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Transmission's True Value

Adding up the benefits of infrastructure investments.

Fortnightly Magazine - February 2012

RTOs cited reduced congestion as a main benefit from expanding transmission capacity. For example, PJM noted that market simulations of recently approved high-voltage upgrades indicate that the upgrades will reduce congestion costs by approximately $1.7 billion compared to congestion costs without these upgrades. 3

The addition of new transmission facilities often also will reduce energy losses incurred in the transmittal of power from generation resources to loads. Due to limitations in simulation models, the full benefits associated with reduced transmission losses generally aren’t captured in estimates of production cost savings. 4 The economic benefits associated with the extent to which major transmission projects reduce transmission losses can be surprisingly large. For example, the economic benefits of reduced losses associated with a single 345 kV transmission project in Wisconsin were sufficient to offset roughly 30 percent of the project’s investment costs. 5 Similarly, in the case of a recently proposed 765 kV transmission project, the present value of reduced system-wide losses equated to roughly half of the project’s cost. 6

While production-cost savings are easily quantified with standard production cost simulation models, often it isn’t understood that these models quantify only the short-term dispatch-cost savings of system operations. They can’t capture a wide range of other transmission-related benefits, including generation-related investment-cost savings. For example, a Western Electric Coordinating Council (WECC) planning group recognized, “The real societal benefit from adding transmission capacity comes in the form of enhanced reliability, reduced market power, decreases in system capital and variable operating costs and changes in total demand. The benefits associated with reliability, capital costs, market power and demand are not included in this [type of production cost simulation] analysis.” 7

In fact, the “benefits associated with reliability, capital costs, market power and demand” often are omitted entirely in transmission cost-benefit analyses because they aren’t readily quantifiable with standard simulation tools. Because these benefits often are more difficult to quantify than production cost and load LMP impacts, they are sometimes discounted as so-called “soft” benefits and often dismissed as “unquantifiable” or “intangible” (see Figure 1) .8

Competition and Liquidity

Production cost simulations generally assume generation is bid into wholesale markets at variable operating costs, which doesn’t account for the fact that bids will include mark-ups over variable costs, particularly in real-world wholesale power markets that are less than perfectly competitive. Thus, wholesale power market benefits of transmission investments generally will exceed the benefits quantified in cost-based simulations.

Transmission investments can enhance the competitiveness of wholesale electricity markets by broadening the set of suppliers that compete to serve load. While the magnitude of savings depends on market concentration and how much load is served at market-based rates—rather than through cost-of-service regulated generation—studies have found that the economic value of increased competition can reach 50 percent to 100 percent of a project’s costs. 9 This benefit is explicitly considered in the California ISO’s economic transmission planning methodology. ISO New England also recently noted that increased transmission capacity into constrained areas such as Connecticut and Boston have significantly reduced congestion, “thereby significantly reducing the likelihood that resources in a submarket could benefit