Valuing flexibility in transmission expansion planning from the perspective of a social planner: A methodology and an application to the Chilean power system

Abstract

We study the value of adding flexibility to Transmission ExpansionPlanning (TEP) projects from the perspective of a social plannerusing real options. Due to the deregulation of electricity markets,TEP projects currently face multiple uncertainties. These uncertaintiesoften cause traditional project valuation methods to recommendsub-optimal investment decisions. Additionally, to incorporate theeffects of uncertainties on the valuation of TEP projects, current literaturerely on some critical simplifications that do not fit well withthe real operations of a power market. This paper models the powermarket in a realistic way by combining an equilibrium model, toassess the power market equilibrium that the TEP project will generate,with a valuation model based on real options, to incorporatethe value of flexibility. The methodology is applied to determine thevalue of adding capacity expansion flexibility to a portion of therigid TEP project that connects the main two interconnected systemsin Chile since 2018. Our results show that, in this case, adding flexibilityincreases the net expected social welfare by $14.03 million.Several sensitivity analyses confirm that this flexibility has more valuewhen uncertainty is higher and/or investment costs are lower.