Portfolios of Real Options and Capacity Expansion in Transmission Network Expansion Planning

In network investments, much of the real options value may reside “in” identifying the proper configuration to develop, in terms of the timing and sizing of its deployment. A longer-term perspective, with a treatment of uncertainty that moves beyond simply increasing deterministic specifications, has the potential to improve the design of networked infrastructures, such as power transmission networks. In this paper we present a new model for Transmission Network Expansion Planning, with uncertainty in demand, which considers investments in transmission lines as a portfolio of real options, and use this model to study the impact of uncertainty and demand correlation in basic network building blocks. Our analysis confirms the value of network sources of operational flexibility in a multi-stage setting. The results also show that uncertainty increases the network value in a non-monotonous way, due to the load curtailment costs and discrete capacity expansions, and higher demand correlations do not necessarily lead to reductions in the network value.