Investment Strategies as a Portfolio of Real Options for Distribution System Planning under Uncertainty

Due to the liberalization of the electricity sector and the regulation of revenues, the distribution system operator has to cope with a strong cost-pressure to achieve a cost-efficient grid. Therefore, well-timed investments and choice of the right expansion strategies have become one of the main tasks. Consequently, distribution system planning is a complex decision making process, which includes the challenge to choose among alternatives that provide, on one hand, a sufficient level of flexibility to react on unforeseen future development and, on the other hand, are economically efficient. For managing the planning uncertainties some kind of strategic flexibility must be considered in the valuation of distribution system planning alternatives. This article presents a valuation approach for strategic investments based on the real option valuation method to value the strategic flexibility of several investment strategies. Furthermore, this paper presents a new approach for visualizing different investment strategies in a kind of "strategic option space" to compare them with each other.