Price-Responsive demand, EPA regulations, and merger policy will be on the agenda for the coming year as the Federal Energy Regulatory Commission works its way through the list of key cases that...
Transmission's True Value
Adding up the benefits of infrastructure investments.
from the exercise of market power.” 10
Similarly, limited liquidity of wholesale electricity markets also imposes transaction costs and price uncertainty on both buyer and sellers. These transaction costs and price uncertainties are higher in markets with less liquidity. Transmission expansion can increase market liquidity by increasing the number of buyers and sellers able to transact with each other. This will lower the bid-ask spreads of electricity trades, increase pricing transparency, and provide better clarity for long-term planning and investment decisions. For example, bid-ask spreads for bilateral trades at less-liquid hubs are 50 cents to $1.50 per MWh higher than the bid-ask spreads at more liquid hubs. 11 At transaction volumes ranging from less than 10 million to over 100 million MWh per quarter at each of more than 30 electricity trading hubs, even a 10 cent per MWh reduction of bid-ask spreads due to a transmission-investment-related increase in market liquidity saves $4 million to $40 million per year and trading hub, which would amount to transactions cost savings of approximately $500 million annually on a nationwide basis.
Reliability and Operations
Transmission investments, even if not driven by reliability concerns, will generally increase reliability on the power system. This increase in reliability provides economic value by reducing service curtailments and avoiding high-cost outcomes during extreme system conditions. The cost of reliability problems and their expected unserved energy can be measured with estimates of the value of lost load, which can exceed $5,000 to $10,000 per curtailed MWh. 12 The high value of lost load means that avoiding even a single reliability event that results in a blackout would provide savings that range from tens of millions to billions of dollars.
In addition to reducing the frequency and magnitude of possible blackouts, transmission investments can reduce reliability-related operating costs, which tend to add significantly to congestion costs but often aren’t captured in production cost simulations. 13 Transmission also can reduce the demand and cost of ancillary services, a benefit that will grow in importance as the penetration of variable generation resources such as wind expands.
By also reducing the high generation dispatch and power purchase costs incurred during reliability events or challenging market conditions, transmission upgrades provide insurance against the impacts of extreme events, such as unusual weather conditions, fuel shortages, or multiple generation and transmission outages. For example, the chair of the CAISO Market Surveillance Committee estimated that if significant additional transmission capacity had been available during the California energy crisis from June 2000 to June 2001, its value would have been as high as $30 billion over this 12 month period. 14 Similarly, a detailed analysis of the insurance benefit of a 345 kV transmission project found that the project’s probability-weighted savings from reducing the impacts of extreme events equated to approximately 20 percent of the project’s costs. 15
Investment and Resource Costs
Transmission projects can provide investment and resource cost benefits by displacing or delaying otherwise needed capital investment, allowing the integration of lower-cost generation resources, and reducing the cost—or increasing the value—of subsequent transmission projects. For example, transmission investments that allow the