Overview of transmission expansion planning using real options analysis

Kory W. Hedman, Feng Gao, Gerald B. Sheblé

Research output: Chapter in Book/Report/Conference proceedingConference contribution

25 Scopus citations


Deregulation of the electric industry has opened the doors for competition and this has caused a significant difference in what information is needed to evaluate how much an transmission expansion investment is worth as well as the risk involved. The change comes from the fact that, in the past, the risk associated with regulated investments in transmission would be covered by the government and a project would be chosen based on minimum cost while meeting the requirements such as reliability, power flow, etc. Due to this change, there is a push for better ways to evaluate the worth and risk of transmission expansion investments. This paper discusses the method of Real Options Analysis and how it can be used to value transmission expansion investments. The paper also discusses the difference between this approach and other approaches. One key difference is that Real Options Analysis does not assume the decision making process is static like traditional methods do. Instead, it allows for these managerial options to be considered, expanded, abandoned, etc. Thus, by doing so, it provides a better estimate of the investment's worth. There are multiple Real Options methods from Black-Scholes to Monte-Carlo Simulation to Trees (Binomial, Trinomial, etc.) and more. This paper will discuss Monte-Carlo Simulation & Trees only.

Original languageEnglish (US)
Title of host publicationProceedings - Thirteenth International Symposium on Temporal Representation and Reasoning, TIME 2006
Number of pages6
StatePublished - 2005
Externally publishedYes
Event37th Annual North American Power Symposium, 2005 - Ames, IA, United States
Duration: Oct 23 2005Oct 25 2005

Publication series

NameProceedings of the 37th Annual North American Power Symposium, 2005


Other37th Annual North American Power Symposium, 2005
Country/TerritoryUnited States
CityAmes, IA


  • Binomial trees
  • Decision making
  • Monte-Carlo simulations
  • Multinomial trees
  • Power systems economics
  • Real options analysis
  • Transmission company (TRANSCO)
  • Transmission expansion planning

ASJC Scopus subject areas

  • General Engineering


Dive into the research topics of 'Overview of transmission expansion planning using real options analysis'. Together they form a unique fingerprint.

Cite this