Journal article 2026
IEEE Transactions on Engineering Management Vol. 73 · pp. 3881–3895
Infrastructure flexibility has environmental value when managers can wait for uncertainty to resolve and exercise design options at the right time, rather than committing irreversibly at the outset.
Infrastructure appraisal usually treats flexibility and uncertainty in financial terms, while environmental methods such as Life Cycle Assessment tend to assume fixed designs and operating conditions. This research connects the two perspectives by developing a real-options methodology in which CO₂-equivalent emissions, rather than cash flows, become the decision metric. The model is illustrated through floating offshore wind infrastructure and the option to add battery energy storage to mitigate uncertain wind-energy curtailment.
How can infrastructure be planned while considering long-term CO₂-equivalent uncertainty and flexibility?
The study develops a stochastic Real Options Analysis model based on discounted CO₂-equivalent flows. Monte Carlo simulation represents uncertainty, while an optimized exercise-threshold method identifies when a flexible design option should be exercised. The illustrative application evaluates battery energy storage systems for a floating offshore wind project under alternative curtailment dynamics, grid carbon-intensity trajectories, discounting assumptions and battery configurations.
In the base case, the mean CO₂-based NPV is maximized at a 1.8% curtailment-rate exercise threshold, reached on average after 4.3 years. The result demonstrates that flexibility is valuable because investment can be conditioned on how uncertainty actually evolves.
Compared with stochastic discounted-flow appraisal, the optimized real-options approach increases average CO₂-equivalent returns in the tested cases. Once the option is exercised, the base-case mean NPV rises by 21%, while the probability of a positive NPV also improves.
Larger storage options and more uncertain conditions can generate greater option value because managers retain the ability to delay irreversible deployment. Sensitivity analyses show that the exercise-threshold logic remains robust across alternative curtailment, carbon-intensity and discounting assumptions.
The article extends Real Options Analysis beyond financial valuation by showing that option logic can be expressed directly in CO₂-equivalent terms. It also reframes lifecycle environmental performance as something shaped by managerial timing and flexible design choices, not simply measured after an infrastructure decision has been made.
For infrastructure managers and policymakers, the model provides a quantitative way to decide when flexible low-carbon investments should be exercised under uncertainty. The methodology is designed to be transferable beyond offshore wind to other complex infrastructures where environmental performance depends on long operating lives and uncertain future conditions.
Paravano, A., Neri, A., Brizzante, G., Bosani, A., Cagno, E., & Locatelli, G. (2026). A Novel CO₂-Based Real-Options Methodology to Integrate Uncertainty and Flexibility in Infrastructure Appraisal: An Illustrative Application in Offshore Energy Infrastructure. IEEE Transactions on Engineering Management, 73, 3881–3895. https://doi.org/10.1109/TEM.2026.3697823
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