The value of the flexibility given by Demand Management on investment assessment in distribution systems

This work deals with investment assessment of expansion projects in electricity distribution systems. An integrated approach is adopted, in which demand side management projects are modeled together with expansion projects. The methodology used to assess investment decisions is based on cash flow analysis and financial tools. A real options approach, which uses a binomial tree model, is adopted in order to assess the managerial flexibilities given by investment alternatives. Monte Carlo simulation is used to take into account main uncertainties that influence cash flows and to determine the volatility of investment return. The methodology is applied on the context of the Brazilian distribution segment, which is strongly regulated. Results show that the value added by the flexibility introduced by demand side activities is significant.