[BETA] Fortnightly

A holistic, new approach to cost/benefit analysis.

The still-fresh memories of last year's Northeast blackout coupled with rising congestion nationwide have increased awareness of the electric transmission investment shortfall in the United States. Such investment, in the right locations, would have a highly positive benefit-cost ratio. But how much should be spent?

To answer this question, ICF Consulting recently conducted a holistic forward-looking analysis of transmission investment, assessing transmission along with new generation, plant retirement, and load management options.1 We integrated all factors affecting power production and delivery, including air emissions requirements, fuel market dynamics and expected prices, power plant economics and financing, costs of congestion, and network reliability. We also provided a new application of the value of lost load (VoLL) to electric transmission as a recommended means for assessing future transmission benefits.

Insufficient transmission capacity can impose costs on consumers in several ways, by:

Creating transmission "islands" and preventing sharing of generation reserves, so isolated markets must carry excessive reserves;

Raising the capital costs of generation in isolated markets (, New York City);

Compelling the mothballing of less expensive generation due to inaccessibility;

Making consumers in congested markets pay more for power at times; and

Making reliability margins of overburdened transmission networks higher than they are for lightly loaded networks.

An examination of the wholesale incremental costs and benefits of various levels of transmission investments, in the context of generation and other options for satisfying the need for power, can lead to reduced costs.

Tricky Business

Estimating optimal transmission investments is challenging because of the complexity of power flows on the grid and because of network externalities such as loop flows. Analyses that examine historical declines in transmission investment are too simplistic. There are two main categories of investment needs-those needed for reliability and those desired to lower power costs. These reliability and economic needs are complementary; that is, by adding economic transmission to reduce congestion, system reliability improves as well. ICF Consulting uses different analytic approaches to capture each factor.

In this study, we calculated economic transmission benefits by modeling the complex future interactions of generation, transmission, environmental, and fuel markets over 27 years (2004 to 2030), compared with not making such investments. We evaluated three scenarios, with variations on the second one.

Base Case. In the Base Case, we restricted capacity additions to generation only, assuming that all projects that have broken ground would be completed.

Optimal Case. We analyzed an Optimal Transmission Investment Case in which economic generation and transmission additions compete to serve load. In many cases, the model still builds significant generation, as incremental energy and capacity are also required. As we know, transmission is a challenge to site, so we also analyzed four cases where optimal transmission builds were scaled down by 10, 25, 50, and 75 percent, respectively, in which generation would instead meet the additional resource requirements. We also modeled two above-optimal cases, in which transmission builds were scaled up 10 and 25 percent.

Lower Reserve Margins.

We analyzed the economic impact of reducing reserve margins below the Base Case level, since