Investment in mutually exclusive transmission projects under policy uncertainty

Abstract

In this paper we evaluate mutually exclusive transmission projects under policy and economic uncertainty. The alternatives being considered are transmission investment projects between Norway and Germany, and Norway and the UK. We apply a real option valuation framework allowing the investor to choose the optimal time and location of the investment, and also how different conditions affect the decision to invest in either of these two projects. The analysis shows that the value of the option does not necessarily increase with volatility.