1 Abstract-- Nowadays, higher electricity consumption and need for economic efficiency have led to increased use of the electric power transmission network. After the severe absence of investments in the transmission grid observed in the last decades, the transmission investment problem is currently a topic of increasing interest among the power market agents as well as regulatory authorities. Therefore, tailored investment valuation models are needed for quantifying the contribution of strategic flexibility in the investment portfolios. In addition, models capable of replicating the uncertain evolution of the long-term behavior of power markets represent a reliable benchmark for designing contingent actions against unfavorable unfolding of uncertainty, aiming at ensuring the transmission network adaptation. This paper analyzes the impact of flexibility on the evaluation of transmission investment under uncertainty based on system-wide social welfare. Stochastic simulations are performed in order to characterize the uncertainty behavior of the investment portfolio performance. From these simulations, an appraisal methodology based on a Real Options approach is applied for valuing the strategic flexibility embedded into the transmission projects and finding the optimal timing for investing. The results show how omission or incorrect handling, of ongoing project uncertainty of the key variables could lead to non-optimal decisions. Index Terms- Monte Carlo simulation, Real Options, strategic flexibility, transmission investment, uncertainty I. INTRODUCTION CCORDING to the Edison Electric Institute, during 30 years, in the Unites States (US), investment in power transmission declined, between 1975 and 1999 at an average rate of USD 83 million per annum [1]. In words of [2], “some of the given reasons are an overbuilt system prior to 1975, retail rate freezes, lack of available capital due to other investment activities, cost-effective generation located closer to load, and uncertain regulation of transmission”. In addition, events which have taken place at the beginning of this century reveal an important requirement of investments in power network. Some of these event are related to: security issues related with terrorism attacks, blackouts of 1996 in US as well as 2003 and 2006 in Europe, , natural gas price spikes G. Blanco is with the Facultad Politécnica at Universidad Nacional de Asunción (UNA), Universitary Campus, San Lorenzo 2111, Paraguay (E-mail: gblanco@pol.una.py). F. Olsina and F. Garcés are with CONICET at the Institute of Electrical Energy (IEE), National University of San Juan (UNSJ), Av. Lib. Gral. San Martín 1109 (O), J5400ARL, Argentina. (e-mail: olsina@iee.unsj.edu.ar, garces@iee.unsj.edu.ar). making nukes and coal more competitive and last but not least, the green energy promotion since renewable energy sources are usually remote from the load [2]. Therefore, a limited recovery of the network investments has appeared since the end of the 20 th [3]. From 1999 through 2003, transmission investment activity augmented at an average annual rate of USD 286 million, a substantial reversal of trends. Nevertheless, it is not clear what accounted for this trend reversal or whether the change is temporary or long- term [3]. In any case, the theory and tools for valuing transmission investments are still below the requirements of the actual power markets. This issue is indeed true in aspects such as the quantification in economic terms of strategic flexibility [4]. The transmission investment problem is characterized by the nature of the investments involved. Features as: scale economy, irreversibility, low adaptability and intensive capital are present in the investments in network expansions. In addition, the value of an investment is usually amortized over a long period of time and depends on many other developments. Consequently, the transmission investments are strongly exposed to the large long-term uncertainties. Obviously, the unavoidable uncertainties related with transmission investments are better managed with flexibility rather than fixed scenario expectations by the discount cash flow (DCF) approach. Flexibility offers the possibility to adapt the investment plan of the transmission system, rapidly and at a low cost, to any change, foreseen or not, in the conditions that were expected at the time it was decided. [4]- [5] Hence, strategic flexibility could be seen as a risk management technique [6], which allows properly managing major uncertainties, which are unresolved at the time of making investment decisions. Nevertheless, expressing the value of flexibility in monetary terms is not a trivial task and requires rather refined valuing tools [7]. The Real Option Valuation (ROV) approach provides a well-founded framework –based on the theory of financial options- to assess the intrinsic flexibility of strategic investments under uncertainty [8]. Power transmission investments comprise intrinsic flexibility by multiple strategic options, such as: the option to expand in a posterior stage, postpone the option and abandon the investment in the future [9]. This paper is an extension of the research presented in [10] and addresses the problem of valuation of flexible transmission investment projects on the basis of the social welfare of the electricity market. It proposes a methodology Transmission Investments under Uncertainty: the Impact of Flexibility on Decision-Making Gerardo Blanco, Member, IEEE, Fernando Olsina and Francisco Garcés A 978-1-4673-2729-9/12/$31.00 ©2012 IEEE