Risk, flexibility, and investment in Fischer–Tropsch fuels: Insights from real options analysis

Mehrara, M., Zetterholm, J., Toffolo, A., & Wetterlund, E. (2026). Risk, flexibility, and investment in Fischer–Tropsch fuels: Insights from real options analysis. Cleaner Energy Systems 13 e100232. 10.1016/j.cles.2026.100232.

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Abstract

The transition to sustainable transportation fuels requires investment in emerging biomass-to-liquid production pathways under uncertain market and policy conditions. This study applies a real options analysis framework to evaluate the economic viability and timing of investments in biomass-and power-to-liquid pathways by identifying conditions where an investor should invest, defer, or abandon investments. The analysis is conducted for Sweden, reflected by its large biomass base and well-developed forest industry and ambitious defossilization policies. Results indicate that large price gaps between feedstock and produced fuels are not by themselves sufficient to trigger investment; in volatile markets, investors may still defer because the option to wait has economic value. Thus, even at identical price levels across scenarios, outcomes range from commitment to inaction depending on volatility. Moreover, when investments do occur, they are consistently deferred until the final year of the investment window. While modest subsidies may suffice under stable price conditions, volatile markets with high drifts require significantly greater support to counteract the incentive to defer investments. Electricity cost structures and carbon pricing must be targeted to support the transition toward electrified fuel production pathways. The insights from this study can inform the design of policy instruments that align investor incentives with global transition goals.

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