Valuing Expansions of the Electricity Transmission Network under Uncertainty: The Binodal Case

• Main Authors: José M. Chamorro, Luis M. Abadie
• Format: Article
• Language: English
• Published: MDPI AG 2011-10-01
• Series: Energies
• Subjects: electricity; transmission network; congestion; expansion; load; fuel prices; generation costs; emission allowances; EU Emissions Trading Scheme (ETS); GHG abatement
• Online Access: http://www.mdpi.com/1996-1073/4/10/1696/

Transmission investments are currently needed to meet an increasing electricity demand, to address security of supply concerns, and to reach carbon-emissions targets. A key issue when assessing the benefits from an expanded grid concerns the valuation of the uncertain cash flows that result from the expansion. We propose a valuation model that accommodates both physical and economic uncertainties following the Real Options approach. It combines optimization techniques with Monte Carlo simulation. We illustrate the use of our model in a simplified, two-node grid and assess the decision whether to invest or not in a particular upgrade. The generation mix includes coal- and natural gas-fired stations that operate under carbon constraints. The underlying parameters are estimated from observed market data.