Transmission investments under uncertainty: The impact of flexibility on decision-making

Nowadays, higher electricity consumption and need for economic efficiency have led to increased use of the electric power transmission network. After the severe absence of investments in the transmission grid observed in the last decades, the transmission investment problem is currently a topic of increasing interest among the power market agents as well as regulatory authorities. Therefore, tailored investment valuation models are needed for quantifying the contribution of strategic flexibility in the investment portfolios. In addition, models capable of replicating the uncertain evolution of the long-term behavior of power markets represent a reliable benchmark for designing contingent actions against unfavorable unfolding of uncertainty, aiming at ensuring the transmission network adaptation. This paper analyzes the impact of flexibility on the evaluation of transmission investment under uncertainty based on system-wide social welfare. Stochastic simulations are performed in order to characterize the uncertainty behavior of the investment portfolio performance. From these simulations, an appraisal methodology based on a Real Options approach is applied for valuing the strategic flexibility embedded into the transmission projects and finding the optimal timing for investing. The results show how omission or incorrect handling, of ongoing project uncertainty of the key variables could lead to non-optimal decisions.