1 Session 14.B Module E.2 Electricity transmission: Investment Prof. Ignacio J. Pérez-Arriaga Engineering, Economics & Regulation of the Electric Power Sector ESD.934, 6.974 2 Regulation of transmission services INVESTMENT2 3 Readings  F.F Wu, F.L. Zhengb, F.S. Wen, “Transmission investment and expansion planning in a restructured electricity market”, Energy 31 (2006) 954–966. 4 Investment Which is the objective?  To ensure that all transmission facilities that are “justified”, i.e., meet a prescribed social welfare efficiency criterion (which must account both for economic & quality of supply considerations) are  built at optimal times  properly operated & maintained at minimum cost3  Investment optimality according to traditional regulation: “Invest in network assets only while the additional network investment cost is still smaller than the additional saving in system operation costs (generation costs, loss of supply)”  This definition is consistent with the one adequate for a context of competition: “Invest so that the net aggregated benefits (once network charges are included) of all network users (i.e. generators & consumers) are maximized”  Technical reliability rules have to be met in any case, although it is preferable that they are incorporated into the cost / benefit function The “regulatory test” What is a “justified” investment? 6 The “golden rule” in both centralized & competitive frameworks (1)  Traditional framework: Maximize global social welfare Max {U(D) - FG - VG - CT} (1) U(D): utility for the demand D FG: generation fixed costs VG: generation variable costs CT: transmission total costs4 7 The “golden rule” in both centralized & competitive frameworks (2)  Open market framework: PD = IG + CT (2) PD: payments by consumers (at wholesale level) IG: revenues of generators (once they have paid their transmission charges) CT = IVT + CCT (optionally) (3) IVT: “variable” transmission revenues (from application of nodal energy prices to consumers & generators) CCT: complementary charge (assuming that transmission is regulated so that its total costs are fully recovered) 8 The “golden rule” in both centralized & competitive frameworks (3)  Open market framework (continuation): Rearranging equation (2): PD - IG - CT = 0, which can be introduced in (1): Max {(U(D) - PD) + (IG + CT) - FG - VG - CT} & then Max {(U(D) - PD) + (IG - FG - VG)} = = Max {net benefit of consumers + net benefit of generators} as we wanted to prove5 9  A useful property  An economically justified network investment under traditional network expansion rules network investment cost < savings in operation costs will increase the net benefit of Generators: income from nodal prices – operation costs – network charges Consumers: utility – cost of purchasing electricity – network charges if the residual network cost is allocated pro rata of the economic benefits of each network user 10 The “regulatory test” in practice  A fully convincing “regulatory test” is missing in practice  to verify that a proposed investment is justified or even that it is the “optimal” one within a set of proposed network reinforcement options  the current predominant criterion in Europe & most of US is to comply with prescribed security criteria (some countries have mandatory “Grid Codes”) & to eliminate network bottlenecks  Some countries specifically include the criterion of economic efficiency, but it is not clear how this is applied (or if it is actually applied)6 11 Physical components for the transmission function (1)  Transmission lines  Overhead lines & underground cables (AC & DC)  Elements for connexion, voltage transformation & operation  Bus bars  Transformers  Phase-shifters  Breakers  Disconnect switches  Insulators ...!12 Physical components for the transmission function (2)  Protection components  Automatic breakers  Lightning arresters  Protection relays  Metering & control components  Voltage & current transformers  Telemetering & telecontrol  Reactive power control  Capacitors  Reactances  SVCs (Static voltage compensators)  FACTS, in general7 13 Investment Nature of transmission costs Actual transmission network costs  Infrastructure costs  investment capital costs  operation & maintenance costs Costs incurred because of the existence of the network  Ohmic losses (generation costs)  Costs of redispatch that are incurred to eliminate violations of transmission constraints (generation costs)  Some of the costs of ancillary services  reactive power / operating reserves / black start capability System Operation & transmission are different activities (although sometimes they are performed by the same firm)9 17 Transmission costs (a sample, based on regulated standard costs in Spain, 2002)  Fixed costs of network facilities (M stands for “million”)  Lines & substations  400 kV 2 Circuit Duplex: 0,288 M€/km  400 kV 1 Circuit Duplex: 0,182 M€/km  220 kV 2 Circuit 0,168 M€/km  220 kV 1 Circuit 0,108 M€/km  Substations: 1.8 M€/bay 400 kV  Control center: about 4.8 M€  Operation & maintenance costs  400 kV 3.350 €/circuit/km/year  220 kV 1.940 €/circuit/km/year 18 Transmission vs. total costs (case example: Spain)  Total regulated transmission costs in 2002: 582 M€ 347 M€ for REE 235 M€ for the other transmission owners  Total electricity supply cost 12000 M€ In this case transmission costs amount to less than 5% of total electricity costs However, in some countries the percentage may reach up to 20%10 19 Determination of transmission network costs  Dilemma: Remunerate according to the actual incurred costs or trying to reflect the current marginal investment costs  Answer depends on who is really responsible for the development of the network  If the transmission firm is “active”, then the remuneration must refer to an efficient & well adapted network & economic incentives should depend on the actual contribution to quality of supply, losses & congestion costs, i.e. “performance”  If the transmission firm is “passive”,