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DOI: 10.1016/j.energy.2018.05.143
Please cite this article as: Alvin Henao, Enzo Sauma, Angel Gonzalez, Impact of introducing
flexibility in the Colombian Transmission Expansion Planning, Energy (2018), doi: 10.1016/j.energy.
2018.05.143
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ABSTRACT
1. Introduction
Transmission Expansion Planning (TEP) plays a key role in all power systems around the
world because of the requirement of interconnecting load centers and generation units,
especially as a mechanism for integrating renewable energy [1]. The increasing
penetration of renewable energy poses some challenges on TEP by adding more sources
of uncertainty, such as the intermittency of some renewables, and by dealing with shorter
construction times of new generation facilities compared to conventional plants [2–5]. As a
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result, the network planner makes long-term investment decisions under deep uncertainty.
Robustness and flexibility are important approaches to address uncertainties in this field
[6–8].
A simple method to produce a transmission plan is adding new circuits between nodes at
different periods of the planning horizon. In this simple framework, the network planner is
able to use a robust or a flexible approach in that process. If the planner uses a robust
approach, then she needs to identify the “robust” new circuits at the initial stage to support
the different scenarios employed. In contrast, if the planner adds circuits using a flexible
approach, then she acts in response to new information. Thus, selecting a flexible
approach generally involves an increase of the net present benefits, but with an extra cost
[11]. Consequently, some questions arise: What are those increments on the net present
benefits? What is the extra cost? What is the meaning of this? This paper aims to provide
answers to these questions.
Maghouli et al [17] deal with uncertainty by using both the robust and the flexible
approaches. They propose a multi-objective model that simultaneously minimizes total
social cost, maximum adjustment cost, and maximum regret. By adding new circuits to the
network, under different scenarios, they identify the best solution considering all
objectives. From a flexible point of view, they use an AC method. Accordingly, the
proposed method allows selecting the network additions with the minimum cost of
adaptation to the selected scenarios (i.e., making transmission investments that have the
minimum cost in case they need to be adapted). However, the authors do not estimate the
value of the flexibility added.
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On the other hand, MSO allows adapting an initial investment decision on transmission
expansion after the market reaction is known [18]. In this case, the network planner split
the planning horizon using several fixed points where she observes the consequences of
her decision in one previous time point to make adjustments in the next point. This
procedure, commonly known as “wait and see”, works with multiple scenarios. Each
scenario has an assigned probability, previously determined. Although this method may
require a high computational effort, some solutions have been proposed in the literature
[19]. In contrast with the AC approach, MSO allows estimating the value of flexibility,
although in an indirect manner [13,18,20]. In [18] this value is obtained by the comparison
with a robust approach.
It has been widely discussed that TEP is surrounded by uncertainties [21] and involves
irreversible investments [22]. In [23], however, the authors argue that an opportunity to
invest is not an obligation, but a right to buy an asset in the future. In this sense, if an
investor makes an irreversible investment, he exercises the option to invest. However,
waiting for new information may change the initial decision. Naturally, this flexibility has
value, which should be included in the project cost-benefit analysis [24]. Under this
paradigm, flexibility can be viewed as a way to increase the Net Present Value of
transmission plans [25]. RO theory recognizes that managerial flexibility value may be
substantial in some projects and provides a simple method to estimate such flexibility.
The application of RO in TEP requires the construction of a project cash flow. Additionally,
it requires the identification of options, the estimation of volatilities, and a solution method
for the RO problem [26]. A good explanation about the framework that supports RO in a
context of TEP can be found in [27]. A solution in this kind of problems can be obtained by
using techniques based on continuous time stochastic models [18], including both
stochastic partial differential equations [28] and dynamic programming [27] that bears
discrete time stochastic models, like the binomial tree [29]. Techniques like Least Square
Monte Carlo and dynamic programming, proposed for valuing American Options in [30],
allow handling complex investment projects with multiple uncertain variables considered
as a portfolio of options. These techniques have been applied on TEP [15,16,31], but from
a private-investment viewpoint. Other applications of RO on TEP can be found on the
literature; some of them focus on determining the optimal time for investing in transmission
lines [27,32], or the value added by flexibility [33], or on proposing improvements in solving
the stochastic optimization problem [34].
The previous works recognize the value that flexibility may add to the investment decision
in TEP, but they ignore the fact that flexibility involves an extra cost in order to make a
flexible plan. In addition, they generally focus on private profit, not observing the problem
from a social-welfare viewpoint. This gap is partially filled out in [11], where the authors
make a RO analysis in a simple two-node network from a social-welfare perspective. In
[11], the authors consider a network planner that optimizes social welfare by managing
energy production from private generators. Based on that work, this paper splits the
transmission expansion process into two parts, as a simple strategy to introduce flexibility
as a hedging mechanism against uncertainty. Accordingly, the network planner will invest
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in the second-part component only if the market conditions are favorable to this
investment. In consequence, this paper applies RO considering the second-part process
as an option to defer. Although RO allows the direct estimation of the value of flexibility, we
also include a simple comparison of the results with a robust approach, to make explicit
the meaning of flexibility.
In the case of Colombia, although power-sector regulations require medium- and long-term
flexible plans [35], studies applying flexibility approaches are scarce. This article seeks for
estimating the value of flexibility in the Colombian TEP, using a methodology based on
RO. In particular, a binomial tree technique is applied because of its simplicity, intuition,
and convenience to determine the value of the flexibility [36]. We estimate this flexibility
using a simplification of the National Interconnected System (SIN) of Colombia.
The rest of this article is organized as follows. Section 2 describes the Colombian power
system and the simplified model used in this paper. Section 3 explains the methodology
proposed. Section 4 shows our results. Finally, Section 5 concludes the paper.
2. Methodology Proposed
Fig. 1 shows a flow diagram summarizing the general methodology followed in this paper.
This methodology is similar to the one described in [11] in determining the option value.
However, differently than the methodology in [11], this methodology incorporates some
complexities that were previously ignored by adding transmission lines as a flexible
strategy, introducing Kirchhoff’s current and voltage Laws, and modeling competitive
generation firms (i.e., price-taker generators). In addition, a comparison between flexible
and robust approaches is performed in order to better understand the implications of
estimating the value of deferring an option to invest.
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Start
Estimate volatility
End
The first step in the proposed methodology (first box following Start in Fig. 1) is to define
the “base case”, which, in our case, corresponds to the no transmission expansions
decision by the system operation. In this base case, values are estimated by solving, for
each year and each scenario, the Optimal Power Flow (OPF) model described in the
Appendix A.
The transmission expansion process is split in two parts to incorporate flexibility. The first
one is called “fixed expansion”, which corresponds to determining a transmission
expansion that is optimal under the expected evolution of the system conditions. The
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second one is an expansion, additional to the first one, which serves as an adapting-to-
contingency mechanism. The latter is called “flexible expansion”.
Several alternatives of transmission lines for fixed expansion are evaluated in terms of
their contributions on the total surplus of the system, ∆𝑇𝑆𝑡. This contribution (in $/h) during
the planning horizon in each scenario is computed as in (1).
The first term of the right-hand side is the incremental consumer surplus, ∆𝐶𝑆𝑛,𝑡 produced
by the fixed expansion on the base case at node 𝑛 and at time 𝑡. The second term is the
incremental producer surplus ∆𝑃𝑆𝑛,𝑡 at node 𝑛 and at time 𝑡. Finally, the third term, in
square brackets, represents the contribution of the incremental congestion rent produced
by the fixed expansion (sub-index 2) over the base case (sub-index 1). This term uses
nodal prices 𝑃𝑛,𝑡 at node 𝑛 and at time 𝑡. The incremental consumer surplus and the
incremental producer surplus are determined in (2) and (3), respectively.
The sub-indexes 2 and 1 in (2) and (3) represent the fixed expansion and the base case,
respectively. In addition, the summation symbol includes all generators in node 𝑛.
For each transmission expansion alternative, incremental total surplus (∆𝑇𝑆𝑡) is estimated
at each year of the planning horizon and its present value is obtained using the same
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discount rate in each scenario. Then, the alternative with the largest expected present
value is selected.
2.1. Flexibility
Managerial decisions may vary during the planning horizon due to the presence of
uncertainties. In this case, having flexibility may allow increasing the capacity of the fixed
expansion when future conditions suggest an improvement in social welfare. Naturally, the
following situations may occur:
Evidently, this flexibility in the future expansion, additional to the initial network capacity,
has a cost. The value of the option to defer the investment may be used as an upper
bound of the willingness to pay of the network planner for this extra cost of having
flexibility.
Following Fig.1, our methodology requires to determine a size for the flexible expansion
and to estimate its contribution on the total surplus, after the fixed expansion is already
made.
RO methodology requires defining an underlying asset value (𝑆0), which is the expected
present value of the incremental total surplus of the flexible expansion in this case. The
evolution of 𝑆0 over time serves as a signal to decide if it is convenient either to invest on
the flexible expansion at a specific time or to wait. Obviously, this decision depends on the
value of the option to defer.
The estimation of 𝑆0 follows the same steps done in determining the fixed expansion
described before. A binomial tree, like the one shown in Fig. 2, represents the evolution of
𝑆0 through the planning horizon [36]. The construction of the binomial tree requires the
estimation of the volatility of the underlying asset [39]. This volatility is the variability of the
cash flow return estimated from the values of the incremental total surplus of the flexible
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expansion. The volatility is obtained, in this case, by Monte Carlo simulation [40],
according to (4) – (6).
𝑖
𝑖
𝑍𝑡 = 𝑙𝑛
( )
𝑃𝑉𝑡
𝑃𝑉0
(4)
𝑖
𝜎𝑡 = 𝑠𝑡𝑑 𝑑𝑒𝑣. (𝑍𝑡) (5)
𝜎1 = 𝜎𝑡/ 𝑡 (6)
𝑖
where 𝑍𝑡 is the logarithmic cash flow return for 𝑡 years estimated at Monte Carlo simulation
𝑖
𝑖; 𝑃𝑉𝑡 is the present value of ∆𝑇𝑆𝑡 at period 𝑡 at Monte Carlo simulation 𝑖; 𝑡 is any time in
the future; 𝜎𝑡 is the volatility through time step t; and 𝜎1 is the volatility for one time step.
The forecast of the incremental total surplus in the system over the planning horizon
𝑖
allows estimating the variable 𝑃𝑉𝑡. This forecast considers demand growth rate as a
random variable that follows a triangular distribution. Under these conditions, the OPF
described in the appendix A is executed at each period of the planning horizon, allowing
the estimation of ∆𝑇𝑆𝑡 using (1) – (3), but with sub-index 2 representing the system with
both the flexible expansion and the fixed expansion and sub-index 1 representing the
system with only the fixed expansion, in this case. Future values of ∆𝑇𝑆𝑡 are brought to
present 𝑡 by using a discount rate of 10%.
The process described above is repeated 1000 times by Monte Carlo simulation, so (4) –
(6) can be applied at the end.
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Fig. 2. Binomial tree appearance with 𝜎𝑡 =1 year and a planning horizon of 8 years.
In Fig. 2, the evolution of 𝑆0 can go up or down due to the realization of the demand
uncertainty in the model. To represent an upward movement of 𝑆0 this value is multiplied
by a factor U that is a number larger than 1. On the other hand, when the value goes
down, 𝑆0 is multiplied by a factor D smaller than 1. U and D are calculated as follows:
As mentioned earlier, a key assumption in this approach is fixing the life of the option as
the planning horizon (𝑇). This allows us to estimate the value of the option at the end of
the planning horizon.
The last nodes of the binomial tree (i.e., the nodes at the end of the life of the option)
contain the range of possible values that the underlying asset may take when the option
expires (these values range from SoU8 to SoD8, if 𝑇 = 8 as in Fig. 2). The maximization
criterion in (9) determines the value of the option to defer the flexible expansion when the
option expires. This criterion suggests that the option has value if the net value reached by
𝑆0 at the end of the life of the option ( 𝑃𝑉𝑇,𝑗) is positive:
where 𝑋𝑇 is the exercise price or strike price (i.e., investment needed to obtain the present
value PV of the project at period 𝑇). For simplicity, this investment cost does not change
through the planning horizon; 𝑃𝑉𝑇,𝑗 is the value of the underlying asset at time 𝑇 at node 𝑗
(the upper node is 𝑗 = 1); and 𝑃𝑒𝑛𝑎𝑙𝑡𝑦𝑇 is the opportunity cost lost due to the fact that the
flexible expansion is not executed at time T (it would be zero if there is not congestion in
the system).
The penalty term is included because network congestion reduces social welfare. Penalty
magnitude at time 𝑇 is estimated as the incremental total surplus produced by the flexible
expansion at that time if such expansion were made.
By applying backward induction, the option value is obtained at each stage of the binomial
tree, until the initial node is reached at 𝑡 = 0.
The option value (𝑂𝑉𝑡,𝑗) for prior periods to the last one are estimated applying the
following maximization criterion (although, other approaches are possible [16].
where 𝐷𝑉𝑡,𝑗 is the expected discounted value of continuing with the option open (i.e., it
represents the value of not exercising the option in period t and waiting until next period to
decide). The following equation calculates 𝐷𝑉𝑡,𝑗:
‒ R𝑓 ∗ δt
DVt,j = [p ∗ OVt + δt,j + (1 ‒ p) ∗ OVt + δt,j + 1]e (11)
When 𝑡 = 0 is reached, the Present Value with Options (𝑃𝑉𝑂) is obtained, and it contains
the option value to defer the flexible expansion. To estimate the option value at time 0 (
𝑂𝑉0,1), the value of the project without flexibilities, 𝑃𝑉𝑊𝐹, is subtracted from 𝑃𝑉𝑂 (
𝑃𝑉𝑊𝐹 = 𝑆0 ‒ X0).
Next, we explain the robust approach we use to compare the introduction of flexibility into
the TEP process.
Using (1) – (3) and the equations presented in Appendix A, we can evaluate the
performance of the eligible transmission lines in each scenario of demand growth. In
particular, the comparison of incremental total surplus provided by each candidate line
allows us the identification of the optimal value for each scenario. Deviations from this
optimum yield to a regret value for each eligible transmission line, as describes in (14).
∗
𝑅𝑒𝑔𝑟𝑒𝑡𝑖,𝑗 = |𝑇𝑆𝑖,𝑗 ‒ 𝑇𝑆 𝑗| (14)
∗
where 𝑅𝑒𝑔𝑟𝑒𝑡𝑖,𝑗 is the regret function for candidate line 𝑖 at scenario 𝑗 and 𝑇𝑆 𝑗 is the
incremental total surplus for optimum at scenario 𝑗.
In 2015, the SIN had a total generation capacity of 15 GW. Two thirds of them come from
hydroelectric power plants [42]. The SIN has approximately 24,000 kms of transmission
lines, 57% of which corresponds to the National Transmission System (STN). The STN is
a set of transmission lines with at least a voltage of 220 kV [35]. The transmission lines
below 220 kV (that do not belong to the Local Distribution System, SDL) represent the
Regional Transmission System (STR).
The Colombian network planner performs the TEP using robust criteria over certain
scenarios to identify and evaluate solutions from a technical and economic point of view
[37].
We model the SIN network with six nodes (or buses), each containing load centers and
main generation units. Historical data of energy generation and prices were taken from
[37]. Fig. 3 shows a diagram of this reduced system.
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The localization, technology, marginal costs, and capacity of generation units are shown in
Table 1. Table 2 contains information about transmission lines. Nodal and total loads at
the beginning of the horizon are presented in Table 3.
In the TEP formulation of the system described in Fig. 3, we consider a planning horizon of
14 years. Within this horizon, power load grows annually. We consider three scenarios for
the annual load growth rate (2%, 2.5%, and 2.7%), the same at every node of the SIN. We
assume that, although load at nodes changes annually, it remains constant within each
year.
4. Results
Results from the base case (i.e., OPF with no transmission expansions) in the system
described in Fig. 3 suggest that there is congestion between nodes 4 and 6. Accordingly,
the inclusion of a new transmission line in this path seems to be a good candidate for
expansion. Table 4 shows the candidate lines selected, their investment costs, and their
contributions to the total surplus if they are built. Reactance of candidate lines are
estimated from Table 2 by adjusting a regression equation to the corresponding data [38].
In addition, Table 4 presents the results under three scenarios of the demand growth rate
(probabilities are in parenthesis). The last column shows the maximum values of total
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surplus under each scenario. Finally, the last row shows the net value of the incremental
total surplus that results when the investment costs are subtracted from the expected
value. Consequently, a fixed expansion of 2,000 MW is the best solution because it
presents the largest contribution to total surplus.
Using Monte Carlo simulation, we estimate the value of the parameters 𝜎1, U, D, and p.
Results are shown in Table 6 (risk free rate R𝑓 = 0.03).
These values are needed in order to build the binomial tree showing the evolution of the
underlying asset over time. Subtraction of investment ($89.4 millions for this 350 MW line)
and penalties from this tree produces the binomial tree with net values that is shown in Fig.
4. Appendix B presents the penalties used in this case.
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Fig. 4. Binomial tree with the net values of the underlying asset for the Colombian case
(amounts in millions of dollars)
From Fig. 4, we can observe that there are conditions under which investment on flexible
expansion produces negative contribution on values of total surplus, so it is not convenient
investing in these cases. However, delaying the investment may represent a good
alternative in some cases. Fig. 4 does not allow seeing this. The binomial tree of the option
value, shown in Fig. 5, is more useful for that purpose.
If the network planner executes the flexible expansion at period 14 (see Fig. 5), she will
obtain an increment of social welfare expressed by those numbers inside the boxes.
Positive numbers in the last period indicate that the planner should invest. Positive number
in the rest of periods may indicate investing immediately or waiting until the next period
(the decision will depend on which value is larger). Finally, boxes marked with a zero
indicate that the option to defer until next period has no value, and the investment is not
convenient because it reduces social welfare. The application of the maximization criterion
represented in (9) produces those values in Fig. 5.
The values presented in columns 1 through 13 in Fig. 5 are the result of comparing the
execution of the flexible expansion at that time against the delay of that investment until
the next period using (10) and (11). As a result, Fig. 5 shows the maximum values of this
comparison. The option to defer expires when the planner decides to make flexible
investment.
Fig. 6 illustrates the best decision in every case. This figure shows the cases where the
planner invest (boxes marked with light gray color), where she does not invest in flexible
expansion (boxes marked with dark color), and where she waits for new information
(boxes with no color) for making decisions. Fig. 6 shows a clear zone (after period 6),
during planning horizon, where the option has expired.
According to these figures, it is better to wait in period 0 than to invest in flexible expansion
because this decision increases the value of the investment. In other words, delaying the
decision to make the flexible investment increases the incremental total surplus in the
system. The value of this flexibility is $35 millions. This is the option value that results from
the difference between of $2,306 minus $2,271 (see Fig. 5 and Fig. 4 at period 0).
The additional expansion (in addition to the original system) can be built only if the original
system is able to accept it. Allowing this generally involves some extra costs,
corresponding to taller or wider transmission towers in the original system, among other
actions. The network will find flexibility useful if the option value is larger than the
necessary extra cost. That means that the option value to delay a flexible expansion
becomes an upper bound of the willingness to pay for providing the system with this
adaptation ability.
As a sensitivity analysis, we explore the impact on the value of the option to defer of
changes in the generation costs. We select to perform a sensitivity analysis with respect to
this parameter because it is the one with the largest influence on the option value.
Recall that Table 1 shows the types of generators located in each node of the reduced
version of the Colombian power system shown in Fig. 3. Each type of generator has its
own cost of generation that might lead to congestion depending on its localization. The
most common generation technologies in Colombia are hydro and gas, so this sensitivity
analysis explores the effects on the value of the option to defer if hydro generators reduce
their cost in 50% (keeping the rest unchanged), and if gas generators reduce their cost in
50% (keeping the rest unchanged). The results of these sensitivity analyses are shown in
Table 8.
Flexibility – PVWF
(Millions of dollars)
Project Value With $2,306 $3,011 $4,211
Options – PVO (Millions
of dollars)
Option Value, OV0,1 $35 $45 $30
(Millions of dollars)
Table 8 shows that a reduction in the generation cost of hydro power plants increases the
value of the option to defer, but the reduction in the cost of gas power plants reduces the
option value. The explanation of this phenomenon is detailed next.
Under the context of cost minimization, the OPF gives priority to hydro generators so the
possibility of delaying the transmission investment increases its value because the needs
of the system can be covered with nearby generators. This is not true in the case of gas
generators because gas generators with larger capacity are far from the location of the
transmission expansion, justifying the expansion.
Using (14), we determine the regret of each transmission expansion alternative. Table 9
shows these results.
Results from Table 9 suggest that a unique expansion of 2,000 MW (robust expansion) is
required to support demand growth scenarios. In order to explain this, it is convenient to
remember that total surplus is obtained by the sum of consumer surplus, producer surplus
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and congestion rents so, in this case, a comparison among these terms shows that an
expansion from 2,000 to 2,350 reduces incremental consumer surplus and incremental
congestion rent, but increases incremental producer surplus. However, this increment
does not compensate the reduction of both incremental consumer surplus and incremental
congestion rents.
It is interesting to observe that the robust expansion coincides with the fixed expansion,
although there is an important difference in the approach. A robust expansion does not
allow the possibility of an expansion over the initial infrastructure. In contrast, the flexible
expansion conceives from the beginning that possibility. As a result, it anticipates possible
adaptations and creates options for that (height of tower, space for additional connectors,
etc.). Obviously, creating options produces extra costs. As mentioned previously, the value
of the option gives an upper limit of the extra cost that is rational to pay, which should not
be exceeded.
In the case study analyzed here, it was evident that the flexible expansion should not
always be built (recall Fig 6). That is, there will be the possibility of losing the extra cost
invested if the planner does not invest in the flexible expansion. That situation is similar to
the loss of the premium paid by the option buyer in financial options, when the underlying
stock does not close above the strike price at the expiration date.
5. Conclusions
The Colombian TEP is performed based on a robust approach to cope with uncertainty.
However, this paradigm is contrasted with the possibility of adding flexibility to the TEP.
We showed that the incorporation of flexibility increases social welfare while managing
uncertainty. In this paper, we use a reduced version of the Colombian power system, a
simple strategy to introduce flexibility by adding lines, a well-known methodology among
managers (RO), and a very simple comparison with a robust approach to keep the focus of
the paper clear. Although there are more elaborated methods, techniques and models to
support flexibility, we prefer to keep the methodology simple to maintain the focus of the
paper clear.
The incorporation of flexibility allows the investors to adapt their decisions according to
new information. Planning with flexibility may be a smart decision because it may increase
the value of the project. Planners are able to use CA, MSO or RO to build a flexible plan.
RO allows estimating an upper limit for the extra cost incurred to make the system able to
support future adaptations. Thus, network planners should calculate how much additional
investment is required to make a flexible system and compare it to the value of the
flexibility added.
Under a flexible system, it may occur that the flexible investment is needed, in which case
the extra cost will accomplish its purpose. However, it is also possible that the system
does not require future adaptations so the extra-cost would be lost. This situation suggests
that the extra-cost is like a premium paid by the network planner in order to have the right
to exercise the option to adapt the system to uncertain scenarios.
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Based on the assumptions made on this paper, the following topics are left for future
research work: effects of adding flexibility on a real version of the Colombian
interconnection system, analysis of regulatory changes in the TEP process to introduce
flexibility, inclusion of realistic lead-time for transmission projects, and application of other
methodologies to introduce flexibility and estimation of volatility.
Acknowledgments
This work was partially supported by CONICYT, FONDECYT/Regular 1161112 grant and
by CONICYT, FONDAP 15110019 grant (SERC-CHILE). A. Henao would like to thank the
financial support from Universidad del Norte. We specially thanks Dr. David Pozo for
providing the data of the reduced version of the Colombian power system.
𝑆𝑏
𝑓𝑙 = ∑ Γ𝑙𝑛𝛿𝑛,
𝑥𝑙 𝑛 ∈ 𝑁
∀𝑙 𝜖 𝐿 ( A3)
𝑚𝑎𝑥 𝑚𝑎𝑥
‒𝐹 𝑙 ≤ 𝑓𝑙 ≤ 𝐹 𝑙 , ∀𝑙 𝜖 𝐿 (A4)
𝑚𝑎𝑥
0 ≤ 𝑞𝑖 ≤ 𝑄 𝑖 , ∀i (A5)
𝜋 𝜋
‒ ≤ 𝛿𝑛 ≤ , ∀𝑛 (A6)
2 2
𝛿1 = 0 ( A7)
where:
𝑙: Line index.
𝑁: Set of nodes.
𝐼: Set of producers.
𝑚𝑎𝑥
𝐹 𝑙 : Maximum capacity of line 𝑙.
𝑚𝑎𝑥
𝑄 𝑖 : Maximum power given by generator 𝑖.
The objective function, defined in (A1) is the minimization of the operation cost. Thus, the
OPF selects the least-cost generation that meet demand while taking into account their
maximum power and marginal costs. A DC approximation of Kirchhoff’s Laws are
represented in (A2) and (A3). Constraints (A4), (A5), (A6), and (A7) define operational
limits and the range of the decision variables.
Appendix B. Penalties
The table below shows the values of the incremental total surplus if flexible expansion is
added at the specified time in each scenario. We consider these values as proxy for the
opportunity cost of the society due to postponing the flexible investment decision. Thus,
these values are taken as the penalties for postponing the investment decision.
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Start
Estimate volatility
End
Fig. 1. Binomial tree appearance with δt =1 year and planning horizon of 8 years.
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Fig. 4. Binomial tree with net values of underlying asset for the Colombian case (millions of dollars)
Highlights