Making the Case for Interregional
Transmission Projects: Evaluation
of Benefits and Allocation of Costs
Jose Fernando Prada
Engineering & Public Policy, Carnegie Mellon University
Marija D. Ilić
Electrical & Computer Engineering, Carnegie Mellon University
33rd USAEE/IAEE North American Conference
Pittsburgh, October 28, 2015
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
2
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
3
US Transmission Policy

Open non-discriminatory transmission access


FERC initially relied on economic signals to induce efficient
investment on transmission



FERC’s orders 888/889 (1996)
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
4
US Regional Electricity Markets
US Electric
Power Markets
Source: FERC
5
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
6
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



Calculate net benefit of the project and for each system


Consider whole range of benefits: economic efficiency,
reliability improvements, environmental impact.
Cost allocation between parties should follow the
“beneficiary pays” principle
NPV, B/C or any economic merit measure
Recognize distributional effects: identify winners and losers
7
Allocating scarce Interregional capacity

The foundation of the proposed approach is a decision on
how to use the interconnecting transmission lines



We consider two efficient methods to schedule and price
efficient interregional energy exchange:



How to efficiently allocate scarce interregional transmission
capacity?
Arguably, short-term market-to-market coordination is
superior to bilateral deals
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
8
Methodology to evaluate net benefits of ITP

We illustrate the methodology with a graphical example:

Want to find efficient energy transaction between regions A
and B: direction, quantity and price
9
Import / Export Market
Price ($/ MWh)
IX: Coordinated Exchange
A = System A
trading surplus
B
B = System B
trading surplus
R
Export-A
R = Congestion Rent
A
Import-B
Energy Exchange (MWh)
10
Impacts of interconnected operation and
coordinated trading

Market Impacts: variation of economic surplus



Reliability Impacts: variation of generation reserves



Savings from sharing operating reserves
Interregional provision of planning reserves
Environmental Impact: variation of generation emissions


Net trading surplus in each system
Transmission congestion rent
Social cost of changes in generation emissions
Benefits are calculated for each system and transmission
costs are then allocated according to accrued benefits
11
Implementation on annual basis

Total annual benefits of system j
𝑇𝐵𝑗 $/𝑦𝑟 =

𝑖
(𝑀𝐵𝑖𝑗 +𝑅𝐵𝑖𝑗 + 𝐸𝐵𝑖𝑗 ) , 𝑖 = 1 … . 8760 ℎ, 𝑗 = 𝐴, 𝐵
Total benefits of interregional transmission project
TB ($/yr) = TBA + TBB + R, where 𝑅 ($/𝑦𝑟) =

𝑖 𝑅𝑖
, i= 1 …8760h
Net benefits of project (TC: annual cost of tie-line)
NB ($/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) ]
12
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
Source:
Wood and Wollenberg
13
Application I – Two areas coupling
GA
GB
IX
DA
DB
SYSTEM B
SYSTEM A
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
14
ANNUAL BENEFIT / COST
Transmission Capacity
Maket & Reliability Benefits
System A (MM$/yr)
System B (MM$/yr)
Congestion Rent (MM$/yr)
Total M & R Benefit (MM$/yr)
Transmission Costs
System A (MM$/yr)
System B (MM$/yr)
Total TC (MM$/yr)
Net M&R Benefit
System A (MM$/yr)
System B (MM$/yr)
Total Net M&R Benefit (MM$/yr)
B/C Ratio
Environmental Benefits (MM$/yr)
Net M-R-E Benefit (MM$/yr)
Constrained
250 MW
Unconstrained
400 MW
$ 5.60
$ 9.50
$ 6.90
$ 22.00
$ 8.58
$ 15.94
$ 0.00
$ 24.53
$ 4.63
$ 7.87
$ 12.50
$ 7.00
$ 13.00
$ 20.00
$ 3.52
$ 5.98
$ 9.50
1.76
$ 6.13
$ 15.63
$ 1.58
$ 2.94
$ 4.53
1.23
$ 9.81
$ 14.34
15
Optimal Interregional Transmission Capacity
Net Annual Benefit of Interregional Transmission Line
18.00
16.00
14.00
Million $
12.00
10.00
8.00
6.00
4.00
2.00
MW
0.00
0
50
100
150
Net Benefit without CO2 emissions
200
250
300
350
400
Net Benefit with CO2 emissions
16
Application II: 2-area 5-bus interconnection,
with tie-line expansion
System A
System B
G1
G2
L2
1
2
F12
G3
L3
Second circuit to be added
3
F45
5
4
L5
G4
L4
17
Coordinated Trading
Node
1
3
5
1-2
4-5
2
4
1-2
4-5
Price
Generation
Load
($/MWh)
(MW)
(MW)
Before Transmission Expansion
31.7
57.7
53.5
Local
Export
Import
494.4
185.6
0.0
680.0
40.0
45.2
Local
Export
Import
20.0
350.0
370.0
144.1
114.2
Price
Generation
Load
($/MWh)
(MW)
(MW)
After Transmission Expansion
System A
0.0
33.3
350.0
49.4
300.0
46.4
650.0
Local
144.1
Import
Export
System B
150.0
36.4
250.0
40.2
400.0
Local
Import
114.2
Export
521.9
158.1
0.0
680.0
0.0
350.0
300.0
650.0
171.6
141.7
20.0
350.0
370.0
171.6
150.0
250.0
400.0
141.7
18
Market & Environmental Benefits
Benefits ($/h)
System B
Interconnection
-613
-1,822
-2,435
D Demand Surplus
5,035
1,790
6,825
D Congestion Rent
-3,826
15
-3,811
596
-17
579
-322
0
-322
D Generation Surplus
Total Market
D Environmental
System A
• Policy Questions:
– Is the regional integration a good deal for system A and B?
– Net benefit is positive but CO2 increases, is it acceptable?
– Is this a sustainable energy integration policy? Need monetary
compensations?
19
Thanks !
jprada@andrew.cmu.edu
milic@andrew.cmu.edu
20
Data Application I
Data
System A
System B
Installed Capacity (MW)
4,000
2,500
Peak Demand (MW)
3,600
2,000
360
300
Reserves Requirement (MW)
Generation Marginal Cost ($/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
G1
G3
G2
G4
Load
L3
L5
L2
L4
Type
Coal ST
Gas ST
Gas GT
Gas CCGT
Summer
Peak
(MW)
350
300
150
250
Pmin
(MW)
Pmax
(MW)
Generation Cost
($/h)
CO2 emissions
(kg/kWh)
230
70
20
150
600
250
150
350
2000 + 2P + 0.03.P2
1000 + 2P + 0.15.P2
500 + 2P + P2
2000 +0.05P + 0.03P2
0.94
0.55
0.61
0.40
Winter
Peak (MW)
Line
Resistance
(p.u)
Reactance
(p.u)
300
250
130
220
1-2
1-3
2-4
3-5
4-5
0.04
0.02
0.03
0.02
0.04
0.16
0.08
0.1
0.08
0.16
Maximum
Capacity
(MW)
150
350
300
350
150