transmission planning and investment in the … · transmission planning and investment in the...

TRANSMISSION PLANNING AND INVESTMENT IN THE

COMPETITIVE ENVIRONMENTPSERC Seminar Presentation

by

George Gross

Department Of Electrical and Computer Engineering

University of Illinois at Urbana – Champaign

April 5, 2005© 2005, George Gross, UIUC

2© 2005, George Gross, UIUC

OUTLINE

The changed utilization of transmission

Planning in the competitive environment

The sorry state of transmission investment

Key challenges and complexities

An analytic framework for transmission

investment

Illustrative examples

Concluding remarks


OPEN ACCESS IMPACTS

Power system restructuring fosters the

development of competition in wholesale

electricity markets

Markets bring about changes in the way power

systems are operated and planned

The vertically integrated structure is slowly

disintegrating into many new parts

New structures and players have important roles

and result in decentralized decision making


THE VERTICALLY INTEGRATED UTILITY INDUSTRY STRUCTURE

customers

self-generation

IPP Generation

Transmission

Distribution

Customer Servicecustomer service

distribution

transmission

generation


THE VERTICALLY INTEGRATED UTILITY INDUSTRY STRUCTURE

customers

self-generationIPP

Generation

Transmission

Distribution

Customer Service

customer service

distribution

transmission

generation


VERTICALLY INTEGRATED UTILITY STRUCTURE IS DISINTEGRATING

transmission ownership

customer

service

marketing/

trading

ISO

ancil

lary

servi

ces

markets

generation

distribution wires

generation

transmission

customerservice

distribution


CENTRALITY OF TRANSMISSION IN RESTRUCTURING

A common thread in the restructuring of electricity around the globe is the unbundling of transmission from the generation and the distribution of sectorsThe role of transmission in evolving wholesale competition in electricity is criticalThe provision of the nondiscriminatory transmission access and services to all market players under the open access transmission regime entails the establishment of independent transmission entities


PLANNING UNDER COMPETITION

Major shift in the planning paradigm

cessation of the centralized integrated

planning of the past

role of regional planning under the

independent grid operator

unclear responsibility for implementation

under the ownership/control separation

role of decentralized decision making


PLANNING UNDER COMPETITION

Planning, to the extent it is performed in the new

environment, is an asset management problem

investment under uncertainty

critical importance of effective risk

management

subject to regulations in a continuous state

of flux


TRANSMISSION USAGE UNDER COMPETITION

Frequent congestion situations result whenever

too many customers compete for transmission

services that the grid is capable of providing

Despite the more intense utilization of the grid by

the many established and new players, develop-

ments in transmission planning have failed to

keep pace with the increases in demand


THE SORRY STATE OF TRANSMISSION INVESTMENT

As demand increases, significant additions of

new generation are being made in virtually every

region

The reserve margins in capacity are improving

year after year

Transmission investments have failed to keep up

with the increases in demand and the additions

in new generation


DEMAND AND TRANSMISSION CAPACITY GROWTH

0

5

10

15

20

25

30

1988 – 98 1999 – 09

electricitydemand

transmissioncapacityexpansion

%

Source: EPRI


THE NERC CAPACITY MARGIN FORECASTS

1999

2000

2001

2002

perc

ent

25

20

15

10

51999 20112001 2003 2005 2007 2009

yearSource: NERC Reliability Assessment, 2002 – 2011


PROJECTED GENERATION GROWTH IN 1998 – 2007

Each percentage is with respect to the 1998 installed capacity

change in %40 and higher20 to 40

0 to 20Source: EPRI


HISTORICAL TRANSMISSION SYSTEM INVESTMENT

Source: E. Hirst, “U.S. Transmission Capacity: Present Status and Future Prospects,” June 2004


TRANSMISSION MAINTENANCE SPENDING

tota

l spe

ndin

g


230 kV AND ABOVE TRANSMISSION

2003 2004-2008 2009-2013

< .49% / yr

207.9

213.5

218.2

+2.2%

+2.7%

thou

sand

s of

mile

s

Source: NERC 2004


SEVERE STRESSING OF THE GRID

Large number of new and existing playersProliferation in the number of transactionsIncreasing load demandSimultaneous accommodation of pool and bilateral transactions Markedly different and more intense utilization of the grid than in the way that it was planned and designedLow level of investment in transmission improvement


SEVERE STRESSING OF THE GRID

Severe stressing of the grid leads to frequent

congestion situations with customers competing

for the scarce and heavily constrained transmis-

sion services

The transmission-bottleneck-caused congestion

situations significantly impact both the reliability

and the economics of electricity supply


TRANSMISSION BOTTLENECKS: WESTERN INTERCONNECTION

size of transmission paths

< 1 GW

1 GW ≤ ≤ 3 GW

> 3 GW

50% and greaterpercentage of hours congested

40% to 49%30% to 39%20% to 29%10% to 19%

Source: DoE National Transmission Grid Study, May 2002


TRANSMISSION BOTTLENECKS: EASTERN INTERCONNECTION

size of transmission paths

< 1 GW

1 GW ≤ ≤ 3 GW

> 3 GW

Source: DoE National Transmission Grid Study, May 2002

80% and greaterpercentage of hours congested

60% to 79%40% to 59%20% to 39%10% to 19%


CONGESTION IMPACTS

Decreased reliability

Reduced competition

Increased consumer prices

Creation of enhanced opportunities for market

power exercise

Increased infrastructure vulnerability


CONGESTION : ECONOMIC SIGNALS

LMPs provide short-term congestion signals

The translation of LMPs into long-term

investment signals is complicated

LMPs create the need for the effective

integration of financial hedging instruments:

FTRs and flowgate rights


TRANSMISSION EXPANSION

Network expansion is by its very nature a very

complex multi-period and multi-objective optimi-

zation problem

Its nonlinear nature and the inherent uncertainty

in future developments constitute major compli-

cations


TRANSMISSION INVESTMENT : KEY BARRIERS

Transmission is a regulated service: tariffs are

cost based and not value based

Uncertainty about the recovery of transmission

investments due to

long-term revenue stream needs

lack of clarity in regulatory pricing policy


TRANSMISSION INVESTMENT : KEY BARRIERS

conflicting goals of federal and state

regulators

Difficulty of recovering investment costs due to

free rider problem

Organizational complexities in the new industry

structure


COMPLICATIONS IN TRANSMISSION EXPANSION

Every transmission improvement impacts the

transfer capabilities in the interconnected

network covering a large geographic region

Each transmission investment affects market

participants differently

Free rider problem creates a problem in the

investment recovery

Lumpiness of transmission investments is a key

complication



A long-time horizon with the sequence of

appropriate decisions needs to be considered

Economies of scale encourage overbuilding

Imperfect electrical markets provide

opportunities for market power exercise



Short-run marginal costing information from the

hourly LMPs need to be translated into long-run

marginal cost for investment decisions

FTR/FGR integration into the investment

decision is needed

The explicit consideration of wide ranges of

uncertainty in all aspects, including regulatory,

environmental and player behavior, is required


ANALYTIC FRAMEWORK

A four-layer structure consisting of

physical

commodity market

financial

investment

layers

The interrelationships between layers represen-

ted through information flows


THE FRAMEWORK STRUCTURE

commodity market layer

financial market layer

investment layer

physical network layer


PHYSICAL NETWORK LEVEL


THE PHYSICAL LAYER

Represents the physical flows in the

transmission network including real power line

flows, nodal injections and physical

network/operational constraints

Models congestion and allows the evaluation of

congestion impacts on the transmission

customers/market participants


THE COMMODITY MARKET LAYER


THE COMMODITY MARKET LAYER

Models the purchases/sales in both the day-

ahead hourly and the bilateral transaction

markets

Represents the RTO decision making process to

establish feasible transmission schedules

Interacts with the physical layer and the

financial layer through information transfers


THE FINANCIAL LAYER


THE FINANCIAL LAYER

Models the financial instruments used to

provide hedging against congestion changes

Models Financial Transmission Rights (FTR)

and flowgate rights

Represents the salient aspects of rights

issuance and trading


TRANSMISSION INVESTMENT LAYER


TRANSMISSION INVESTMENT LAYER

Models the transmission investment decision making process and determines the

locationquantitytiming

of the transmission assetsEvaluates the impacts of the investment decisions on the investor, system operator and the transmission customers and assesses their financial aspects


THE INFORMATION FLOWS


commodity market layer

physical network layer

LMPs

system states

SFTresult

investment layer

social welfare

topology change

market outcomes

feasible FTR

desired FTR


RTO TRANSMISSION PLANNING PROBLEM FORMULATION

Maximize aggregate social welfare:

pool

bilateral contracts

subject to:

power flow balance equations

line flow equations

generator and demand limits

line flow limits


BASIC PROBLEM FORMULATION

( ) ( )

max

( ) ( )N W

b b s s w wh n n n n

n 0 w 1

s b T0 0 0 0 0

s b

d

p p t

p p p b

p p p B

B A f

τ

τ

β β α

θ µ

θ µ

θ λ

= =

= − +

− + = ↔

− + = ↔

≤ ↔

∑ ∑S

s.t.

∑8760

1

S S hh

max=

=

Note: all parameters and variables are hourly quantities


EVALUATION OF METRICS

$/MWh

MWh/h

consumer surplus

producer surplus

Bρ

Sρ

congestion rents

market effi-

ciencyloss

dead-weight

loss


APPROPRIATE METRICS FOR TRANSMISSION INVESTMENT

RTO metrics:

social welfare: aggregated value

loss of efficiency: decrease in social

welfare due to transmission constraints

congestion rents: money collected by the

system operator because of congestion



Producer metrics:

producer surplus: difference between what

the producer collects from the system and

the real costs

redispatch costs: difference in the produ-

cers’ costs with and without congestion



Consumer metrics:

consumer surplus: difference between the

demand bids and the demand payments

load payment costs: difference in demand

payments with and without congestion


THREE – BUS SYSTEM EXAMPLE

One-hour horizon

Lossless network

Quadratic functions for the costs and benefits

No bilateral transactions


NETWORK TOPOLOGY

1S

3S

1B

2S

2B

3B

lossless system

21

~

~

3

~


NETWORK DESCRIPTION

line l = (i, j) with

i j

1 2 0.1 300

1 3 0.1 300

2 3 0.1 300

x

( p.u.)

f max

(MW )ll


OFFER REPRESENTATION

Cost function:

Offer function:

( ) ( )=2

0.5C i i i i i is s s s s sP P Pβ γ+

( )σ =i i i i is s s s sP Pβ γ+


OFFER DATA

iβ

($/MWh )

γ

[($/MWh )2h]

( p )max

(MWh/h )

1 3.0 0.001 1000

2 4.5 0.005 1000

3 4.0 0.003 1000

si si si


OFFER PARAMETERS

$/MWhgenerator

offer

β si

γ si

MWh/h


BID REPRESENTATION

Benefit function:

Bid function:

⎛ ⎞ ⎛ ⎞⎜ ⎟ ⎜ ⎟⎝ ⎠ ⎝ ⎠

=2

0.5B j j j j j jb b b b b bP P Pβ γ+

⎛ ⎞⎜ ⎟⎝ ⎠

=j j j j jb b b b bv P Pβ γ+


BID DATA

iβ

($/MWh )

γ

[($/MWh )2h]

( p )max

(MWh/h )

1 13 0.0150 1000

2 23 0.0200 1000

3 16 0.0150 1000

bj bj bj


BID PARAMETERS

$/MWh

demandbidβ bj

γ bj

MWh/h


PRE – EXPANSION RESULTS

metric value in $

total producer surplus 761.98

total consumer surplus

congestion rents

social welfare

6632.01

520.67

7914.66

total production = 1056.57 MW


POST – EXPANSION RESULTS

metric value in $

total producer surplus 880.24

total consumer surplus

congestion rents

social welfare

7150.03

163.83

8194.10

total production = MW 1092.60


PRE – AND POST – COMPARISON

pre-expansion post-expansion

consumerpower demanded

(MW)

surplus

($)

power demanded

(MW)

surplus

($)

1 293.75 1294.34 273.44 1121.52

2 426.92 3645.27 440.00 3872.00

3 335.90 1692.41 379.17 2156.51

379.17104.17308.19320.513

440.0090.00101.26142.312

273.44898.44352.54593.751

surplus

($)

power generated

(MW)

surplus

($)

power generated

(MW)producer

post-expansionpre-expansion


PRE – AND POST – COMPARISON

metric pre-expansion post-expansion

total producer surplus ($) 761.98 880.24

6632.01 7150.03

163.83

8194.10

1092.60

520.67

7914.66

1056.57

total consumer surplus ($)

congestion rents ($)

social welfare ($)

total production (MW)


MULTI – PERIOD ANALYSIS

physical network physical network

commodity market commodity market



investment layer

social welfare social welfare

operational period Hoperational period 1

topology

changetopology change

. . .

. . .

. . .

. . .

SFT

LMPs LMPsfeasible

FTR

desired FTR

market outcomes

market outcomessystem

statessystem states

feasible FTR

market outcomes

market outcomes


IEEE RTS SEVEN – BUS NETWORK EXAMPLE

Study horizon of one year; typical week day

and week end day for each of four seasons

Lossless network

Quadratic functions representation for costs

and benefits

No bilateral transactions

Hourly computations


STUDY SCENARIOS

Reference scenario: the pre-expansion system

Scenario 1: addition of line ( 3 , 4 )

Scenario 2: addition of line ( 5 , 6 )

Scenario 3: addition of lines ( 3 , 4 ) and ( 5 , 6 )


NETWORK TOPOLOGY

B1

B3

B2

B4

B6 B7

B5

S1

S2

S3S4

S5

bus 1 bus 2

bus 3

bus 4

bus 5

bus 6 bus 7

~

~

~

~

~


NETWORK DESCRIPTION

line l = ( i, j ) with

i j

1 2 0.0576 300

1 3 0.0920 200

2 4 0.0586 300

3 4 0.1008 150

3 6 0.1720 300

4 5 0.0625 300

5 6 0.1610 300

5 7 0.0850 300

6 7 0.0856 200

xl ( p.u. ) f l ( p.u. )max


OFFER DATA

i β γ ( p )max

1 3.5 0.002 1000

2 5.0 0.005 1000

3 4.5 0.003 1000

4 3.8 0.004 1000

5 3.8 0.004 1000

si si si


BID DATA

i β γ ( p )max

1 20 0.015 1000

2 21 0.018 1000

3 50 0.022 1000

4 20 0.010 1000

5 28 0.017 1000

6 20 0.016 1000

7 27 0.015 1000

bj bj bj


ANNUAL RTO METRICS

social welfare

loss of efficiency

congestion rentsscenario

( k$ )

reference 305,101.73 6,679.58 7,664.69

1 308,204.19 3,577.12 8,715.52

2 305,975.03 5,806.28 4,939.40

3 308,799.57 2,981.74 5,179.23


ANNUAL PRODUCER AND CONSUMER METRICS

producer surplus

consumer surplus

27,0073.95

27,1984.71

27,2329.14

27,3615.14

scenario( k$ )

reference 27,363.09

1 27,503.96

2 28,706.49

3 30,005.20


AGGREGATE METRICS FOR A SUMMER WEEKDAY

$$

$ $


NODAL PRICES FOR A SUMMER WEEKDAY

nodal prices, reference scenario nodal prices, scenario 1

nodal prices, scenario 2 nodal prices, scenario 3

$/M

Wh/

h

$/M

Wh/

h

$/M

Wh/

h

$/M

Wh/

h


NODAL PRICE DIFFERENCES FOR A SUMMER WEEKDAY

nodal price differences, scenario 1

nodal price differences, scenario 2 nodal price differences, scenario 3

$/M

Wh/

h

$/M

Wh/

h

$/M

Wh/

h

$/M

Wh/

h

nodal price differences, reference scenario


SEVEN – BUS SYSTEM RESULTS

Best overall solution is scenario 3 with the lines

( 3, 4 ) and ( 5, 6 ) added in scenario 3

Scenario 1 results in the highest congestion

results

Scenarios 2 and 3 are characterized by flat nodal

price differences and lower average LMPs than

in the reference scenario


CONCLUDING REMARKS

Multi-layer analytic framework for transmission

expansion planning

Framework capability to deal with the complex

issues in transmission investment

Appropriate metrics to determine the best

investment policy

Scenario analysis allows the identification of

optimal strategy and investigation of what if

questions


FUTURE WORK

Transmission service pricing on a value rather

than cost basis

Formulation of effective incentives for transmis-

sion investment

The formulation and solution of the individual

investor problem

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