TRANSMISSION PLANNING AND INVESTMENT IN THE COMPETITIVE ENVIRONMENT

1. TRANSMISSION PLANNING AND INVESTMENT IN THE COMPETITIVE ENVIRONMENT PSERC Seminar Presentation by George Gross Department Of Electrical and Computer Engineering University of Illinois at Urbana – Champaign April 5, 2005 © 2005, George Gross, UIUC

2. OUTLINE • The changed utilization of transmission • Planning in the competitive environment • The sorry state of transmission investment • Key challenges and complexities • An analytic framework for transmission investment • Illustrative examples • Concluding remarks

3. OPEN ACCESS IMPACTS • Power system restructuring fosters the development of competition in wholesale electricity markets • Markets bring about changes in the way power systems are operated and planned • The vertically integrated structure is slowly disintegrating into many new parts • New structures and players have important roles and result in decentralized decision making

4. THE VERTICALLY INTEGRATED UTILITY INDUSTRY STRUCTURE customers customer service Customer Service distribution Distribution transmission Transmission self- generation IPP generation Generation

5. THE VERTICALLY INTEGRATED UTILITY INDUSTRY STRUCTURE self- generation Generation generation IPP transmission Transmission distribution Distribution Customer Service customer service customers

6. VERTICALLY INTEGRATED UTILITY STRUCTURE IS DISINTEGRATING distribution wires customer service customer service distribution transmission ownership marketing/ trading transmission generation ancillary services generation markets ISO

7. CENTRALITY OF TRANSMISSION IN RESTRUCTURING • A common thread in the restructuring of electricity around the globe is the unbundling of transmission from the generation and the distribution of sectors • The role of transmission in evolving wholesale competition in electricity is critical • The provision of the nondiscriminatory transmission access and services to all market players under the open access transmission regime entails the establishment of independent transmission entities

8. PLANNING UNDER COMPETITION • Major shift in the planning paradigm • cessation of the centralized integrated planning of the past • role of regional planning under the independent grid operator • unclear responsibility for implementation under the ownership/control separation • role of decentralized decision making

9. PLANNING UNDER COMPETITION • Planning, to the extent it is performed in the new environment, is an asset management problem • investment under uncertainty • critical importance of effective risk management • subject to regulations in a continuous state of flux

10. TRANSMISSION USAGE UNDER COMPETITION • Frequent congestion situations result whenever too many customers compete for transmission services that the grid is capable of providing • Despite the more intense utilization of the grid by the many established and new players, develop-ments in transmission planning have failed to keep pace with the increases in demand

11. THE SORRY STATE OF TRANSMISSION INVESTMENT • As demand increases, significant additions of new generation are being made in virtually every region • The reserve margins in capacity are improving year after year • Transmission investments have failed to keep up with the increases in demand and the additions in new generation

12. DEMAND AND TRANSMISSION CAPACITY GROWTH % 30 25 electricity demand 20 15 transmission capacity expansion 10 5 0 1988 – 98 1999 – 09 Source: EPRI

13. THE NERC CAPACITY MARGIN FORECASTS 25 2002 20 2001 15 percent 2000 10 1999 5 1999 2001 2003 2005 2007 2009 2011 year Source: NERC Reliability Assessment,2002 – 2011

14. PROJECTED GENERATION GROWTH IN 1998 – 2007 change in % 40 and higher 20 to 40 0 to 20 Each percentage is with respect to the 1998 installed capacity Source: EPRI

15. TRANSMISSION MAINTENANCE SPENDING total spending

16. 230 kV AND ABOVE TRANSMISSION +2.2% +2.7% < .49% / yr 218.2 thousands of miles 213.5 207.9 2009-2013 2003 2004-2008 Source: NERC 2004

17. SEVERE STRESSING OF THE GRID • Large number of new and existing players • Proliferation in the number of transactions • Increasing load demand • Simultaneous accommodation of pool and bilateral transactions • Markedly different and more intense utilization of the grid than in the way that it was planned and designed • Low level of investment in transmission improvement

18. SEVERE STRESSING OF THE GRID • Severe stressing of the grid leads to frequent congestion situations with customers competing for the scarce and heavily constrained transmis-sion services • The transmission-bottleneck-caused congestion situations significantly impact both the reliability and the economics of electricity supply

19. TRANSMISSION BOTTLENECKS: WESTERN INTERCONNECTION size of transmission paths < 1 GW > 3 GW 1 GW ££ 3 GW 50% and greater 40% to 49% 30% to 39% 20% to 29% 10% to 19% percentage of hours congested Source: DoENational Transmission Grid Study, May 2002

20. TRANSMISSION BOTTLENECKS: EASTERN INTERCONNECTION size of transmission paths < 1 GW > 3 GW 1 GW ££ 3 GW 80% and greater 60% to 79% 40% to 59% 20% to 39% 10% to 19% percentage of hours congested Source: DoENational Transmission Grid Study, May 2002

21. CONGESTION IMPACTS • Decreased reliability • Reduced competition • Increased consumer prices • Creation of enhanced opportunities for market power exercise • Increased infrastructure vulnerability

22. CONGESTION : ECONOMIC SIGNALS • LMPs provide short-term congestion signals • The translation ofLMPs into long-term investment signals is complicated • LMPs create the need for the effective integration of financial hedging instruments: FTRs and flowgate rights

23. TRANSMISSION EXPANSION • Network expansion is by its very nature a very complex multi-period and multi-objective optimi-zation problem • Its nonlinear nature and the inherent uncertainty in future developments constitute major compli-cations

24. TRANSMISSION INVESTMENT : KEY BARRIERS • Transmission is a regulated service: tariffs are cost based and not value based • Uncertainty about the recovery of transmission investments due to • long-term revenue stream needs • lack of clarity in regulatory pricing policy

25. TRANSMISSION INVESTMENT : KEY BARRIERS • conflicting goals of federal and state regulators • Difficulty of recovering investment costs due to free rider problem • Organizational complexities in the new industry structure

26. COMPLICATIONS IN TRANSMISSION EXPANSION • Every transmission improvement impacts the transfer capabilities in the interconnected network covering a large geographic region • Each transmission investment affects market participants differently • Free rider problem creates a problem in the investment recovery • Lumpiness of transmission investments is a key complication

27. COMPLICATIONS IN TRANSMISSION EXPANSION • A long-time horizon with the sequence of appropriate decisions needs to be considered • Economies of scale encourage overbuilding • Imperfect electrical markets provide opportunities for market power exercise

28. COMPLICATIONS IN TRANSMISSION EXPANSION • Short-run marginal costing information from the hourly LMPs need to be translated into long-run marginal cost for investment decisions • FTR/FGRintegration into the investment decision is needed • The explicit consideration of wide ranges of uncertainty in all aspects, including regulatory, environmental and player behavior, is required

29. ANALYTIC FRAMEWORK • A four-layer structure consisting of • physical • commodity market • financial • investment layers • The interrelationships between layers represen-ted through information flows

30. THE FRAMEWORK STRUCTURE investment layer financial market layer commodity market layer physical network layer

31. THE PHYSICAL LAYER • Represents the physical flows in the transmission network including real power line flows, nodal injections and physical network/operational constraints • Models congestion and allows the evaluation of congestion impacts on the transmission customers/market participants

32. THE COMMODITY MARKET LAYER • Models the purchases/sales in both the day-ahead hourly and the bilateral transaction markets • Represents the RTO decision making process to establish feasible transmission schedules • Interacts with the physical layer and the financial layer through information transfers

33. THE FINANCIAL LAYER • Models the financial instruments used to provide hedging against congestion changes • Models Financial Transmission Rights (FTR) and flowgate rights • Represents the salient aspects of rights issuance and trading

34. TRANSMISSION INVESTMENT LAYER • Models the transmission investment decision making process and determines the • location • quantity • timing of the transmission assets • Evaluates the impacts of the investment decisions on the investor, system operator and the transmission customers and assesses their financial aspects

35. THE INFORMATION FLOWS investment layer topology change social welfare financial market layer LMPs feasible FTR SFT result commodity market layer desired FTR market outcomes system states physical network layer

36. RTO TRANSMISSION PLANNING PROBLEM FORMULATION • Maximize aggregate social welfare: • pool • bilateral contracts subject to: • power flow balance equations • line flow equations • generator and demand limits • line flow limits

37. BASIC PROBLEM FORMULATION s.t. Note: all parameters and variables are hourly quantities

38. EVALUATION OF METRICS consumer surplus dead- weight loss market efficie-ncy loss producer surplus $/MWh congestion rents MWh/h

39. APPROPRIATE METRICS FOR TRANSMISSION INVESTMENT • RTO metrics: • social welfare: aggregated value • loss of efficiency: decrease in social welfare due to transmission constraints • congestion rents: money collected by the system operator because of congestion

40. APPROPRIATE METRICS FOR TRANSMISSION INVESTMENT • Producer metrics: • producer surplus: difference between what the producer collects from the system and the real costs • redispatch costs: difference in the produ-cers’ costs with and without congestion

41. APPROPRIATE METRICS FOR TRANSMISSION INVESTMENT • Consumer metrics: • consumer surplus: difference between the demand bids and the demand payments • load payment costs: difference in demand payments with and without congestion

42. THREE – BUS SYSTEM EXAMPLE • One-hour horizon • Lossless network • Quadratic functions for the costs and benefits • No bilateral transactions

43. NETWORK TOPOLOGY 1 2 lossless system 3

44. NETWORK DESCRIPTION l l

45. OFFER REPRESENTATION • Cost function: • Offer function:

46. OFFER DATA si si si

47. OFFER PARAMETERS $/MWh generator offer si si MWh/h

48. BID REPRESENTATION • Benefit function: • Bid function:

49. BID DATA bj bj bj

50. BID PARAMETERS $/MWh demand bid bj bj MWh/h