Making the Case for Interregional Transmission Projects: Evaluation of Benefits and Allocation of Costs

Jose Fernando PradaEngineering & Public Policy, Carnegie Mellon University

Marija D. IlićElectrical & Computer Engineering, Carnegie Mellon University

33rd USAEE/IAEE North American Conference Pittsburgh, October 28, 2015

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Overview

Role and Challenges of Interregional Transmission - IRT (Cross-Border Transmission, CBT)

Integrated Methodology to Evaluate Benefits and Allocate Costs of IRT Projects

Two Applications using Market Coupling and Coordinated Economic Dispatch

Policy Implications

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The Key Role of Transmission

Strong transmission networks increase the reliability of electrical interconnections

Adequate transmission is required to support robust and competitive trading in electricity markets

Effective integration of utility-scale renewable generation is dependent on availability of transmission

Transmission capacity is an increasingly scarce resource Transmission investment has lagged behind at regional and

interregional levels

US Transmission Policy

Open non-discriminatory transmission access FERC’s orders 888/889 (1996)

FERC initially relied on economic signals to induce efficient investment on transmission Merchant model proved to be ineffective Result was low pace of transmission investment

FERC now promotes centralized regional transmission planning and interregional coordination FERCs Order 1000: cost allocation according to benefits,

inclusion of public policy objectives

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US ElectricPower Markets

Source: FERC

US Regional Electricity Markets

Interregional Transmission Projects - ITP

Primarily built for reliability purposes, but markets have brought renewed interest on cross-border trading

Public policy objectives are nowadays an additional driver New ITPs will serve more than one of these purposes and

total benefit should consider their aggregation Valuation of benefits is not straightforward and fair

allocation of costs is a challenge Project development affected by “market seams” or

“harmonization” issues Big potential benefits but limited development

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How to make a strong case for Interregional (Cross-Border) Transmission? Objective is to realize full potential of ITP and provide

efficient expansion signals (vis-à-vis other alternatives) Need a consistent analytical framework to assess net

benefits from tie-lines between regional systems Consider whole range of benefits: economic efficiency,

reliability improvements, environmental impact. Cost allocation between parties should follow the “beneficiary

pays” principle

Calculate net benefit of the project and for each system NPV, B/C or any economic merit measure

Recognize distributional effects: identify winners and losers

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Allocating scarce Interregional capacity The foundation of the proposed approach is a decision on

how to use the interconnecting transmission lines How to efficiently allocate scarce interregional transmission

capacity? Arguably, short-term market-to-market coordination is

superior to bilateral deals

We consider two efficient methods to schedule and price efficient interregional energy exchange: Market Coupling Clearing import/export curves Coordinated Economic Dispatch Multi-area OPF

On the basis of efficiently coordinated energy exchanges we can measure the benefits of interregional transmission

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Methodology to evaluate net benefits of ITP

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We illustrate the methodology with a graphical example: Want to find efficient energy transaction between regions A

and B: direction, quantity and price

Import / Export Market

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Energy Exchange (MWh)

Price ($/ MWh)

R

B

A

IX: Coordinated Exchange

A = System A trading surplus

B = System B trading surplus

R = Congestion RentImport-B

Export-A

Impacts of interconnected operation and coordinated trading Market Impacts: variation of economic surplus

Net trading surplus in each system Transmission congestion rent

Reliability Impacts: variation of generation reserves Savings from sharing operating reserves Interregional provision of planning reserves

Environmental Impact: variation of generation emissions Social cost of changes in generation emissions

Benefits are calculated for each system and transmission costs are then allocated according to accrued benefits

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Implementation on annual basis

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Total annual benefits of system j

Total benefits of interregional transmission project TB ($/yr) = TBA + TBB + R, where , i= 1 …8760h

Net benefits of project (TC: annual cost of tie-line) NB ($/yr) = TB – TC = TBA + TBB – (TC – R)

Allocation of costs between systems cA = TBA / (TBA +TBB) and cB = TBB / (TBA +TBB)

Net benefit for system j NBj = TBj – cj (TC – R) or NBj = (TBj + cj R) – cj TC

Optimal interregional transmission capacity IX* = arg max [ NB(IX) = TB(IX) – TC(IX) ]

Coordinated Economic Dispatch Market coupling is suitable for single price markets and

bilateral trading over transmission flowgates Markets with locational prices and multiregional trading

require a coordinated economic dispatch Multi-area Optimal Power Flow Measure variations against existing baseline

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Source: Wood and Wollenberg

Application I – Two areas coupling

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SYSTEM A SYSTEM B

GA GB

DA DB

IX

GA = Generation system A GB = Generation system B

DA = Peak demand system A DB = Peak demand system B

IX = Power flow from system A to system B

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ANNUAL BENEFIT / COST Constrained UnconstrainedTransmission Capacity 250 MW 400 MW

Maket & Reliability Benefits System A (MM$/yr) $ 5.60 $ 8.58 System B (MM$/yr) $ 9.50 $ 15.94 Congestion Rent (MM$/yr) $ 6.90 $ 0.00 Total M & R Benefit (MM$/yr) $ 22.00 $ 24.53Transmission Costs System A (MM$/yr) $ 4.63 $ 7.00 System B (MM$/yr) $ 7.87 $ 13.00 Total TC (MM$/yr) $ 12.50 $ 20.00Net M&R Benefit System A (MM$/yr) $ 3.52 $ 1.58 System B (MM$/yr) $ 5.98 $ 2.94 Total Net M&R Benefit (MM$/yr) $ 9.50 $ 4.53 B/C Ratio 1.76 1.23Environmental Benefits (MM$/yr) $ 6.13 $ 9.81 Net M-R-E Benefit (MM$/yr) $ 15.63 $ 14.34

Optimal Interregional Transmission Capacity

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0 50 100 150 200 250 300 350 4000.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00Net Annual Benefit of Interregional Transmission Line

Net Benefit without CO2 emissions Net Benefit with CO2 emissions

MW

Mill

ion

$

Application II: 2-area 5-bus interconnection, with tie-line expansion

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1

F45

F12

L5

L3

L2

L4G4

G3

G2G1

5

3

2

System A System B

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Second circuit to be added

Coordinated Trading

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Node

Price ($/MWh)

Generation (MW)

Load (MW)

Price ($/MWh)

Generation (MW)

Load (MW)

Before Transmission Expansion After Transmission Expansion

System A1 31.7 494.4 0.0 33.3 521.9 0.03 57.7 185.6 350.0 49.4 158.1 350.05 53.5 0.0 300.0 46.4 0.0 300.0 Local 680.0 650.0 Local 680.0 650.0

1-2 Export 144.1 Import 171.64-5 Import 114.2 Export 141.7

System B2 40.0 20.0 150.0 36.4 20.0 150.04 45.2 350.0 250.0 40.2 350.0 250.0 Local 370.0 400.0 Local 370.0 400.0

1-2 Export 144.1 Import 171.6 4-5 Import 114.2 Export 141.7

Market & Environmental Benefits

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Benefits ($/h) System A System B Interconnection

D Generation Surplus -613 -1,822 -2,435

D Demand Surplus 5,035 1,790 6,825

D Congestion Rent -3,826 15 -3,811

Total Market 596 -17 579

D Environmental -322 0 -322

• Policy Questions:– Is the regional integration a good deal for system A and B?– Net benefit is positive but CO2 increases, is it acceptable?– Is this a sustainable energy integration policy? Need monetary

compensations?

Thanks ! jprada@andrew.cmu.edu

milic@andrew.cmu.edu

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Data Application I

Data System A System B

Installed Capacity (MW) 4,000 2,500

Peak Demand (MW) 3,600 2,000

Reserves Requirement (MW) 360 300

Generation Marginal Cost ($/MWh), MC 10 + GA/100 18 + GB/50

Price of Energy ($/MWh) 46.00 58.00

Price of Operating Reserve ($/MW-h) 4.00 6.00

CO2 marginal emission factor (kg/kWh) 0.50 0.70

CO2 social cost ($/ton) 20.00 20.00

Transmission Equivalent Annual Cost $ 50,000 / MW-yr

Data Application II

Generator Type Pmin (MW)

Pmax (MW)

Generation Cost($/h)

CO2 emissions(kg/kWh)

G1 Coal ST 230 600 2000 + 2P + 0.03.P2 0.94G3 Gas ST 70 250 1000 + 2P + 0.15.P2 0.55G2 Gas GT 20 150 500 + 2P + P2 0.61G4 Gas CCGT 150 350 2000 +0.05P + 0.03P2 0.40

Load Summer Peak (MW)

Winter Peak (MW)

L3 350 300L5 300 250L2 150 130L4 250 220

Line Resistance (p.u)

Reactance (p.u)

Maximum Capacity

(MW)1-2 0.04 0.16 1501-3 0.02 0.08 3502-4 0.03 0.1 3003-5 0.02 0.08 3504-5 0.04 0.16 150