decision-making to support infrastructure sustainability, addressing critical challenges in managing uncertainty, optimizing infrastructure investments, and achieving long-term decarbonization objectives.