Options for real options: dealing with uncertainty in investment decisions for electricity networks

Part of the liberalization effort in the Netherlands was to regulate the income of the network companies. Although the reduction in income was not as dramatic as in the United Kingdom, it still forced the network companies to review their expenditures. Complicating the challenge was the silent requirement that the cost reduction should not result in more risk. This required a change in the valuation methods. So far these valuation methods have changed from purely technical criteria into a more risk based, net present value alike approach. The real option theory is not commonly used in the decisions. This seems a bit odd, as major uncertainties influence the valuation process. In this paper a few options in which the real option theory might be valuable are presented. It is an invitation to the real option specialists to show the network companies how real options could be of value.