TRANSMISSION PLANNING AND INVESTMENT IN THE COMPETITIVE ENVIRONMENT PS ERC 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 © 2005, George Gross, UIUC 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 © 2005, George Gross, UIUC customers self- generation IPP THE VERTICALLY INTEGRATED UTILITY INDUSTRY STRUCTURE Generation Transmission Distribution Customer Service customer service distribution transmission generation

5 © 2005, George Gross, UIUC THE VERTICALLY INTEGRATED UTILITY INDUSTRY STRUCTURE customers self- generation IPP Generation Transmission Distribution Customer Service customer service distribution transmission generation

6 © 2005, George Gross, UIUC VERTICALLY INTEGRATED UTILITY STRUCTURE IS DISINTEGRATING transmission ownership customer service marketing/ trading ISO ancillary services markets generation distribution wires generation transmission customer service distribution

7 © 2005, George Gross, UIUC 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 © 2005, George Gross, UIUC 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 © 2005, George Gross, UIUC 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 © 2005, George Gross, UIUC 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 © 2005, George Gross, UIUC 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 © 2005, George Gross, UIUC DEMAND AND TRANSMISSION CAPACITY GROWTH – – 09 electricity demand transmission capacity expansion % Source: EPRI

13 © 2005, George Gross, UIUC THE NERC CAPACITY MARGIN FORECASTS percent year Source: NERC Reliability Assessment, 2002 – 2011

14 © 2005, George Gross, UIUC PROJECTED GENERATION GROWTH IN 1998 – 2007 Each percentage is with respect to the 1998 installed capacity change in % 40 and higher 20 to 40 0 to 20 Source: EPRI

15 © 2005, George Gross, UIUC HISTORICAL TRANSMISSION SYSTEM INVESTMENT Source: E. Hirst, “U.S. Transmission Capacity: Present Status and Future Prospects,” June 2004

16 © 2005, George Gross, UIUC TRANSMISSION MAINTENANCE SPENDING total spending

17 © 2005, George Gross, UIUC 230 kV AND ABOVE TRANSMISSION <.49% / yr thousands of miles % +2.7% Source: NERC 2004

18 © 2005, George Gross, UIUC 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

19 © 2005, George Gross, UIUC 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

20 © 2005, George Gross, UIUC TRANSMISSION BOTTLENECKS: WESTERN INTERCONNECTION size of transmission paths < 1 GW 1 GW   3 GW  3 GW 50% and greater percentage of hours congested 40% to 49% 30% to 39% 20% to 29% 10% to 19% Source: DoE National Transmission Grid Study, May 2002

21 © 2005, George Gross, UIUC TRANSMISSION BOTTLENECKS: EASTERN INTERCONNECTION size of transmission paths < 1 GW 1 GW   3 GW  3 GW Source: DoE National Transmission Grid Study, May % and greater percentage of hours congested 60% to 79% 40% to 59% 20% to 39% 10% to 19%

22 © 2005, George Gross, UIUC CONGESTION IMPACTS  Decreased reliability  Reduced competition  Increased consumer prices  Creation of enhanced opportunities for market power exercise  Increased infrastructure vulnerability

23 © 2005, George Gross, UIUC CONGESTION : ECONOMIC SIGNALS  LMP s provide short-term congestion signals  The translation of LMP s into long-term investment signals is complicated  LMP s create the need for the effective integration of financial hedging instruments: FTR s and flowgate rights

24 © 2005, George Gross, UIUC 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

25 © 2005, George Gross, UIUC 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

26 © 2005, George Gross, UIUC 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

27 © 2005, George Gross, UIUC 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

28 © 2005, George Gross, UIUC 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

29 © 2005, George Gross, UIUC COMPLICATIONS IN TRANSMISSION EXPANSION  Short-run marginal costing information from the hourly LMP s need to be translated into long-run marginal cost for investment decisions  FTR / FGR integration 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

30 © 2005, George Gross, UIUC ANALYTIC FRAMEWORK  A four-layer structure consisting of  physical  commodity market  financial  investment layers  The interrelationships between layers represen- ted through information flows

31 © 2005, George Gross, UIUC commodity market layer financial market layer investment layer THE FRAMEWORK STRUCTURE physical network layer

32 © 2005, George Gross, UIUC 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

33 © 2005, George Gross, UIUC 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

34 © 2005, George Gross, UIUC 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

35 © 2005, George Gross, UIUC 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

36 © 2005, George Gross, UIUC THE INFORMATION FLOWS financial market layer commodity market layer physical network layer LMP s system states SFT result investment layer social welfare topology change market outcomes feasible FTR desired FTR

37 © 2005, George Gross, UIUC 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

38 © 2005, George Gross, UIUC BASIC PROBLEM FORMULATION s.t. Note: all parameters and variables are hourly quantities

39 © 2005, George Gross, UIUC EVALUATION OF METRICS $ / MWh MWh/h consumer surplus producer surplus congestion rents market efficie- ncy loss dead- weight loss

40 © 2005, George Gross, UIUC 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

41 © 2005, George Gross, UIUC 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

42 © 2005, George Gross, UIUC 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

43 © 2005, George Gross, UIUC THREE – BUS SYSTEM EXAMPLE  One-hour horizon  Lossless network  Quadratic functions for the costs and benefits  No bilateral transactions

44 © 2005, George Gross, UIUC NETWORK TOPOLOGY lossless system 21 3

45 © 2005, George Gross, UIUC NETWORK DESCRIPTION line = (i, j) with x ( p.u.) f max ( MW ) ij

46 © 2005, George Gross, UIUC OFFER REPRESENTATION  Cost function:  Offer function:

47 © 2005, George Gross, UIUC OFFER DATA i  ( $/MWh )  [( $/MWh ) 2 h] ( p ) max ( MWh/h ) sisi sisi sisi

48 © 2005, George Gross, UIUC OFFER PARAMETERS MWh/h $/MWh generator offer  si si  si si

49 © 2005, George Gross, UIUC BID REPRESENTATION  Benefit function:  Bid function:

50 © 2005, George Gross, UIUC BID DATA i  ( $/MWh )  [( $/MWh ) 2 h] ( p ) max ( MWh/h ) bjbj bjbj bjbj

51 © 2005, George Gross, UIUC BID PARAMETERS $/MWh demand bid  bj bj  bj bj MWh/h

52 © 2005, George Gross, UIUC PRE – EXPANSION RESULTS metric value in $ total producer surplus total consumer surplus congestion rents social welfare total production = MW

53 © 2005, George Gross, UIUC POST – EXPANSION RESULTS metric value in $ total producer surplus total consumer surplus congestion rents social welfare total production = MW

54 © 2005, George Gross, UIUC pre-expansionpost-expansion consumer power demanded (MW) surplus ($) power demanded (MW) surplus ($) pre-expansionpost-expansion producer power generated (MW) surplus ($) power generated (MW) surplus ($) PRE – AND POST – COMPARISON

55 © 2005, George Gross, UIUC PRE – AND POST – COMPARISON metricpre-expansionpost-expansion total producer surplus ( $ ) total consumer surplus ( $ ) congestion rents ( $ ) social welfare ( $ ) total production ( MW )

56 © 2005, George Gross, UIUC MULTI – PERIOD ANALYSIS physical network commodity market financial market layer financial market layer investment layer social welfare operational period 1 operational period H topology change topology change... SFT LMP s feasible FTR desired FTR market outcomes market outcomes system states system states feasible FTR market outcomes market outcomes

57 © 2005, George Gross, UIUC IEEE RTS SEVEN – BUS NETWORK EXAMPLE  Study horizon of one year; typical week day and week end day for each of four seasons  Lossless network  Quadratic functions representation for costs and benefits  No bilateral transactions  Hourly computations

58 © 2005, George Gross, UIUC STUDY SCENARIOS  Reference scenario: the pre-expansion system  Scenario 1 : addition of line ( 3, 4 )  Scenario 2 : addition of line ( 5, 6 )  Scenario 3 : addition of lines ( 3, 4 ) and ( 5, 6 )

59 © 2005, George Gross, UIUC NETWORK TOPOLOGY B1B1 B3B3 B2B2 B4B4 B6B6 B7B7 B5B5 S1S1 S2S2 S3S3 S4S4 S5S5 bus 1 bus 2 bus 3 bus 4 bus 5 bus 6 bus 7 ~ ~ ~ ~ ~

60 © 2005, George Gross, UIUC NETWORK DESCRIPTION line = ( i, j ) with x ( p.u. ) f ( p.u. ) ij max

61 © 2005, George Gross, UIUC OFFER DATA i  ( p ) max sisi sisi sisi

62 © 2005, George Gross, UIUC BID DATA i  ( p ) max bjbj bjbj bjbj

63 © 2005, George Gross, UIUC ANNUAL RTO METRICS scenario social welfare loss of efficiency congestion rents ( k$ ) reference305, , , , , , , , , , , ,179.23

64 © 2005, George Gross, UIUC ANNUAL PRODUCER AND CONSUMER METRICS scenario producer surplus consumer surplus ( k$ ) reference27, , , , , , , ,

65 © 2005, George Gross, UIUC AGGREGATE METRICS FOR A SUMMER WEEKDAY $ $ $ $

66 © 2005, George Gross, UIUC NODAL PRICES FOR A SUMMER WEEKDAY nodal prices, reference scenarionodal prices, scenario 1 nodal prices, scenario 2nodal prices, scenario 3 $/MWh/h

67 © 2005, George Gross, UIUC NODAL PRICE DIFFERENCES FOR A SUMMER WEEKDAY nodal price differences, scenario 1 nodal price differences, scenario 2nodal price differences, scenario 3 $/MWh/h nodal price differences, reference scenario

68 © 2005, George Gross, UIUC SEVEN – BUS SYSTEM RESULTS  Best overall solution is scenario 3 with the lines ( 3, 4 ) and ( 5, 6 ) added  Scenario 1 results in the highest congestion results  Scenarios 2 and 3 are characterized by flat nodal price differences and lower average LMP s than in the reference scenario and scenario 1

69 © 2005, George Gross, UIUC CONCLUDING REMARKS  Multi-layer analytic framework for transmission expansion planning  Framework capability to deal with the complex issues in transmission investment  Appropriate metrics to determine the best investment policy  Scenario analysis allows the identification of optimal strategy and investigation of what if questions

70 © 2005, George Gross, UIUC FUTURE WORK  Transmission service pricing on a value rather than cost basis  Formulation of effective incentives for transmis- sion investment  The formulation and solution of the individual investor problem