Electricity Transmission Line Rehabilitation Project / Economic Evaluation

Transcript

1. Economics of Electricity Transmission Rehabilitation Line Investments Sener SALCI Department of Economics, Queen’s University, Canada sener.salci@gmail.com / ssalci@econ.queensu.ca May 2017
2. •  Reference Material h.p://econpapers.repec.org/paper/pramprapa/78929.htm 2
3. Outline of Talk 1.  Introduction 2.  Costs and Benefits of Transmission Capacity Investments 3.  Evaluation of Transmission Capacity Investments Using CBA Framework 4.  Application of CBA in Transmission Capacity Investments 5.  Some Extensions in the Evaluation of Transmission Capacity Investments 6.  Examples of CBA in the Evaluation of Transmission Capacity Investments 3
4. Electricity Market Structure in LAC Source: Roques, 2015 4 Electricity Market in LAC
5. Some Facts •  Electricity transmission infrastructure transport power in electricity markets (i.e. meeting producers in X region with consumers living in Y region) •  The system operator carries out transmission control. •  Transmission investments are endogenous to market conditions ( i.e. coordination of investments in transmission and generation of electricity) •  Traditionally, transmission line was responsible for transport of electricity securely and efficiently at minimum operating cost while meeting demand (functions of transmission infrastructure) •  With the unbundling in the electricity sector, generation and supply of electricity is separated aiming to introduce competition in the industry and to regulate the transmission and distribution systems. With the introduction unbundling , transmission must ensure fair access to energy for all participants, mitigate the market power, make a possible a competitive electricity market and enable optimum expansion of electric system, and integrate the increase of decentralized production (functions of transmission infrastructure) •  Timing and Scaling: Avoid or delay the need for future reliability projects by economically justifying the transmission projects. 5
6. Transmission Capacity Business •  Long-lived capital intensive assets •  Average costs decrease with capacity (i.e. economies of scale) •  Long-lead times for construction and investments are irreversible •  Natural Monopoly (for good) o  where transmission is unbundled, monopoly subject to regulations, including pricing of transmission to cover fixed costs and earn “fair” from investments (see Hernandez et al, nd) •  Transmission is sometimes a substitute for electricity generation 6
7. Transmission Capacity Investments Case I. Is it economically viable to expand transmission capacity? Ø Evaluate transmission capacity expansion as part of long-run generation capacity investment (i.e. integrated generation and transmission investment) Ø Examples of such projects include: •  to accommodate growing demand •  to connect additional power generation source into network (e.g. issue of integrating wind power into the system) Case II. Is it economically viable to rehabilitate transmission capacity? Ø Evaluate as “stand-alone project” Ø Examples of such projects include: •  to replace , repair ageing network infrastructure •  to replace “old” to avoid energy losses Case III. Is it economically viable to upgrade transmission capacity? Ø Evaluate as “some combination of the above situations” Ø Examples of such projects include: •  to improve the reliability of supply to existing consumers from upgrading the overall transmission •  to provide inter-connection between two demand grids 7
8. Models of Market for Transmission Investments 1.  Traditional: Integrated generation and transmission planning o  Public Investment, o  Transmission line “traditionally” responsible for security and reliability of the system while ensuring that the demand is satisfied 2.  Competitive: generation and transmission are separated to ensure fair competition and achieve economic efficiency (unbundling) Regulated transmission capacity o  Transmission company (monopoly) proposes and builds a new investment if regulator approves the proposed investment o  Transmission company collects revenues from users to pay for the investment Merchant expansion 8
9. Traditional transmission expansion planning procedure 9 Source: Wu et al., 2006, p. 957
10. Transmission expansion planning procedure in the deregulated environment 10 Source: Wu et al., 2006, p. 960
11. Remarks q Each case and market model requiring a different approach to the evaluation of benefits and costs and overall investment. q But in all cases and market structure (not merchant expansion), investments would have to pass approval by “regulators” and regulator will authorize transmission capacity investment if the savings in generation out of merit costs and losses (or even savings from capacity) exceeded the capital and operating costs of the reinforcement. 11
12. Costs and Benefits 12
13. Transmission Investment Costs q Capital Expenditures - CAPEX q Operating Expenditures - OPEX Costs are function of various inputs including length of lines and capacity of lines. Payment for the transmission investment ($/MWh), for instance, is based on Regulated Revenue Requirement: Pay for capital expenditures made ( rate covers return on capital and depreciation) and OPEX. Payments are made on load factor and operating costs of transmission line, so regulated price might higher in order to cover capital costs and depreciation expenses and earn “fair” rate of return from invested capital. These charges are allocated to network users. Methods and ways of payment vary across 13
14. Transmission Investment Benefits Adding up the main short and long-run benefits of transmission capacity investments: 1.  Production cost savings plus 2.  Reliability and Resource Adequacy Benefits 3.  Generation Capacity Cost Savings 4.  Market Benefits (e.g. insurance benefits, competitiveness benefits) 5.  Environmental Benefits 6.  Other Benefits such as public policy benefits, impacts on fuel markets, employment benefits etc.) 14
15. Why do we need to move away from “traditional approach”? Importance of taking into account all project benefits for project selection Benefits are accrued over time, quantification and certainty of occurrence of project benefits is harder than estimation of costs of the projects occurred during initial years – but uncertainty costs must be also assessed. 15
16. Transmission Expansion Benefits Without Expansion Consumer Surplus: A Producer Surplus: E Congestion rent: B+C+D With Expansion Consumer Surplus: A+B+F Producer Surplus: D+E+H Congestion Rents: C+G Net INCREMENTAL Benefits: F+G+H 16
17. Challenges in Estimating Benefits Estimation of benefits from transmission investments is not the only challenge, but monetizing them in single numeric value is also challenge. In other words, the wholesale price for electricity might not reflect all or large portion of benefits from new transmission investment. E.g. Benefits from new transmission line (or new investment package such as wind capacity and transmission integration costs) must be reflected in price and corresponding quantities associated with the new price. o  Not an easy task: price determination happens in short or medium, and it is complex task, load dispatch analysis might not reflect price changes due to project over time o  Long-term utility benefits, economy wide benefits cannot be captured from demand o  This particular transmission investment is tied to wind investment 17
18. Evaluation of Transmission Capacity Investments using CBA Framework 18
19. CBA Framework for Market Efficiency Net Benefits from each are measured by comparing total system costs and benefits for: Ø future “with” the project to future “without” the project (i.e. “base” case) Both benefits and costs are subject to some level of “uncertainty” and “risk” Ø  evaluate the project with a range of scenarios and sensitivities 19
20. CBA Framework for Policy Objective Policy Objective: Connecting hydro resources in North of Chile into grid Question: Is it economically viable to invest on hydro in Chile? Example: 600 km long transmission line to boost renewables in Chile; to address the main challenge that the Chilean electricity system faces such as the interconnection between its various subsystems, to ensure security of supply and to reduce the price of energy Policy Objective: Connecting transmission infrastructure between Peru and Chile Question: Is it economically viable to invest in such of interconnection of transmission infrastructure? What are the gains from power exchange? How should allocation of benefits and costs be made? Who are the gainers and losers from power exchange between Peru and Chile? Example: Possibility of interconnection of transmission infrastructure between Peru and Chile could happen before 2021. Both of these investment in transmission line are attached to energy policy objective and most likely such investments are undertaken if they are cost-efficient (not necessarily least-cost option), and CBA framework is required to test the impacts of such policies on different actors involved in the project. 20
21. Steps for CBA Analysis 1.  Get the comprehensive data from system planners and stakeholders involved in the project (e.g. list of likely benefits and project costs) 2.  Perform unbiased evaluation to value as many of the identified benefits possible and costs of expansion 3.  Evaluate to determine whether project is beneficial overall by adding up estimated economy ‐wide benefits (i.e. societal) benefits with estimates of total project costs 4.  Distribute costs including transmission pricing cost allocation) and benefits to stakeholders 5.  Work out on allocation of transmission costs via transmission pricing mechanism so that costs are recovered and natural monopoly earns fair rate of return from invested capital and operating costs. 21
22. What does CBA analysis actually do? Evaluate the proposed project: •  Integrated financial, economic impact analysis and distributional assessments for particular groups of concern (e.g. the private sector, electric utility, consumers, country-economy and national government etc.) •  Incorporate risk and uncertainty within the evaluation, and their individual impacts on each stakeholder. •  Re-allocate the benefits and costs according to the provision of the agreements. •  Address the important issues, and provide policy recommendations based on careful CBA evaluation. 22
23. Investment Decision Criteria 1. Net Present Values ($) Ø  Build an additional transmission capacity if discounted total savings exceed the discounted total transmission expansion costs. Ø  Add capacity until the marginal generation savings equal the marginal cost of building additional capacity. 2. Levelized Costs ($/MWh) 23
24. What CBA analysis cannot not do? You cannot decide on amount of optimal capacity, location and timing of transmission capacity to be built. You cannot estimate the benefits and costs of transmission projects. But, cost-benefit analyst will can do economic evaluation and distribution of such impacts in a consistent maner (see steps for CBA). 24
25. Application of CBA in Transmission Capacity Investments Example I: ATC’s Paddock-Rockdale Project Example II: Southern California Edison’s Palo Verde-Devers 2 Project 25
26. •  Install new 345 kV circuit on existing right of way connecting Paddock Substation in Rock County to the Rockdale Substation in Dane County •  35 miles new double and triple circuit monopole and reused double circuit lattice structures •  Substation upgrade work also required at: Rockdale, Christiana and Paddock –  Replace 336 MVA transformer with 500 MVA –  5 breaker replacements –  Substation footprint expansion –  Ground grid and grade work 26 Example I: ATC’s Paddock-Rockdale Project
27. •  Aim is to reduce the delivered cost of energy to Wisconsin customers by reducing congestion on the system and improving access to additional energy sources. These savings from project will passed onto end-use electricity consumers. •  ATC owns, operates, builds and maintains the high-voltage electric transmission. •  Estimated project costs: $132 millions. Updated final total project cost is about $116 millions. •  Approved in June 2008 and line entered service in March 2010 27 ATC’s Paddock-Rockdale Project
28. Results from ATC’s Paddock-Rockdale Project Source: American Transmission Company, Planning Analysis of the Paddock-Rockdale Project, April 2007, p.63 28
29. Example II: Southern California Edison’s Palo Verde-Devers 2 Project 29 The proposed project consists of two electric transmission lines: the Devers-Harquahala 500 kilovolt transmission line between California and Arizona and the Devers-Valley No. 2 500 kilovolt transmission line between SCE’s Devers and Valley substations in California. Objectives are to increase the ability to transfer electricity between states in the southwestern US, create access to sources of cost- effective energy (reduce energy dependency, large scale solar investments), help facilitate development of new electrical generation sources in the region (connect eastern Riverside resources into grid), reduce congestion and improve reliability in the Southwest network.
30. Southern California Edison’s Palo Verde-Devers II Project 30
31. Southern California Edison’s Palo Verde- Devers II Project •  Levelized Cost of the project Costs: $71 millions $. •  Southern California Edison (electric utility) Selected Quanta Services for Construction of Devers-Palo Verde 2 Transmission Project •  Approved 2005, project started July 2011 and operational since Sept. 2013 (we will come to this point later) 31
32. Southern California Edison’s Palo Verde-Devers II Project ($, millions) Source: Zhang, (2010, p.262)* (*): some benefits are excluded for illustration purpose. 32
33. Southern California Edison’s Palo Verde- Devers II Project Q: Is there any more electricity market benefits that are not captured in this study? A: Yes! Long-term benefits in the form of capacity, emission and competitive benefits amount of $41 million (75% of total energy saving benefits), increasing B-C ratio from 1.10 to 1.68. Therefore, without accounting these savings, benefits are only 10% higher than projected costs and under-estimation of benefits might cause refusal of “good” transmission project. This holds also when actual costs are higher than costs estimated. 33
34. Southern California Edison’s Palo Verde- Devers 2 Project 34
35. Some Extension in the Evaluation of Transmission Capacity Investments 35
36. o Underlying the benefits for different groups (new and existing connections) from transmission capacity investments. o Some notes on regulatory aspects of transmission capacity business. 36
37. Transmission Expansion Benefits New Connections (e.g. rural electrification) Pd 0: Price of alternative source of energy Pd 1 : Electricity tariff for new connection QT 0 : Energy consumption per household in the absence of electricity QT 1 : Electricity consumption per household at the prevailing tariff C+D = Value of resources used before connecting consumers to electricity = Resource Savings from Replacement (primitive to modern energy source) 37 C D
38. Decision to Invest: The “golden rule” is: PV of all Benefits (sum of area A+B, C+D) > PV of Total Costs of Power Supply Compare with other options, for example off-grid renewable applications in situations where transmission investments are not economically viable to serve. Then compare and select least-cost option for rural electrification. Transmission Expansion Benefits New Connections (rural electrification) 38
39. Transmission Expansion Benefits Existing Connections Without Expansion Consumer Surplus: A Producer Surplus: E Congestion rent: B+C+D With Expansion Consumer Surplus: A+B+F Producer Surplus: D+E+H Congestion Rents: C+G Net INCREMENTAL Benefits: F+G+H 39
40. The “golden rule” in both centralized and competitive frameworks, regulator’s decision based on: PV of all Benefits (sum F+G+H)* > PV of Total Costs of Transmission Expansion *add economic benefits from “new connected consumers” if there is any additional connection results from transmission capacity investment. * issue of benefits from new transmission capacity investment that are not captured by the price of electricity Transmission Expansion Benefits Existing Connections 40
41. Examples of CBA in the Evaluation of Transmission Capacity Investments 41
42. Transmission Capacity Investments CBA Analysis 1.  Peligre Transmission Line Rehabilitation Project, PAP Region, Haiti h.p://econpapers.repec.org/paper/pramprapa/78929.htm 2. Southern California Edison’s Palo Verde-Devers 2 Project (interconnection project) http://web.stanford.edu/group/fwolak/cgi-bin/sites/default/files/files/Using%20Market%20Simulations%20for %20Economic%20Assessment%20of%20Transmission%20Upgrades_Applications%20of%20the%20California%20ISO %20Approach.pdf http://www.cpuc.ca.gov/Environment/info/aspen/dpv2/toc-feir.htm 3. TC’s Paddock-Rockdale Project (high-voltage connection to regional generation sources) http://www.atcllc.com/oasis/Customer_Notices/ Filed_CPCN_Economic_Analysis_PR_051607.pdf 4. Vietnam: Power Transmission Investment Program (MFF) http://www.adb.org/projects/42039-033/main http://www.adb.org/projects/documents/power-transmission-investment-program-mff-0 42