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)
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 language | English |
|---|---|
| Place of Publication | Vienna |
| Publisher | Forschungsinstitut für Regulierungsökonomie, WU Vienna University of Economics and Business |
| Publication status | Published - 30 Sept 2010 |
Publication series
| Series | Working Papers / Research Institute for Regulatory Economics |
|---|---|
| Number | 2010,3 |
WU Working Paper Series
- Working Papers / Research Institute for Regulatory Economics