Flexibility value in electric transmission expansion planning

Abstract

Electric Transmission Expansion Planning (TEP) is a complex task exposed to multiple sources of uncertainties when the electricity market has been restructured. Approaches like those based on scenarios and robustness have been proposed and used by planners to deal with uncertainties. Alternatives of solution for expansion are identified and economically evaluated through methodologies based on Discounted Cash Flow (DCF). In general, these approaches have the risk to produce undersized or oversized designs of transmission lines because of uncertainties in demand growth rates and economies of scale. In addition, DCF helps to make a decision only with the information available today and it does not consider managerial flexibility. In consequence, transmission expansion projects are auctioned and the winner investor is forced to execute the project under bidding terms without the possibility to adapt the project to unpredictable events. This research introduces flexibility in TEP process and estimates its value as an approach to cope with uncertainties. A methodology based on Real Options is used and the value of flexibility is estimated in terms of social welfare. In particular, an option to defer a transmission expansion is applied and its value is estimated by using a binomial tree technique. Two case studies are analyzed: A two-node case and a reduced version of the Colombian transmission network. Conclusions suggest flexibility is a valid approach to be introduced in TEP in order to handle uncertainties.