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 33 rd 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’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 4

5 US Electric Power 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 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  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 7

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 8

Methodology to evaluate net benefits of ITP 9  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 10 Energy Exchange (MWh) Price ($/ MWh) R B A IX: Coordinated Exchange A = System A trading surplus B = System B trading surplus R = Congestion Rent Import-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 11

Implementation on annual basis 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 13 Source: Wood and Wollenberg

Application I – Two areas coupling 14 SYSTEM A SYSTEM B GAGA GBGB DADA DBDB IXIX G A = Generation system A G B = Generation system B D A = Peak demand system A D B = Peak demand system B I X = Power flow from system A to system B

15 ANNUAL BENEFIT / COSTConstrainedUnconstrained Transmission Capacity250 MW400 MW Maket & Reliability Benefits System A (MM$/yr)$ 5.60$ 8.58 System B (MM$/yr)$ 9.50$ Congestion Rent (MM$/yr)$ 6.90$ 0.00 Total M & R Benefit (MM$/yr)$ 22.00$ Transmission Costs System A (MM$/yr)$ 4.63$ 7.00 System B (MM$/yr)$ 7.87$ Total TC (MM$/yr)$ 12.50$ Net 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 Environmental Benefits (MM$/yr)$ 6.13$ 9.81 Net M-R-E Benefit (MM$/yr)$ 15.63$ 14.34

Optimal Interregional Transmission Capacity 16

Application II: 2-area 5-bus interconnection, with tie-line expansion 17 1 F45 F12 L5 L3 L2 L4 G4 G3 G2 G System ASystem B 4 Second circuit to be added

Coordinated Trading 18 Node Price ($/MWh) Generation (MW) Load (MW) Price ($/MWh) Generation (MW) Load (MW) Before Transmission ExpansionAfter Transmission Expansion System A Local Local Export 144.1Import Import114.2 Export141.7 System B Local Local Export144.1 Import Import 114.2Export 141.7

Market & Environmental Benefits 19 Benefits ($/h)System ASystem BInterconnection  Generation Surplus ,822-2,435  Demand Surplus 5,035 1,7906,825  Congestion Rent -3, ,811 Total Market  Environmental Policy Questions : – Is the regional integration a good deal for system A and B? – Net benefit is positive but CO 2 increases, is it acceptable? – Is this a sustainable energy integration policy? Need monetary compensations?

Thanks ! 20

Data Application I DataSystem ASystem B Installed Capacity (MW)4,0002,500 Peak Demand (MW)3,6002,000 Reserves Requirement (MW) Generation Marginal Cost ($/MWh), MC10 + G A / G B /50 Price of Energy ($/MWh) Price of Operating Reserve ($/MW-h) CO 2 marginal emission factor (kg/kWh) CO 2 social cost ($/ton)20.00 Transmission Equivalent Annual Cost $ 50,000 / MW-yr

Data Application II GeneratorType Pmin (MW) Pmax (MW) Generation Cost ($/h) CO 2 emissions (kg/kWh) G1Coal ST P P G3Gas ST P P G2Gas GT P + P G4Gas CCGT P P Load Summer Peak (MW) Winter Peak (MW) L L L L Line Resistance (p.u) Reactance (p.u) Maximum Capacity (MW)