What's causing price volatility, and will it last?
Coal markets have changed dramatically in the last year, but uncertainty...
Breaking the Gridlock
A proposal to remove the bottlenecks on grid investment.
an economically rational manner … this does not necessarily mean it is a powerful incentive for transmission construction and upgrade.” 3
A long term (10 years +) congestion revenue rights (CRRs) administered by the RTO could be a workable solution. Like a long term bond these long term CCRs would have a guaranteed income stream even if the short term CCRs diminish or go to zero if the constraint is eliminated. This would make transmission investment financiable. Making the return on transmission investments correlated to the system economic benefits would spur technology applications in the Grid and make transmission investments more attractive to financial markets.
While regulators seem to buy wholeheartedly into the locational marginal price (LMP) concept in developing market structures, they do not fully appreciate that if LMP signals are to provide a mechanism for long-run system investment decisions, the market structure should allow rational choices to be made among generation, transmission, and demand-side infrastructure options. The concept that seems to trip up a lot of industry stakeholders is the prevalent but erroneous concept that transmission is an enabler and does not compete with generation options. A corollary to this concept is that we should not do anything with transmission that would distort the energy market. The fundamental fallacy of this agreement is that transmission does affect the energy and capacity markets. In fact, transmission defines these markets. A well-defined LMP-based market mechanism for transmission investments should allow for tradeoffs among generation, transmission, and demand-side options for serving future energy needs.
Let us explore transmission in energy markets in terms of an enabler versus a market participant. The bulk transmission system allows generating units to compete within a wide geographic area to create efficient markets. However, by building transmission we can displace the need for local generation. In this scenario, owners of displaced local generation would view transmission as a competing entity, though transmission’s role merely is to “enable” remote generation to compete in a local market. Thus, the true nature of the market impact of transmission upgrade options is somewhat more complex than that of a passive “enabler.”
Transmission allows power plants to compete within regions. If there is no transmission congestion the LMP in every node of the region is the same. As demand for power increases, certain lines may reach their limits over a number of hours. In a region where transmission constraints are prevalent, LMPs are not uniform across that region. Congested transmission corridors also have congestion costs associated with them that can be hedged against using CRRs and similar financial instruments. The rational mechanism for upgrading a transmission corridor would be to upgrade when the present value of the congestion costs is greater than the cost of the upgrade. The view of transmission as an enabler works very well in this scenario.
Now examine a case where several regions are interconnected by tie lines ( see Figure 1 ). The graphic on the left shows a number of load-serving entities connected by weak transmission ties. The graphic on the right shows the same load-serving entities