Grid Expansion Investments When Production is Uncertain - A Real Options Model in the Context of Renewables
16 Pages Posted: 23 Aug 2010 Last revised: 6 Nov 2010
Date Written: November 4, 2010
Recently, there is a perennial debate on the effects of renewable energy production and the adjacent rising uncertainty in the electricity supply on investment incentives in the generation as well as the transmission market. Moreover, the regulation of the transmission and distribution prices may also adversely affect these investment decisions. The model presented in this paper derives the impact of uncertainty (inherent in renewable sources) on the value and the timing of investments into generation facilities whose prices and costs are not restricted or subject to any kind of regulation. Based on these results, the transmission and distribution operator is confronted with the necessity to connect new generators to the existing grid, and to adopt the grid if the overall demand requires additional expansions. We discuss how variations in parameter values impact investment trigger values and timing in the unregulated upstream market of electricity production and the regulated transmission- and distribution market.
Keywords: Regulation, Renewables, Price Cap, Real Option
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By Ian M. Dobbs