Real options-based investment decision making for distribution networks under long-term uncertainties

This paper proposes a novel real option-based method for investment decision making for distribution networks under long-term load uncertainties. In long-run planning, the strategic flexibility of investments offered by new technologies enables investors to revise original investment decisions based on information in the future. Thus, deferral and expansion options over the investment horizon may provide significant values for investors. This paper develops a contingent claim analysis (CCA) method and proposes an investment valuation approach for distribution networks to help investors make clear-cut decisions. The proposed approach quantifies the option value and flexibility value of deferring or expanding network investments. A case study comprised of two scenarios is demonstrated to illustrate the value of the model. The results indicate that flexible investment strategies are more valuable under higher uncertainties because managerial opportunities can improve the upside potential and limit the downside losses.