A Binomial Tree Model for Investment in Transmission Assets

The need for investment in the improvement and expansion of the electric transmission grid has not been met in the new competitive environment. Investment in transmission assets poses demanding challenges: multiplicity of players, market imperfections, among others. The integration of financial instruments poses also an additional level of complication, because investors wish to ensure steady long-term returns and to withstand short-term market volatility. This paper presents a binomial tree model for option valuation of transmission assets. The model is applied to one representative example with several transmission investment scenarios showing the approach’s capabilities as a decision-aid tool for transmission investors.

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