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The LMP Model: Bottlenecking Merchant Transmission

Locational marginal pricing has not been adequate in providing transmission expansion incentives. Others are needed.
Fortnightly Magazine - April 15 2003

expansion or the rights associated with the expansion. Regional differences in market structure should be carefully reviewed to assure that new seams issues are not created.

By defining rules that specify revenue streams and/or other privileges that match the characteristics and capabilities added by the expansion, the value to the expander is increased. As the expander captures more of the value that the expansion creates, the viability of this structural solution is improved. Thus, while allocating congestion, energy, and capacity revenues is important, the challenge facing regulators going forward is to think beyond congestion reduction to other sources of revenue that are appropriate to allocate to the expander because they would not be possible "but for" the expansion. Some of the broader benefits of transmission expansion include the following:

  • Increasing reliability by improving the deliverability of generation to load during conditions that stress the reliability of the system;
  • Creating the ability to move energy from one location to another where the energy has greater value, including the ability to move high priced emergency power;
  • Improving the ability of power to move through the remainder of the transmission network by reducing the impacts of system contingencies on the rest of the system. In a security-constrained dispatch, this can improve normal flow limits on constrained transmission elements outside of the expansion;
  • Providing ancillary services such as voltage support service by providing controllable reactive power output, both when there is flow over the expanded facilities and when there is not;
  • For transmission expansions connecting multiple control areas, improving the ability of these areas to share operating reserves;
  • Reducing market power by increasing the size of relevant geographic markets, thereby increasing the apparent number of competitors in energy, capacity, and ancillary service markets; and
  • Within a control area, reducing the number of units that must be committed to meet expected regional loads by allowing a wider pool of generators and potentially diverse loads to be considered in the unit commitment decision thereby reducing system uplift costs associated with unit commitment.

In approving UDRs, FERC has signaled that it is willing to support new market incentives for structural improvement to the grid. To ensure that structural remedies to congestion such as merchant transmission are viable, much more must be done. Further progress on developing additional market incentives and related mechanisms is important to ensure that economic improvements to the transmission system can and will be undertaken.

  1. Unforced Capacity is the means for accrediting generating capacity in NYISO, ISO-NE and PJM. Unforced capacity adjusts the amount of capacity a generating unit can sell to meet a resource adequacy requirement by that unit's availability (i.e. a 100-MW unit with a 95 percent availability can provide 95 MW of unforced capacity). This discussion focuses on capacity for simplicity.
  2. Customers in New York City must procure enough ICAP from resources in New York City to equal 80 percent of their peak load. Customers on Long Island must procure ICAP from Long Island resources to equal 93 percent of their peak load.
  3. Preliminary studies demonstrated that if the benefits of the CSC