As the U.S. electric power industry unbundles, the industry and its regulators grapple with two big questions concerning the degree to which distribution services should be unbundled. First, what...
Profiting from Transmission Investment
economic at a cost of $7 billion.
Benefits From Reserve Sharing
The economic benefits of transmission would be even larger if we incorporate benefits from reserve sharing. In the optimal case, we allowed reserve margins to decline over time to a minimum level of 13 percent, while in the Reserve Sharing Case, we assumed reserve margins declining to a minimum of 12 percent and remaining flat thereafter. With this modest 1 percent reduction, economic benefits increase sharply, from an NPV of $4.4 billion to as much as $9.7 billion.
This analysis shows significant economic benefits of investing in new transmission capacity:
Overall, approximately $8.2 billion NPV in 2003 dollars of incremental transmission investment is optimal between 2004 and 2030. These investments would yield economic benefits of $12.6 billion in real 2003 dollars and net benefits of $4.4 billion, for a benefit-to-cost ratio of over 1.5 ($12.6 billion divided by $8.2 billion). With a 1 percent reduction in reserve margins, economic benefits more than double, for a benefit-cost ratio of 2.2 at the optimal transmission investment levels. Including investments in generation hook-ups in maintaining existing economic transfer capabilities, the NPV of transmission investment is estimated to be $43 billion in year 2003 dollars. There are first-mover advantages. Early investors are more likely to achieve their desired return on equity, while providing substantially more benefits.
The Energy Information Administration (EIA) indicates that there were about 133 million U.S. residential, commercial, and industrial customers in 2002, so net savings per current customer would be approximately $33 in present value dollars ($4.4 billion of net benefits divided by 133 million), though the number of customers would tend to grow over time. With the benefit of reserve sharing, the present value benefit per current customer increases to $73.
Thus, in the United States, it is economic to invest billions in transmission, as consumers would realize a substantial benefit (in conjunction with billions invested in power generation). ICF Consulting's analysis confirms that the national transmission shortfall is quite large.
Further, these results indicate that public policies, regulations, and statutes should favor transmission-line development. When we include the substantial additional benefit to the overall economy from lowering system outages, the case for encouraging new transmission becomes even more compelling.
Value of Lost Load: A Large Additional Benefit?
Appropriate transmission investments will help reduce transmission-related outages (TROs), which, despite their lower frequency when compared with distribution-related outages, generally have much greater consequences. Our study also estimated the economic value of the load not lost by making the right transmission investments. VoLL is defined as the value placed by an average consumer on an unsupplied unit of electric power.
Key steps in such analysis include:
Determining the past frequency of TROs and making a reasonable projection of their likely occurrence and severity in the future; Assessing the extent to which TROs affect each sector (residential, commercial, industrial), and the value of power to each sector; Estimating the potential reduction of TROs from appropriate transmission investments, and the load that would be "saved"; and Calculating the value of that load saved over