Real option valuation of FACTS investments based on the least square Monte Carlo method

Abstract

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.