Waiting Cost Based Long-Run Network Investment Decision-Making Under Uncertainty

Abstract

Traditional system investment decision is costly and hard to reverse. This is aggravated by uncertainties from flexible load and renewables (FLR), which impact the accuracy of network investment decisions and could trigger a high asset risk. Thus, system operators have the incentive to postpone network reinforcement, and ‘wait and see’ whether the request of investment can be reduced or delayed with new information. This paper proposes a novel method to evaluate network investment horizon deferral based on the trade-off between waiting profit and waiting cost under FLR uncertainties. Although deferring investment leads to waiting cost, it is worthy to wait if the cost is smaller than the waiting profits. To capture the impact of FLR uncertainties on system investment, nodal uncertainties are converted into branch flow uncertainties based on a combined cumulant and Gram-Charlier expansion method. The waiting cost is quantified by the options’ cost based on real options method and waiting profit is from asset present value reduction due to the deferral. Thus, by paying waiting cost, current investment cost can be reserved until uncertainties are reduced to an acceptable level. The waiting time is evaluated by Sharp ratio and expected return, determined by the waiting cost and uncertainty level. The results show that paying waiting cost is an economical way to reduce the impact of uncertainty and avoid hastily investment.