Power transmission investment under uncertainty: A Real Option framework

Transmission power system plays a critical role in competitive electricity markets. It promotes competition among generators, mitigates market power of generators and allows an efficient and sustainable use of the primary energy resources. Currently, decision making on building new grid infrastructure is affected by many uncertainties. Under these circumstances, the efficient and timely expansion of electrical systems is a challenging task. This work presents a methodology for evaluating transmission investments in an environment of great uncertainty considering flexibility in decision-making. It incorporates real options analysis to evaluate flexible assets. The main focus is to shows some application of real options analysis in the assessments of transmission capacity investment in competitive electricity markets. Flexibility embedded in transmission projects, such as the option to defer, the option to expand and compound options, is appraised. The results of the study emphasize the importance of considering the flexibility value in transmission investment projects. Finally, the use of real options to design compensation mechanisms that encourage the efficient expansion of the transmission system is shown.