The revised Renewable Fuel Standard of the U.S. mandates a production of 16 billion gallons per year by 2022 from cellulosic biofuels. Iowa, rich in agricultural residues like corn stover, is a major player in contributing to the fulfillment of the cellulosic biofuels mandate. Is it a good time for Iowa to start investing in cellulosic biofuels? Using a fast pyrolysis facility as an example, we present a real options approach for valuing the investment of a new technology for producing cellulosic biofuels subject to construction lead times and uncertain fuel price. We conduct a case study on Iowa, in which the decision maker finds the optimal investment time for the fast pyrolysis facility subject to production and distribution constraints. Our result indicates that the project is profitable if the facility is invested now, but could be more profitable if invested later. Namely, now it is not the optimal time for Iowa to start constructing the fast pyrolysis facility. We also find that the impact of the lead time on the project value is too significant to overlook. The profitability of the project is sensitive to the outlook of fuel price. If the future retail fuel price drops just 7% lower than forecasted by the Energy Information Administration, the investment may not be profitable. The impact of the technology improvement (production yield) and biomass feedstock price is also analyzed using regression.
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NOTICE: This is the author's version of a work that was accepted for publication in Ingternational Journal of Production Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Vol. 167, 2015, doi: 10.1016/j.ijpe.2015.05.019.