The Value and Risk Implications of Grid Expansion Investments

Engelbert J. Dockner, Denes Kucsera, Margarethe Rammerstorfer

Publication: Working/Discussion PaperWU Working Paper

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Abstract

In this article, we look at a model with (independent) system operator who faces stochastic but growing transmission demand and a penalty if frequency
is not balanced. In this set up, we derive an optimal grid expansion investment strategy and analyze its value and risk implications. It turns out that
the firm value is strictly concave in the level of transmission demand. Firm value, however, increases with optimal investment for any level of demand.
Moreover, firm risk is decreasing in the level of demand and higher when the firm has an investment option. The risk increase corresponds to the exercise of the call option and is stronger, the closer the firm approaches its exercise
trigger. (author's abstract)
Original languageEnglish
Place of PublicationVienna
PublisherForschungsinstitut für Regulierungsökonomie, WU Vienna University of Economics and Business
DOIs
Publication statusPublished - 30 Sept 2010

Publication series

SeriesWorking Papers / Research Institute for Regulatory Economics
Number2010,3

WU Working Paper Series

  • Working Papers / Research Institute for Regulatory Economics

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