Fernando Olsina

Real Option Valuation of FACTS Investments Based on the Least Square Monte Carlo Method

Abstract form only given. Efficient and well-timed investments in electric transmission networks that cope with the large ongoing power market uncertainties are currently an open issue of significant research interest. Strategic flexibility for seizing opportunities and cutting losses contingent upon an unfavorable unfolding of the long-term uncertainties is an attribute of enormous value when assessing irreversible investments. In this sense, flexible AC transmission systems (FACTS) devices appear as an effective manner of adding flexibility to the transmission expansion planning. This article proposes an investment valuation approach which properly assesses the option value of deferring transmission lines investments whereas gaining flexibility by investing in FACTS devices. The flexibility provided by FACTS investments-option to abandon and to relocate-is assessed through a real option valuation approach based on the novel least square Monte Carlo method. In order to illustrate the practicability of the proposed valuation approach, a traditional expansion strategy (lines) and a flexible investment strategy (lines and FACTS) are compared in a real study case. The article shows that a proper combination of lines and FACTS leads to efficient investments by allowing a progressive adaptation of the transmission grid to the changing scenarios.

Valuing Flexibility of DG Investments in Transmission Expansion Planning

Planning for efficient and well-timed investments in electric transmission systems, whereas properly managing the huge uncertainties involved, is currently a subject of considerable research interest. Retaining strategic flexibility in order to make fast and economic contingent decisions upon unexpected scenarios is a sound strategy for dealing with uncertainty within the transmission expansion problem. In this sense, distributed generation (DG) seems an effective way for adding flexibility to transmission expansion plans. In this article, a new expansion planning approach that properly assesses the option value of deferring expansion investments while flexibility is gained by investing in DG is proposed. In a numerical example, the economic value of the flexibility provided by different real options is compared against economies of scale of a larger, though more irreversible, transmission project obtained by classical stochastic optimization techniques.

Stochastic Simulation of Spot Power Prices by Spectral Representation

Simulating the random changes of power prices is a crucial task for operational and trading decisions. Currently, models stemming from econometrics and financial mathematics represent the dominating approach to the stochastic simulation of electricity prices. This work proposes a novel methodology based on frequency-domain techniques for simulating the random fluctuations of hourly electricity prices according to probabilistic and spectral properties observed in historical data. The developed nonparametric algorithm is based on the well-known spectral representation method. The method has been extended to accurately reproduce the remarkable non-Gaussian and local nonstationary features of power prices. An iterative procedure and a nonlinear memoryless transformation have been applied to simultaneously match the observed evolutionary spectral content and the marginal non-Gaussian probability density function (PDF) of the random power price fluctuations. The proposed method is general and can be applied to any power market as it does not require the postulation of a model structure and the calibration of model parameters. The method is computationally very efficient as it takes advantage of fast Fourier transform techniques. Spot prices quoted on the German EEX have been selected for extensively testing the quality of the synthetically generated prices. Results show that price samples simulated with the proposed model replicate very accurately both the distributional and time-varying spectral features of the stochastic electricity price dynamics.

Valuing investments in distribution networks with DG under uncertainty

After deregulation of the electricity sector, Distributed Generation (DG)has received increasing interest in the power systems development. The identification of efficient and well-timed investments in electric distribution networks that cope with large power market uncertainties is currently an open issue of significant research interest. Strategic flexibility for seizing opportunities and cutting losses contingent upon an unfavorable unfolding of the long-term uncertainties is an attribute of enormous value when assessing irreversible investments in Distribution Systems. In this sense, DG units appear as an effective manner of adding flexibility to the distribution expansion planning. This article proposes an investment valuation approach which properly assesses the option value of deferring investments in distribution feeders whereas gaining flexibility by investing in DG units. The flexibility provided by DG investments -option to abandon and to relocate-is assessed through a Real Option Valuation approach based on the novel Least Square Monte Carlo method(LSM).In order to illustrate the feasibility of the proposed valuation approach, a traditional expansion strategy (distribution feeders) and a flexible investment strategy (distribution feeders and DG) are compared in a study case. The article shows that a proper arrangement of feeders and DG may lead to efficient investments by allowing a progressive adaptation of the distribution grid to the changing scenarios.

Transmission expansion planning under uncertainty Ȕ The role of FACTS in providing strategic flexibility

Efficient and well-timed investments in electric transmission networks — that suitably cope with the large power market uncertainties- is currently an open issue of considerable research interest. Strategic flexibility for seizing opportunities and cutting losses contingent upon the market evolution is of enormous value when assessing investments under uncertainties. In this sense, FACTS devices appear as an effective means of adding strategic flexibility to the transmission expansion planning. This article proposes an expansion planning approach which assesses the option value of deferring expansion investments in transmission lines while gaining flexibility by investing in FACTS devices. In a numerical example, a conventional expansion alternative (only transmission lines) is compared to a flexible investment alternative (transmission lines & FACTS) in order to shed light on the investment signals that each approach provides. The article shows that a suitable combination between lines and FACTS could generate flexible investments in smaller stages, instead of infrequent investments in large transmission expansion projects, which facilitates the progressive adaptation of the electric network to the changing scenarios.

Valuing a flexible regulatory framework for transmission expansion investments

Regulatory frameworks for inducing efficient and well-timed investments in electric transmission systems is currently an issue of considerable interest for researchers, policymakers and transmission investors. The traditional approaches have encountered several problems in managing the huge uncertainties involved in the transmission expansion problem, preventing investors expanding from the system in an optimal manner. For dealing appropriately with uncertainty within the transmission expansion problem it seems necessary to introduce some kind of strategic flexibility in order to make contingent decisions. In this article, a new investment approach that properly assesses a merchant transmission investment with the option of becoming regulated in case of an unfavorable unfolding of the uncertain future conditions (switching option) is proposed. In a numerical example, the economic value of the flexibility provided by the proposed approach is compared against the option value of deferring investments in the traditional merchant approach.

Transmission investments under uncertainty: The impact of flexibility on decision-making

Nowadays, higher electricity consumption and need for economic efficiency have led to increased use of the electric power transmission network. After the severe absence of investments in the transmission grid observed in the last decades, the transmission investment problem is currently a topic of increasing interest among the power market agents as well as regulatory authorities. Therefore, tailored investment valuation models are needed for quantifying the contribution of strategic flexibility in the investment portfolios. In addition, models capable of replicating the uncertain evolution of the long-term behavior of power markets represent a reliable benchmark for designing contingent actions against unfavorable unfolding of uncertainty, aiming at ensuring the transmission network adaptation. This paper analyzes the impact of flexibility on the evaluation of transmission investment under uncertainty based on system-wide social welfare. Stochastic simulations are performed in order to characterize the uncertainty behavior of the investment portfolio performance. From these simulations, an appraisal methodology based on a Real Options approach is applied for valuing the strategic flexibility embedded into the transmission projects and finding the optimal timing for investing. The results show how omission or incorrect handling, of ongoing project uncertainty of the key variables could lead to non-optimal decisions.

Flexibility Value of Distributed Generation in Transmission Expansion Planning

The efficiency of the classic planning methods for solving realistic problems largely relies on an accurate prediction of the future. Nevertheless, the presence of strategic uncertainties in current electricity markets has made prediction and even forecasting essentially futile. The new paradigm of decision-making involves two major deviations from the conventional planning approach. On one hand, the acceptation the fact the future is almost unpredictable. On the other hand, the application of solid risk management techniques turns to be indispensable. In this chapter, a decision-making framework that properly handles strategic uncertainties is proposed and numerically illustrated for solving a realistic transmission expansion planning problem. The key concept proposed in this chapter lies in systematically incorporating flexible options such as large investments postponement and investing in Distributed Generation, in foresight of possible undesired events that strategic uncertainties might unfold. Until now, the consideration of such flexible options has remained largely unexplored. The understanding of the readers is enhanced by means of applying the proposed framework in a numerical mining firm expansion capacity planning problem. The obtained results show that the proposed framework is able to find solutions with noticeably lower involved risks than those resulting from traditional expansion plans. The remaining of this chapter is organized as follows. Section 2 is devoted to describe the main features of the transmission expansion problem and the opportunities for incorporating flexibility in transmission investments for managing long-term planning risks. The most salient characteristics of the several formulations proposed in the literature for solving the optimization problem are reviewed and discussed along Section 3. The several types of uncertain information that must be handled within the optimization problem are classified and analyzed in Section 4. The proposed framework for solving the stochastic optimization problem considering the value provided to expansion plans by flexible investment projects is presented in Section 5. In Section 6, an illustrative-numerical example based on an actual planning problem illustrates the applicability of the developed flexibilitybased planning approach. Concluding remarks of Section 7 close this chapter. 16

Stochastic modeling of the long-term dynamics of liberalized electricity markets

Currently, long-term prices and long-term supply reliability are topics of considerable interest for both, firms investing in generation capacity and regulatory authorities. In order to gain insight into the long-term behavior of liberalized power markets, a simulation model based on system dynamics (SD) is proposed. It is shown that the long-term market dynamics can be represented by a balancing feedback loop. Stochastic simulations on an exemplary thermal system are performed. Results suggest that there might be serious problems to adjust early enough the generation capacity to maintain secure reserve margins, and consequently, stable long-term price levels. Because of the existence of time lags in the market balancing feedback loop, the long-term market development might exhibit a quite volatile behavior. By applying stochastic simulation techniques, the ability of the developed SD model for describing the long-term market uncertainty is demonstrated.

Valuing the dynamic power flow control of FACTS devices under uncertainties

Restructuring of the power industry that have arisen from the unbundling of the electrical industry have led to complex and still unsolved problems related to transmission system expansion owing to the singular characteristics of their investments. These difficulties are currently issues of considerable interest for researchers and policy-makers since the lack of adaptation of the transmission infrastructure may damage operations and free competition in the emerging electrical sector. In this context, some degree of dynamic control within the transmission investments is deemed to be necessary in order to face the increasing uncertainties of the new market scenarios through contingent claims, which allow the planner to adapt the investment under scenarios where the uncertain variables unfold unfavorably. Under this conjuncture, this paper presents an approach for valuing the dynamic power flow control of FACTS devices under uncertain variables of liberalized power markets as well as the evaluation of the flexibility of power transmission investments through a Real Option Valuation approach based on the Least Square Monte Carlo method. In order to illustrate the proposed valuation approach, a study case is presented, where it shows that the flexibility of the dynamic controllers under uncertainties could plenty justify the higher cost of these devices.