5/31/04
Missing recommended projects and nature
and distribution of benefits of projects
Chapter 7 Benefits and Costs of Transmission
Expansion
Generic Benefits and Costs of Transmission Expansion
Benefits of investments in transmission expansion may include:
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Improved access for utilities to purchase lower cost power;
Greater liquidity and price competition in power markets, including mitigation of
market power by generators;
Increased ability of generators to diversify fuels used to serve their customers,
which can help minimize fuel price risks and broaden access to renewable
resources;
Tax revenue and other economic benefits to communities and states where
development takes place; and
Improved reliability and greater flexibility for maintenance, and other operational
purposes.
The cost of new transmission includes the capital cost of building the line, operating
and maintenance costs over the life of the line, environmental impacts from construction
of the line, and changes in property values resulting from the location of the line. It is the
common assumption that property values decline in the vicinity of a transmission line,
however, property values could increase, particularly for industrial properties, from
access to transmission lines.
Discussion of Types of Benefits and Beneficiaries1
Lower Cost Generation: Benefits of accessing lower cost generation flow to
utilities and their customers and to certain generators. RMATS alternatives entail
reductions in variable O&M on a West-wide basis. This new access to lower cost
generation can also reduce net revenues for some existing generators, whose higher cost
generation may be displaced.
Enhanced Competition in Energy Markets: In concept, by relieving
congestion, liquidity and competition in energy markets will become more robust. This
may lead to lower and more stable prices, especially in short-term markets, and may help
to mitigate exercise of generator market power, creating benefits which flow to utilities
and their customers within and outside the RMATS region.
1
Presumably under Order 888 the benefit of owning transmission to block competitors having access to
one’s power markets has been eliminated. However, there still may be benefit to the integrated utility in
owning the line since the utility will calculate and reserve ATC on the line for future load growth, thereby
providing an advantage over other users of the line.
Fuel Diversity: It is assumed that fuel diversity means greater reliance on fuels
other than natural gas. By diversifying fuels, generators can mitigate gas price risks.
Further, new access can be provided to renewable resources, helping to reduce risks and
costs, stabilize customer prices, and meet environmental policy objectives, including
renewable portfolio standards. Fuel diversity benefits of new transmission investments
can flow to utilities and their customers. The size of benefits may depend on the value
of reduced fuel price volatility to the generator, how risks and costs are calculated, and on
incremental costs to utilities of alternatives for meeting Renewable Portfolio Standards,
risk management goals, and environmental policy objectives.
Local and State Economic Development: Construction of new power plants
provides economic development benefits in terms of jobs and increased tax revenues to
the communities and states hosting the plants. Tax revenue benefits for states and
localities include increased property taxes, additional franchise taxes, higher utility taxes
revenues, and increased state and local income taxes, offset by the state increase in rates
due to the higher revenue requirement, along with secondary and tertiary induced and
indirect economics and resulting taxes flowing from the investments.
Reliability: All new transmission investments must meet the goal of maintaining
or improving reliability and meet WECC reliability criteria. Full implementation of
alternatives to new lines might have pronounced reliability benefits as needle peaks are
eliminated, as overall energy use is reduced, and as new technology is implemented to
provide better information flows and control potential for existing lines, thereby boosting
their ability to respond to unforeseen problems. New long distance lines may not
decrease reliability and, hopefully, will increase reliability beyond that required by
WECC, particularly if they are oversized. Reliability benefits from an oversized line may
disappear over time if new flows consume excess transfer capacity. The economic value
of reliability investments may be quantified by determining the value of a reduced
likelihood of forced outages.
Quantifying transmission investment benefits and estimating where they fall is a
challenge and matter of judgment. Where construction of a new transmission line is
linked to the construction of a specific powerplant(s), there is greater ability to identify
the benefits from fuel diversification and reduced costs to load serving entities. One can
also identify the generator(s) that benefit from the new line.
Where additional transmission investment is not linked to construction of specific
power plants, it is more difficult to determine the additional investment will provide fuel
diversity benefits and lower power costs to utilities since the types of generation built and
the cost of power will be determined by market forces. It would also be more difficult to
recoup, in advance of construction, part of the investment from generators. If new lines
are built and generators secure transmission service over the lines, then revenues charged
for use of the line can offset construction costs.
The following diagram illustrates the potential range of benefits from a
transmission project and the subset of such benefits that were modeled using ABB
Market Simulator.
Benefits of new transmission investment can accrue to:
 Load serving entities and their customers;
 New generators who can now reach markets, and communities and states hosting
new generation;
 Existing generators who can reach new markets;
 Communities and states where development occurs; and
 All transmission system users where the transmission investment improves
system-wide reliability.
Before examining the costs and benefits of specific recommended projects, it is
important to understand how the differences in how the RMATS modeling approach
identified recommended lines and how decisions on transmission expansion are made in
the “real world.”
Comparison of the Decision Process Under RMATS Modeling Approach and Real
World Decision Processes
Under both decision processes, the location of new generation drives the
determination of the need for new transmission. In the modeling process, the location of
new generation is an assumed input. The RMATS process assumed four generation
scenarios in 2013, one of which was linked to available resource plans of load serving
entities in the RMATS footprint. In the Real World process, the decision on what new
generation is built is largely a determined by choices of load serving entities and their
regulators. Ideally, in the Real World the decision on new generation is made
considering both the cost of the generation and the cost of the transmission to move the
electricity to load.
In the RMATS modeling process, once the location and type of generation is
assumed, then the model chooses the dispatch of the existing and new generation based
on the lowest variable operating and maintenance cost of the generating units without
regard to plant ownership or power purchase contracts. In the Real World process in the
RMATS region, the decision on which generation to dispatch is typically made by each
load serving entity based on the lowest operating cost of the units it owns or power
purchase contracts it has signed.
In the RMATS modeling process, once the model has chosen the units to
dispatch, it is assumed that all transmission paths are available to move the power to load
centers without regard to contractual rights on the transmission system. The transfer of
electricity from the generator to the load is only constrained by the physical capabilities
of the transmission system. In the Real World process, moving power from a generator
to a load can only be done pursuant to schedules over specified transmission paths or
pursuant to a network service contract. To execute a schedule, a party must have rights to
use specific transmission paths from the generator to the load (even though in actuality
the electricity from the generator to the load will flow over other paths as well as the
paths over which the power has been scheduled).
In the RMATS modeling process, after the generation with the lowest operating
and maintenance cost is dispatched over any combination of lines that can physically
handle the transfer, the model determines if there are generators with lower operating and
maintenance costs could not be dispatched because of the lack of transmission capacity
and, in place of this lower cost generation, a higher cost generator was dispatch to meet
demand. The model calculates the variable operating and maintenance cost for all the
generation dispatched in the Western Interconnection and shows differences in dispatch
costs in different bubbles in the Interconnection. Where there are significant differences
in costs between the bubbles, in the RMATS process new transmission was chosen by the
Transmission Working Group to enable the lower cost power to flow to load centers in
order to reduce interconnection-wide variable operating and maintenance costs. In the
Real World, a load serving entity examines whether new transmission would lower the
cost of acquiring generating resources to meet the demands of its customers. Most of the
time, the decision on what new transmission to build is made in conjunction with the
decision on what new generation to acquire. Typically, only after a load serving entity
has decided it wants to build a project will it inquire whether other parties would be
interested in sharing the cost of the line or expanding the line.
What are the linkages and disconnects between the two processes and what
relevance does the modeling work have to decisions made in the real world?
1. There is a major disconnect between the way in which new generation is
determined. The RMATS process tried to remedy this by: (1) including
Alternative 1 which reflected the resource plans of PacifiCorp, Xcel and Idaho
Power; and (2) using generation developers assumptions about where they will
build new plants that will be attractive to power buyers. A significant
shortcoming in the way generation decisions are made in the Real World is that
each load serving entity makes decisions in isolation. Because transmission
additions and some generation additions (e.g., coal) tend to be in lumpy
increments (i.e., do not come in capacities sized to meet incremental needs) and
because there tends to be economies of scale in building transmission (a 500 Kv
line does not cost twice as much as a 230 Kv line), a transmission addition may
not be economic to meet demand in of a single load serving entity, but would be
economic when combined with the needs of other load serving entities.
2. The dispatch of generation in the RMATS process is optimized over the entire
interconnection. In the Real World, dispatch of generation in the RMATS region
is optimized by the load serving entity among the plants under its control. This
leads to higher operating costs in the Real World than in the RMATS process.
3. In the Real World institutional constraints on the use of the transmission system
(e.g., ownership of transmission rights) result in the transmission system being
used than its physical capabilities. In some cases (e.g., West of Hatwai), these
institutional constraints have been overcome by building new transmission even
though the existing system may have been capable of moving the power. In the
RMATS process, the use of the transmission system is optimized.
How do the linkages and disconnects between the RMATS process and the Real
World affect the way in which the modeling findings should be interpreted?
1. The RMATS modeling results are only as relevant as the assumptions about the
location of new generation. In examining the RMATS model findings, one needs
to remember that the location of the generation is an assumption. Resource
planning processes by load serving entities may identify different generation
choices than assumed in the RMATS modeling. Hopefully, the generation
assumed in the RMATS process, particularly in Alternative 2, will inform LSE
resource planning process of potentially lower cost options that they are presently
considering.
2. The RMATS modeling results may understate or overstate the value of new
transmission in lowering operating and maintenance costs. In the Real World, a
load serving entity must utilize the portfolio of resources under its control when
deciding which generation will serve its load. Had there been more transmission
available, the LSE might have been able to reach lower cost generating resources.
3. The RMATS modeling will miss opportunities to build new transmission that
individual market participants would find attractive. For example, lack of
ownership rights on a path may preclude a generator or LSE from being able to
complete an economic power deal because firm capacity on the line is not
available (even when the line is not fully loaded) or there is no ability under
current operations to take account of counterflows that would make capacity
available.
RMATS Modeling
“Real World”
Strength: approach spot
regional generation that is
lower cost than that
considered by LSE
Weakness: assumption do
not reflect LSE decisions
Generation
location and size
of is an
assumption, except
in Alternative 1
Generation
location and size
largely driven by
LSE plans
Strength: Generation
does not have to be
assumed; it is known
Weakness: May miss
lower cost regional
opportunities, particularly
for generation projects
with a shorter lead time
than related transmission
Strength: Bolsters case
that identified
transmission additions add
value for the
interconnection regardless
of future changes in
ownership of plants and
LSE configurations
Weakness: Does not
recognize transmission
expansion that may be
marginally economic from
a global perspective, but
makes economic sense for
specific parties
Optimal
interconnectionwide dispatch of
generation to meet
demand
Generation
dispatch optimized
for LSE but not
across LSEs
Strength: Reflects reality
faced by LSEs today and
thus it is easier to make
decisions on financing of
transmission projects (i.e.,
individual LSEs will see the
benefits of a transmission
project to allow them to
save money by optimize the
dispatch of their resources.
Weakness: Does not reflect
future changes in the
ownership of plants and
their output that would
allow more optimal dispatch
patterns.
Strength: Provides
justification for new
transmission under future
institutional changes, such
as the formation of RTOs,
and provides a compelling
case for new transmission
in the permitting process.
Weaknesses: Does not
reflect the incentives faced
by those who would
finance new transmission.
Optimizes use of
the transmission
system within its
physical
constraints
Reflects
institutional
constraints that
results in suboptimal use of the
transmission
system
Strength: More likely to
result in projects being
financed because it reflects
present (and at least in the
foreseeable future) rules on
transmission system use.
Weakness: Can result in
building transmission that
would not be needed if there
were system operation rules
that allowed more efficient
use of the grid. This may
make permitting of such
transmission more difficult
since the need for the line is
based on institutional rules,
not physical needs.
Benefits and Costs of Each Recommended Transmission Project
TBA
Nature and Distribution of Benefits to Parties of Recommended Transmission
Projects
TBA