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

Luis M. Abadie and Jose Chamorro
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Luis M. Abadie: Basque Centre for Climate Change (BC3), Alameda Urquijo 4,4ª-1ª, 48008 Bilbao, Spain

Energies, 2011, vol. 4, issue 10, 1-32

Abstract: 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.

Keywords: electricity; transmission network; congestion; expansion; load; fuel prices; generation costs; emission allowances; EU Emissions Trading Scheme (ETS); GHG abatement (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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