Real Options Valuation of Transmission Investments

PRINGLES, R.; OLSINA, F.; GARCÉS, F.

Rio de Janeiro

Simposio; XII Symposium of Specialists in Electric Operational & Expansion Planning (SEPOPE); 2012

This research work studies the application of real options analysis in the evaluation of transmission capacity investments in competitive electricity markets. Real options analysis is an innovative valuation technique that allows assessment of physical or real assets under uncertainty and flexibility in decision making. In this work, the option to defer and the option of growth, i.e. increase the capacity of a transmission line, are analyzed. In order to replicate the actual behavior of the electricity market, the uncertainty in the electricity demand, evolving generation costs and availability of system components are considered in the valuation model. In this assessment, the investor has the possibility of making the decision of building a transmission line upon different alternatives with several degree of flexibility. The first analysis considers a transmission line operated at an extra high voltage level with the option to defer the construction. This option allows the possibility of waiting for new information that will arrive in the future, foregoing immediate revenues. Other explored alternative is investing sequentially in order to obtain greater flexibility and adaptability to uncertain future scenarios. In this case, two alternatives are investigated. An extra high voltage line but initially operated at a lower voltage level, with some components in this voltage level with the flexibility of switching to the higher voltage level by upgrading some components, if conditions turn favorable. The other alternative is a double-circuit electric power line, where firstly only one circuit is built and then the expansion to the second circuit is finished if the circumstances look profitable. The results of the study emphasize the importance of considering the flexibility value in transmission investment projects. It has been shown that the benefits of flexible investment options outweigh the benefits of the alternatives that have significant economies of scale. Thus, despite an investment project with a growth option has a higher initial cost, the value of the flexibility to expand the transmission line provides an additional value which may turn it as the best economic alternative. Furthermore, if investments are rewarded on the basis of differences in local prices, the investor maximizes revenues by building lines that have limited capacity, retaining the flexibility to expand in the future.