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Valuing a flexible regulatory framework for transmission expansion investments

Regulatory frameworks for inducing efficient and well-timed investments in electric transmission systems is currently an issue of considerable interest for researchers, policymakers and transmission investors. The traditional approaches have encountered several problems in managing the huge uncertainties involved in the transmission expansion problem, preventing investors expanding from the system in an optimal manner. For dealing appropriately with uncertainty within the transmission expansion problem it seems necessary to introduce some kind of strategic flexibility in order to make contingent decisions. In this article, a new investment approach that properly assesses a merchant transmission investment with the option of becoming regulated in case of an unfavorable unfolding of the uncertain future conditions (switching option) is proposed. In a numerical example, the economic value of the flexibility provided by the proposed approach is compared against the option value of deferring investments in the traditional merchant approach.