Valuing Risk and Flexibility of the Yguazú Hydropower Project in Paraguay

Traditionally, power system planners aim to promote investments in generation and transmission capacity in order to keep pace of an increasing demand. However, if the evolution of this variable is conditioned by major uncertainties, tailored investment valuation models could help in quantifying the contribution of strategic flexibility to the value of investment portfolios of such power system activities. This is the particular case for most of the developing countries, included Paraguay, which started to develop high demand growth rates, with high volatilities, in the last years. However, the investment valuation method used by the Paraguayan system administrator (ANDE) still follows the classic NPV based approach. In that sense, this paper seeks to assess the performance of scheduled investments within the Paraguayan power system under uncertainty. Firstly, it is proposed a mathematical model of Paraguay's National Interconnected System, which considers an uncertain demand growth, by means of the Brownian Motion with Drift stochastic process. This model is applied for calculating the system's Optimal Power Flow in Direct Current (OPF-DC) during the period 2014 to 2023, with the objective of maximizing the system-wide social welfare. This allows computing the risk inherent to the execution of investments scheduled by ANDE. Furthermore, the Real Options method is applied for valuing the strategic flexibility embedded into the Yguazú hydropower project. Finally, results show that the risk levels corresponding to the execution of ANDE's investment plan are significantly low. However, it is found convenient to defer the Yguazú generation project until past 2023.