Real options valuation applied to transmission expansion planning

S. Lumbreras, D.W. Bunn, A. Ramos, M. Chronopoulos

XXIII Finance Forum - Finance Forum 2015, Madrid (Spain). 09-10 July 2015

Summary:
Transmission Expansion Planning (TEP) is a complex problem where building a new line involves a long permitting process of around 10 years. Therefore, transmission expansion must anticipate the evolution of uncertainties particularly those derived f by changes in the capacity and location of new generating facilities. As it is not possible to request permits for all possible lines, priorities must be established. We develop a formulation to use Real Options Valuation (ROV) to evaluate the potential benefit of candidate lines and thereby identify priority projects. We present a feasible representation of optionality in TEP projects and propose a tractable evaluation of option value. The proposed technique identifies the candidate transmission lines with the highest potential, as well as their main value drivers. This is implemented on a realistic case study based on the Spanish system.

Keywords: Power Transmission, Circuit Optimization, Mathematical Programming

Publication date: 2015-07-09.

Citation:
S. Lumbreras, D.W. Bunn, A. Ramos, M. Chronopoulos, Real options valuation applied to transmission expansion planning, XXIII Finance Forum - Finance Forum 2015, Madrid (Spain). 09-10 July 2015.