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Profiting from Transmission Investment

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

for the last five years, as shown in Figure 6.

To estimate future losses, we then escalated the "baseline" average of about $12 billion each year to reflect anticipated increases in electricity consumption (1 percent for residential, 1.7 percent for commercial, 1.3 percent for industrial, and 1.9 percent for "other," as projected by EIA's 2004). By 2012, we determined that the baseline amount would rise to $14.1 billion, and to $16.9 billion by 2025.

Finally, we measured the economic benefit of transmission investment through projected reductions in TROs and the consequent economic savings to consumers. The key was estimating the extent to which outages would decrease as a result of the optimum level of transmission investment. Given the absence of hard data on this topic, we made reasonable estimates in five different time periods, based on this logic:

  • Initial transmission investments would take a few years to materialize, so the impact in reducing outages in 2005-2006 would be relatively small;
  • By 2007-2008, some of the "best" initial transmission investments would occur with a higher benefit;
  • For 2009-2014, reduced outages should be substantial, as major transmission investments would take place; and
  • In 2015-2020, incremental benefits may decline, with a smaller benefit compared with 2009-2014. Benefits would remain constant for 2021-2030.
  • The exact size of this benefit is debatable, but we believe that the overall shape of the curve should follow this logic. In this light, compared with the baseline, we hypothesized a pattern for outage reductions in outages related to transmission ().

    Thus, we project that in the long run, optimal transmission investment could reduce transmission-related outages 50 percent from its normalized levels, taking growth in electricity consumption into account.

    The final step was to translate these projections into their economic value by multiplying the VoLL in each year by the cumulative reduction for that period to find the savings. For example, in the year 2012, when the overall economic value of outages would be $14.1 billion, a 30 percent reduction would save nearly $4.2 billion. We then added up the projected annual savings for a cumulative savings over the entire period of $149 billion, with an NPV of $50 billion, at a 7 percent discount rate.

    Using the approach described above, the VoLL would provide nominal benefits of more than $1,100 per current customer from incremental transmission, and an NPV savings of $376 per current customer. The benefit-cost ratio when including VoLL rose to more than 8.0.

    The Benefits of Transmission Investment

    This study has answered some key questions. Is substantially more transmission needed? Could optimum transmission investment reduce the cost of power by facilitating economic transfers (in addition to interconnecting generation and maintaining reliability)? Would such investment reduce the likelihood and severity of outages, with corresponding benefits to the economy? The answer to all these questions is emphatically "yes." Figure 8 provides our findings regarding the optimal level of incremental transmission investment.

    Benefits to the economy from reducing transmission-related outages clearly would justify billions of dollars in additional transmission investment. We recommend that the VoLL approach be incorporated into future utility,