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The Value and Risk Implications of Grid Expansion Investments

Dockner, Engelbert J. and Kucsera, Denes and Rammerstorfer, Margarethe (2010) The Value and Risk Implications of Grid Expansion Investments. Working Papers / Research Institute for Regulatory Economics, 2010,3. Forschungsinstitut für Regulierungsökonomie, WU Vienna University of Economics and Business, Vienna.

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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)

Item Type: Paper
Keywords: grid expansion / frequency balancing (spinning reserves) / real options / Elektrizitätsversorgung / Erweiterungsinvestition / Investitionsentscheidung / Realoption
Classification Codes: RVK QP 720, QR 600 ; JEL G31, G32, L94
Divisions: Forschungsinstitute > Regulierungsökonomie
Depositing User: Dissertation Administrator
Date Deposited: 04 May 2011 10:34
Last Modified: 28 Mar 2012 14:37
URI: http://epub.wu.ac.at/id/eprint/3071

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