Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Profiting from Transmission Investment

A holistic, new approach to cost/benefit analysis.
Fortnightly Magazine - October 2004

incremental transmission capacity could require less investment in generation to meet the same level of reliability for the grid as a whole.

Forecast Results

After substantial work to properly specify and run our models, we addressed the key question: What is the optimal level of incremental economic transmission investment ()? All levels of investment yield substantial benefits, but the optimal level can be identified. Specifically, we project an optimal economic investment of $12 billion in transmission capital, though just $8.2 billion in net present value (NPV) terms. We further project that if these investments are made, and made in the right locations, the period's gross benefits are about $12.6 billion NPV, yielding net system benefits (including financing costs) of $4.4 billion NPV. Note that we do not assert that the goal should be to eliminate congestion; indeed, some congestion may be cost-effective. As explained below, this forecast of the level of cost-effective investment is in addition to transmission investments made to maintain system reliability and to interconnect power plants, which we assume to be made regardless.

Figure 2 details the gross, net, and marginal benefits per dollar for each case. As per economic theory, system planners should continue investment until the marginal economic benefit is zero. At 25 percent of the optimal investment, the gross savings per dollar invested is approximately $1.90, and the marginal benefit about $0.90. At the optimal level, these figures reach $1.50 in gross savings per dollar and about zero in marginal net savings.

But incremental economic investment in transmission is far from all the transmission investment required. Transmission investment to increase throughput of the grid must be accompanied by hook-up costs for new generation, estimated at $15/kW-year in year 2003 dollars. With more than 600 GW of new generation additions expected in the study horizon, we estimate total hookup costs of approximately $9 billion, with an NPV of about $3 billion. Including both generation hookup costs and new development, total transmission investment needed in the study horizon is more than $20 billion.

In addition, we expect normal transmission capital investments largely to maintain existing reliability and transfer capabilities, which was estimated by the Edison Electric Institute in 2000 at approximately $2 billion annually in 1997 dollars ($2.5 billion in 2003 dollars). Over the study period, this amounts to an NPV of $31.7 billion in 2003 dollars. Figure 3 shows the breakdown of these investments. Thus, including optimal transmission that will lower wholesale power costs, the NPV of overall transmission investment needed is projected at $43 billion in 2003 dollars.

Further, transmission builds will occur over time. Figure 4 shows that the optimal transmission builds would provide a cumulative 60 GW of transfers from 2004 to 2030. Of the $12 billion, about $4 billion would be optimal by 2007, providing 20 GW of economic transfer capability. Less economic transmission investment is required between 2008 and 2011. Between 2012 and 2017, an incremental 6 GW is economic at a cost of $1.5 to $2 billion. From 2017 to 2030, as demand grows, about 35 GW of transfer capability is