69199 ENERGY AND MINING SECTOR BOARD DISCUSSION PAPER PAPER NO.26 JUNE 2011 Transmission Expansion for Renewable Energy Scale-Up Emerging Lessons and Recommendations Marcelino Madrigal Steven Stoft THE WORLD BANK The Energy and GROUP Mining Sector Board AUTHORS DISCLAIMERS Marcelino Madrigal is a senior energy specialist in the The findings, interpretations, and conclusions expressed World Bank’s Energy Anchor Unit of the Sustainable in this paper are entirely those of the authors and should Energy Department (SEGEN). He has previously held not be attributed in any manner to the World Bank, to positions at the Inter-American Development Bank and its affiliated organizations, or to members of its Board of the Ministry of Energy, Energy Regulatory Commission, Executive Directors or the countries they represent. The and Morelia Institute of Technology in Mexico. He holds World Bank does not guarantee the accuracy of the data a B.Sc, M.Sc, and Ph.D in Electrical Engineering with included in this publication and accepts no responsibility emphasis in Power Systems and Markets’ Operations whatsoever for any consequence of their use. and Planning. CONTACT INFORMATION Steven Stoft is the author of Power System Economics. He has consulted for PJM Interconnection and ISO To order additional copies of this discussion paper, New England and is now a member of the Market please contact the Energy Help Desk: 202-473-0652, Surveillance Committee of the California ISO. He holds energyhelpdesk@worldbank.org a Ph.D. in economics and a B.S. in engineering from the University of California at Berkeley. This paper is available online: www.worldbank.org/ energy/ The material in this work is copyrighted. 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ENERGY AND MINING SECTOR BOARD DISCUSSION PAPER PAPER NO.26 JUNE 2011 Transmission Expansion for Renewable Energy Scale-Up Emerging Lessons and Recommendations Marcelino Madrigal Steven Stoft The World Bank, Washington, DC THE WORLD BANK GROUP The Energy and Mining Sector Board Copyright © 2011 The International Bank for Reconstruction and Development/The World Bank. All rights reserved ©2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: (202) 473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. 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ConTenTS ACronyMS AnD ABBreviATionS .............................................................................................................. viii foreWorD ......................................................................................................................................................ix ACknoWleDgMenTS..................................................................................................................................... x exeCuTive SuMMAry ....................................................................................................................................xi PArT i: The neeD To ADDreSS TrAnSMiSSion iSSueS When SCAling uP reneWABle: eMerging PlAnning AnD PriCing PrACTiCeS ............................................ 1 1. inTroDuCTion ......................................................................................................................................... 3 1.1. Background .......................................................................................................................................... 3 1.1.1. The Barriers to Renewable Energy ................................................................................................ 4 1.1.2. Why Developing Transmission is a Challenge to Scaling up Renewable Energy .............................. 5 1.1.3. Other Challenges Associated with Transmission Not Covered in This Report .................................. 6 1.2. The Need for Scaling up Transmission When Scaling up Renewable Energy ......................................... 7 1.2.1. Findings from Long-Term Needs Assessments in Developed Countries ........................................... 7 1.2.2. Findings from Immediate Investment Assessments from Developing Countries ............................... 9 iii 2. TrAnSMiSSion CoST AlloCATion AnD PriCing .............................................................................. 13 2.1. Classification of Transmission Needs Triggered by Generation ...........................................................13 2.2. Interconnection Cost Allocation ..........................................................................................................14 2.2.1. Overview of Interconnection Cost Allocation Policies and Practices .............................................. 14 2.3. Network Infrastructure Pricing ............................................................................................................16 2.3.1. Overview Network Infrastructure Pricing Methodologies .............................................................. 17 2.3.2. An Example of the Impact of Transmission Cost Allocation and Pricing ........................................ 18 3. ProACTive PlAnning AnD oTher inSTiTuTionAl ArrAngeMenTS To exPAnD TrAnSMiSSion for reneWABle energy ........................................................................................... 21 3.1. Summary ............................................................................................................................................ 21 3.2. Proactive Planning Practices and New Institutional Arrangements ...................................................... 21 3.2.1. Brazil........................................................................................................................................ 22 3.2.2. The Philippines ......................................................................................................................... 24 3.2.3. Mexico ..................................................................................................................................... 26 3.2.4. The United Kingdom ................................................................................................................. 29 3.2.5. Texas ........................................................................................................................................ 31 3.2.6. Midwest ISO ............................................................................................................................. 35 3.2. New Technical Planning Options ........................................................................................................ 42 3.3.1. Basics of Transmission Planning ................................................................................................. 42 3.3.2. Overall Principles and Methodology of Traditional Transmission Planning .................................... 43 3.3.3. Overview of Tools to Assist Traditional Transmission Planning ...................................................... 45 3.3.4. New Useful Modeling Approaches for Transmission Planning with Renewable Energy................... 46 3.3.5. Risk or Trade-Off Scenario Planning .......................................................................................... 46 3.3.6. Long-Term GIS-Enabled Generation and Transmission Planning with Hourly or Sub-Hourly Resolution ........................................................................................................... 46 3.3.7. Methods for Developing Renewable Energy Zones for Planning Studies ....................................... 48 3.3.8. Open and Participative Stakeholder Process to Improve Planning Outcomes and Broad Stakeholder Process ........................................................................................................ 50 3.4. Combined Impact of Transmission Planning and Pricing on Renewable Energy Development ............ 50 PArT ii: reneWABle TrAnSMiSSion DeveloPMenT: eConoMiC PrinCiPleS .................................... 53 4. TrAnSMiSSion AnD reneWABle energy, The BASiC TrADe-off .................................................. 55 4.1. Different Types of Entities that Provide Transmission Service ............................................................... 55 4.2. Primary Objectives: The Reduction of Fossil Fuel Externalities ............................................................. 56 4.3. Interactions Between Renewable-Policy and Transmission Efficiency ................................................... 57 4.3.1. A Pigouvian Tax as a Benchmark “Subsidy� Policy ...................................................................... 57 4.3.2. The Effects of Different Renewable Subsidies on Transmission Planning........................................ 58 4.3.3. Production Subsidies ................................................................................................................. 59 4.3.4. Uniform Feed-in Tariffs .............................................................................................................. 59 4.3.5. The Standard Feed-in Tariff ....................................................................................................... 60 4.3.6. The Renewable Portfolio Standard.............................................................................................. 61 4.4. The Generation-Transmission Basic Trade-Off .................................................................................... 61 4.4.1. Viewing Transmission as a Renewable Power Source ................................................................... 62 4.4.2. Finding the Cost of Renewable Power Produced by a Transmission Line ....................................... 62 4.4.3. Using the Value, V, of Renewable Energy to Solve the Generation-Transmission Trade-Off............ 64 4.4.4. Obtaining an Estimate of the Value, V, of Renewable Energy ...................................................... 65 5. eConoMiC PrinCiPleS on TrAnSMiSSion PlAnning.................................................................... 67 5.1. The Cost-Effectiveness of Extra Transmission....................................................................................... 67 iv 5.1.1. Defining the Benefit of a Better Renewable Sources .................................................................... 67 5.2. Developing Transmission Proactively ................................................................................................... 68 5.2.1. Reactive Transmission Investment ............................................................................................... 69 5.2.2. Anticipatory Transmission Investment.......................................................................................... 69 5.2.3. Proactive Transmission Planning................................................................................................. 70 5.3. Maximize the Net Benefit of Renewable Transmission......................................................................... 71 5.3.1. The Need Planning and for Pricing of Transmission .................................................................... 72 5.3.2. A Transmission Planning Example .............................................................................................. 72 5.3.3. Note on Planning for Uncertainty............................................................................................... 76 5.3.4. Achieving Quantity Goals and Price Targets ............................................................................... 76 5.4. A Note on Variable Output, Congestion, Reliability, and Cost ...........................................................77 6. eConoMiC PrinCiPleS of TrAnSMiSSion PriCing ......................................................................... 79 6.1. Observations on Traditional Principles of Transmission Cost Allocation and Pricing ............................ 79 6.1.1. Charging Generation vs. Charging Load ................................................................................... 79 6.1.2. Charging on a per-Megawatt or per-Megawatt-Hour Basis ......................................................... 79 6.1.3. Flow-Based Methods vs. Postage Stamp Methods in the Context of Renewable Energy ................. 80 6.2. Transmission Tariffs Mimicking Competitive Pricing ............................................................................. 80 6.2.1. Fairness to Electricity Consumers ............................................................................................... 81 6.2.2. Increasing the Efficiency of Renewable Generation Investment..................................................... 81 6.2.3. Why Expansion-Pricing is Approximately Long-Term Congestion Pricing ....................................... 83 6.2.4. Why Expansion-Pricing is Better than Congestion Pricing ............................................................. 84 6.2.5. Charging Full Price for Private Lines ........................................................................................... 84 6.3. Broadly Allocating Uncovered Transmission Costs .............................................................................. 85 6.4. Summary of a Framework for Proactive Provision of Renewable Transmission .................................... 86 APPenDix A: inveSTMenT ASSeSSMenT By JuriSDiCTion ................................................................... 87 United States .............................................................................................................................................. 87 Midwest ISO ............................................................................................................................................... 87 Texas—Competitive Renewable Energy Zones ............................................................................................ 88 United Kingdom ......................................................................................................................................... 88 European Union ......................................................................................................................................... 92 Mexico ........................................................................................................................................................ 94 Panama ...................................................................................................................................................... 96 Egypt .......................................................................................................................................................... 97 Brazil ........................................................................................................................................................ 100 The Philippines ......................................................................................................................................... 101 APPenDix B: revieW of ConneCTion CoST AlloCATion AnD neTWork infrASTruCTure PriCing MeThoDologieS ............................................................ 105 B.1 Cost Allocation ................................................................................................................................... 105 Spain ................................................................................................................................................ 105 Germany .......................................................................................................................................... 105 Denmark........................................................................................................................................... 105 United Kingdom ................................................................................................................................ 105 Texas................................................................................................................................................. 105 Mexico .............................................................................................................................................. 106 Panama ............................................................................................................................................ 106 Brazil ................................................................................................................................................ 106 The Philippines .................................................................................................................................. 106 Egypt ................................................................................................................................................ 107 B.2 Review of Network Infrastructure Pricing Methodologies .................................................................... 107 Spain ................................................................................................................................................ 108 Germany .......................................................................................................................................... 108 Denmark........................................................................................................................................... 108 United Kingdom ................................................................................................................................ 108 Texas................................................................................................................................................. 108 Mexico .............................................................................................................................................. 109 v Panama ............................................................................................................................................ 109 The Philippines .................................................................................................................................. 109 Brazil ................................................................................................................................................ 109 Egypt ................................................................................................................................................ 109 APPenDix C: ToPiCS on TrAnSMiSSion PlAnning: reliABiliTy CriTeriA AnD neW ToolS ..... 111 BiBliogrAPhy ........................................................................................................................................... 117 BoxeS Box 3.1: The Overall Transmission Planning Process........................................................................................ 45 Box 3.2: Some GIS-Enabled Transmission Expansion Models with Emphasis on Renewable Generation ................ 48 Box 3.3: Site Selection Methodology Midwest ISO Transmission Planning Study .................................................. 51 Box 4.1: Transmission Cost and Choice of Greenhouse Gas Mitigation Options ................................................ 56 Box 4.2: Subsidies and Transmission Planning ................................................................................................ 59 Box 4.3: An Important Note on Measuring the Cost of Transmission ................................................................. 62 Box 5.1: Example of the Basic Trade-Off: Why Building More Transmission Can Easily Save Money ..................... 68 Box 6.1: Summary Principles on Transmission Expansion and Pricing for Renewable Energy ................................. 86 Box C.1: PRS-Netplan Model for Designing Shared Networks for Multiple Projects in Renewable Zones .............. 116 figureS Figure 1.1: Increase in Global Renewable Energy Generation and Wind and Solar PV Installed Capacity, 2000–08................................................................................... 3 Figure 2.1: Transmission Classification ....................................................................................................... 13 Figure 2.2: Allocation and Pricing of Transmission Costs .............................................................................. 18 Figure 2.3: Transmission Infrastructure—Connecting a Wind Farm to an Existing Transmission Network ............ 19 Figure 2.4: LCOE Scenarios ..................................................................................................................... 20 Figure 3.1: Location of Bagasse Cogeneration and SH Plants (left), Renewable Candidate Projects in Mato Grosso do Sul (right) ................................................................................................... 22 Figure 3.2: Brazil’s Competitive Process to Develop Shared Transmission Networks for Renewable ................... 23 Figure 3.3: Reactive vs. Anticipatory Transmission Plan to Connect Renewable Energy Sites ............................. 26 Figure 3.4: Wind Power Capacity in Operation in La Ventosa Region ............................................................ 27 Figure 3.5: Transmission Planning Open Season Process—Mexico ................................................................ 28 Figure 3.6: Transmission Infrastructure to Connect RE as Result of the Open Season ....................................... 29 Figure 3.7: CREZ Process, Texas ................................................................................................................ 33 Figure 3.8: Potential Wind Resources, Texas................................................................................................ 35 Figure 3.9: Texas CREZ Map .................................................................................................................... 36 Figure 3.10: Balancing Authority Alignment .................................................................................................. 37 Figure 3.11: RPS and Renewable Goals for Individual States .......................................................................... 38 Figure 3.12: RPS or Renewable Goals for Respective States within Midwest ISO ............................................... 38 Figure 3.13: Total Generation and Transmission Cost for Each Option, Midwest ISO ........................................ 39 Figure 3.14: Transmission Cost Based on Three Expansion Scenarios, Midwest ISO (US$ millions) ..................... 39 Figure 3.15: The Value-Based Planning Approach Used by Midwest ISO ......................................................... 40 Figure 3.16: Midwest ISO Transmission Planning Process ............................................................................... 42 Figure 3.17: Cost and Reliability Trade-Off .................................................................................................. 43 Figure 3.18: Building Blocks of a Basic Transmission Planning Methodology .................................................... 44 Figure 3.19: Impact of Transmission Planning and Cost Allocation on Renewable Energy Penetration ................. 52 Figure 5.1: Anticipatory Transmission Planning ............................................................................................ 69 Figure 5.2: Comparing Three Transmission Plans ........................................................................................ 73 Figure 6.1: Why Charge for Some Transmission? ........................................................................................ 82 Figure A.1: Connecting Wind Farm to Existing Transmission Network............................................................. 87 Figure A.2: Native Voltage Transmission Overlay......................................................................................... 88 Figure A.3: Transmission Investments, 2007–15 (i), and Cumulative Installed Capacity (MW), 2007–14 (ii) ....... 89 Figure A.4: Competitive Renewable Energy Zones (CREZs) ........................................................................... 90 vi Figure A.5: Renewable Electricity Generation in the United Kingdom ............................................................. 92 Figure A.6: Renewable Energy Share Targets of the European Countries ........................................................ 93 Figure A.7: New Installed Capacity per Year, 1995–2010 (MW) ................................................................... 93 Figure A.8: Grid Model Mapping Used by Energynautics Grid Study, Status 2010 .......................................... 94 Figure A.9: Wind Speeds in La Ventosa Region Located in the Southeastern State of Oaxaca ........................... 95 Figure A.10: Existing Transmission Network and New Transmission Needs in La Ventosa Region ......................... 96 Figure A.11: Mini-Hydro Sites and Existing and Proposed Substations. Panama Chiriquí Region ......................... 97 Figure A.12: BOO Transmission Project in Egypt ........................................................................................... 99 Figure A.13: Transmission Infrastructure for Renewable Project in Egypt ......................................................... 100 Figure A.14: Some of the Renewable Candidate Projects in Mato Grosso do Sul ............................................ 101 Figure A.15: Philippine Bulk Transmission System and Map Showing All Renewable Candidate Projects and All Transmission System Substations in Luzon ..................................................................... 102 Figure C.1: Transmission Planning in Colombia: Methodology Building Blocks ............................................. 113 Figure C.2: High-Level Planning Process Flow Diagram .............................................................................. 114 TABleS Table 1.1: Summary of Long-Term Investment Needs Assessments for the European Union, United Kingdom, and United States ................................................................................................. 9 Table 1.2: Immediate Investment Needs—Brazil, Egypt, Mexico, Panama, and the Philippines ............................. 11 Table 2.1: Connection Cost Allocation Policy ................................................................................................. 15 Table 2.2: Connection Cost Allocation Policy ................................................................................................. 16 Table 2.3: Connection Cost and UoS Pricing Summary by Country/Region........................................................ 19 Table 2.4: Transmission and Usage Cost Options ........................................................................................... 20 Table 3.1: Summary of Results—NPV of Total Costs and IRR ............................................................................ 25 Table 3.2: Round One Projects—U.K. Transitional Procurement........................................................................ 30 Table 3.3: Round Two Projects—U.K. Transitional Procurement ......................................................................... 30 Table 3.4: Texas Transmission Expansion Projections ....................................................................................... 32 Table 3.5: Megawatt Tiers for ERCOT CREZ Transmission Optimization Study.................................................... 36 Table 3.6: Risk-Based and Scenario Planning Approaches in Transmission and Renewable Energy Planning .......... 47 Table 4.1: Cost and Value of Solar PV-Generated Energy ................................................................................ 64 Table 4.2: Estimating the Value of Renewable Energy ...................................................................................... 66 Table 5.1: Transmission to Remote Location 1 (QR1 = Q) ................................................................................ 74 Table 5.2: Plan 2: Transmission to Remote Location 2 ..................................................................................... 75 Table 5.3: Three-Plan Example, Q = 200 MW .............................................................................................. 76 Table 6.1: Auctioning Access to the Line in Figure 6.1, with a FIT Price of US$150 ............................................ 82 Table A.1: Summary of Estimated Costs for Transmission Facilities .................................................................... 88 Table A.2: Estimated Investment Needs from the CREZ Study ........................................................................... 91 Table A.3: Approved Capital Expenditures for the Three U.K. Transmission Companies ....................................... 92 Table A.4: Installed Capacity in Egypt as of 2009 ........................................................................................... 98 Table A.5: Wind and Solar Expansion Plan (MW)............................................................................................ 98 Table A.6: Potential Renewable Generation Capacity per Grid (MW) .............................................................. 101 Table A.7: Total Capital Expenditure Approved for the Transmission Company, 2005–10 .................................. 103 Table B.1: Basic Formulas for Various UoS Charge Methodologies ................................................................. 107 Table B.2: Flat-Rate UoS, Mexico ................................................................................................................ 109 Table C.1: Various Models That Assist with Transmission Planning ................................................................... 111 Table C.2: Some Widely Used Reliability Criteria........................................................................................... 115 vii ACronyMS AnD ABBreviATionS ISO Independent system operator AC Alternating current km Kilometer ANEEL Agência Nacional de Energia Elétrica kV Kilovolt APC Adjusted Production Cost LCOE Levelized cost of electricity BBS Best break-even site MVA Megavolt-ampere BOO Build, own, operate MVP Multi-Value Projects CCGT Combined cycle gas turbine MW Megawatt CCN Certificate of convenience and necessity MWh Megawatt-hour CCS Carbon capture and storage NBT Net benefit CFE Comisión Federal de Electricidad (Mexico) NERC North American Electric Reliability CO2 Carbon dioxide Corporation CPDST Competitive Process to Develop Shared NGET National Grid Electricity Transmission Transmission Networks NPV Net present value CRE Energy Regulatory Commission (Mexico) NREA New and Renewable Energy Authority Comisión Reguladora de Energía NREB National Renewable Energy Board CREZ Competitive renewable energy zone NREL National Renewable Energy Laboratory CSP Concentrated Solar Power OFGEM Office of the Gas and Electricity Markets viii DC Direct current OFTO Offshore transmission owner DOE Department of Energy PAC Planning Advisory Committee DSO Distribution system operator PPA Power purchase agreement EETC Egyptian Electricity Transmission Company PRM Planning reserve margin EIA Energy Information Administration (U.S.) PUC Public Utility Commission of Texas EPE Empresa de Pesquisa Energética (Brazil) PV Photovoltaic(s) ERC Energy Regulatory Commission RGOS Regional Generation Outlet Study (Philippines) RIIO Revenue = incentives + innovation + ERCOT Electric Reliability Council of Texas outputs (a model) ESMAP Energy Sector Management Assistance RO Renewable obligation Program RPS Renewable Portfolio Standard FERC Federal Energy Regulatory Commission RTO Regional transmission organization FIT Feed-in tariff SH Small hydropower GHG Greenhouse gas SHETL Scottish Hydro-Electric Transmission Limited GIQ Generation Interconnection Queue SPT Scottish Power Transmission Limited GIS Geographic information system TSC Transmission service company GW Gigawatt TSO Transmission system operator GWh Gigawatt-hour TWh Terawatt-hour HVDC High-voltage direct current UoS Use of system IEA International Energy Agency WinDS Wind Development System (NREL, United IRR Internal rate of return States) foreWorD In their efforts to move toward a lower-carbon power sector, developed and developing countries are facing the need to considerably expand their transmission networks to serve the needs of renewable energy. The most cost effective renewable energy resources needed to decarbonize the electricity supply are usually located far from the existing transmission networks and consumption centers. Thus, transmission networks need be expanded and upgraded in order to reliably and cost-effectively connect and transport renewable energy supplies. Policy makers need be aware that renewable energy scale-up goes hand in hand with the expansion of transmission networks and that proper planning and regulatory actions are therefore necessary. ix This report reviews emerging approaches being undertaken by transmission utilities and regulators to cope with the challenge of expanding transmission for renewable energy scale-up. The challenge becomes surmountable if the conducive planning and regulatory approaches are implemented. Proactively planning and regulating transmission networks have been identified as key to ensure that transmission networks are expanded efficiently and effectively. Linking planning with clear and stable cost recovery regulations can also help bringing the private sector to complement the considerable investment needs in transmission. Based on the evolving experience and on established theory and practice, the report also proposes some principles to develop country-specific approaches to planning and regulation of transmission networks. We hope transmission utilities and regulators will find this report useful in their continued efforts to support a transition to lower-carbon power networks. Lucio Monari Manager, Energy Anchor Unit (SEGEN) Sustainable Energy Department ACknoWleDgMenTS The report is a result of a team of World Bank staff and consultants led by Marcelino Madrigal (Senior Energy Specialist) of the Sustainable Energy Department Energy Anchor unit (SEGEN). The main authors of the report are Marcelino Madrigal and Steven Stoft (consultant). Other important contributors to the report are Imran Ali (consultant), Jay JangHo Park (consultant), Ashaya Basnyat, and Jens Wirth (SEGEN), and Digaunto Chatterjee (Midwest ISO). The report benefited as well from an inception paper commissioned by the World Bank to E3 Energy Environment Economic Inc.’s consultant Ren Orans. Thanks also to Vonica Ann Burroughs and Katerina Baxevanis (SEGEN) who provided operational support to this project. Rebecca Kary provided editorial support. x The final report greatly benefited from the insightful comments and suggestions of World Bank peer reviewers Beatriz Arizu de Jablonski, Kwawu Mensan Gaba, and Reynold Duncan. Special thanks to other World Bank staff who provided important revisions and suggestions, including Pierre Audinet, Victor B. Loksha, and Silvia Martinez Romero of the Energy Sector Management Assistance Program (ESMAP), and Daniel Kammen and Gabriela Elizondo Azuela of the World Bank. This research benefited greatly from knowledge dissemination events organized by the World Bank over the past two years. Special thanks to Digaunto Chatterjee (Midwest ISO), Kevin Porter (Exeter Associates, Inc. USA), Jose Carlos de Miranda Farias (Energy Planning Agency, Brazil), Francisco Barnes de Castro (Energy Regulatory Commission, Mexico), and Luiz Augusto Barroso (PSR-Inc., Brazil). We are grateful to Lucio Monari, sector manger of SEGEN, who provided valuable inputs to the report and was responsible for the overall guidance and supervision of this knowledge product. Financial support for the research and production of this report was provided by ESMAP . exeCuTive SuMMAry Scaling up renewable energy, such as wind and solar, goes hand in hand with the expansion of transmission infrastructure. The richest solar and wind renewable energy sites are often located far away from consumption centers or existing transmission networks. Unlike fossil fuel–based power sources, renewable energy sources are greatly site-constrained and, for this reason, transmission networks need to be expanded to reach the renewable energy sites. Delivering transmission is a challenge, given the dispersion and granularity of renewable sources. Tapping a few hundred megawatts of renewable energy sources, such as wind and solar power, will likely require delivering transmission to several sites. Furthermore, transmission is also required to smooth out the variability of new renewable sources in a large geographical area. For xi these reasons, countries’ renewable energy scale-up efforts are being challenged by the need for timely and efficient delivery of transmission networks. Investment needs for transmission expansion to accommodate renewable energy are significant and growing in both developed and developing countries, and they are challenging existing planning and cost-recovery practices. Although the cost of transmission continues to be a relatively small percentage of overall electricity costs, the investments in transmission required to scale up renewable energy are rapidly growing. In some subregions in the United States and countries in Europe, the transmission investment needs already approved by regulators or forecast by transmission companies double or quadruple recent investment trends. Developing countries face a similar situation. Incipient renewable energy scale-up efforts are being challenged by the need to expand transmission to remote sites. Investment needs in Brazil, Egypt, Mexico, and other countries have triggered new approaches to plan and recoup the cost of transmission associated with renewable energy. For instance, in some specific regions in Brazil, the investment needs for renewable energy surpass the asset value of the distribution utilities closest to the renewable energy sites, which has triggered the establishment of a new model to award private transmission-owning concessions to serve renewable energy sites. In Mexico, the need to accommodate various wind power developments led to a new planning process to determine the cost-sharing of the transmission facilities between renewable energy providers and the utility and to a revision of the Connection cost and network cost, along with an network wheeling charges paid by renewable energy appropriate maintenance and return on investment providers. allowance, must be recouped through tariffs to ensure sustainability of transmission utilities. Chapter 2 The objective of this report is to present emerging provides an overview of different alternatives to allocate lessons and recommendations on approaches connection and network costs, an international overview to efficiently and effectively expand transmission of practices, and the qualitative and quantitative networks for renewable energy scale-up. The impacts—through an example—on renewable energy of report focuses on the planning and regulatory different cost allocation policies. Regarding connection aspects of transmission expansion that are relevant costs, Chapter 2 describes how policies vary from to transmission utilities and electricity regulators. options that place the highest burden on the renewable Chapter 1 of the report describes the special features energy provider to options that place little or no of renewable energy scale-up that make transmission burden. In the first category is the deep cost allocation development a new challenge from the technical and policy where renewable energy providers bear the the regulatory perspective. The chapter describes in cost of all enabler facilities (substations), the extension detail the above-mentioned increase in transmission to the grid, and reinforcements that are necessary to investment needs in both developed and developing integrate the project into the transmission network. xii countries as a consequence of the need to integrate In the second category is the shallow cost allocation more renewable energy into their systems. The chapter policies whereby power generators are responsible only describes long- and short-term assessments performed for the cost of the enabling facilities, and the cost of to determine transmission investment needs to achieve system extension and reinforcements is passed on to certain renewable energy targets or to serve the consumers through network prices. Although countries immediate needs of specific renewable energy projects, that have experienced more growth in renewable energy respectively. Efficiently and effectively developing have adopted shallower cost allocation procedures, transmission for renewable energy requires a new there is no clear evidence that generators should not vision for the long-term planning and regulation of bear any connection costs at all. Regarding network transmission services. For this reason, this report focuses costs, there is a trend toward allocating most of these on such aspects and does not deal with other short-term costs to consumers and using simpler methodologies operational issues that arise in operating transmission that do not rely on engineering-based methodologies systems with large amounts of renewable energy. While based on “use of system� estimations. Postage stamp- also important, environmental, social, and financing like methodologies are seen as effective and efficient aspects of transmission are not within the scope of this enough to ensure that long-term network costs are report. The main audience of this report is utilities that efficiently recovered, which is the main obstacle provide transmission services and electricity regulatory to tackle in systems with high-demand growth for commissions. At the same time, this summary highlights transmission services triggered by electricity demand or important messages for renewable energy policy renewable energy growth. makers. Although adjusting cost-recovery regulations To circumvent the impact of the cost of can have positive short-term impacts, improving transmission on renewable energy producers, planning practices is a necessary condition electricity regulators are adjusting transmission for ensuring a sustained and cost-effective cost-recovery practices. Existing regulations on development of the required transmission transmission broadly categorize transmission costs investment needs. Planning transmission for associated with generation projects as connection renewable energy based on responding to individual and network costs. Connection costs refer to the interconnection requests is not well suited for transmission investments that are required for the renewable energy scale-up for different reasons. First, sole purpose of connecting an individual generator’s transmission solutions to individually interconnect premises to the transmission network. Network costs dispersed resources can lead to suboptimal, more refer to all other investments necessary to reinforce the expensive solutions. Second, an interconnection entire network, so that it can adequately and reliably request planning-driven process will significantly transport all generation to the consumption center. “clog� transmission providers’ processes and scarce human resources, leading to delays in the process to approach has been used to develop high-voltage scale up renewable energy. Implementing anticipatory transmission networks, but has now been extended to planning practices is emerging as the best way to the subtransmission segment where investment needs to organize the planning process. Anticipatory planning interconnect renewable energy have been considerable. will design transmission solutions for sets of projects In the case of Texas, the approach has been used to in geographical areas, thereby reducing costs and develop the transmission project associated with the improving the efficiency of the process. Anticipatory renewable energy zones procedure. In the case of planning has been used in a number of jurisdictions, the Midwest ISO, a similar approach has been used including Brazil, Mexico, the United Kingdom, and to plan and cost-allocate the regional transmission the United States, as described in the first two sections needed to serve the needs of various states’ renewable of Chapter 3. To ensure that the most cost-effective energy targets. Finally, in the case of the United solution, combined transmission and generation cost, Kingdom, the approach is being used to develop the is exploited first to achieve renewable energy goals rapidly growing transmission needs for offshore wind efficiently, proactive planning—a step forward to development. anticipatory planning—is required. This is the case of recent efforts in the Midwest ISO and Texas regions New planning methodologies and tools can in the United States, where planning for transmission greatly assist transitioning from reactive to networks considers the trade-off between spending anticipatory or proactive planning approaches xiii more in transmission and accessing higher-quality to expand transmission. No single tool has been resource sites. While planning for transmission does able to solve all transmission planning problems, not always affect decisions in generation, prioritizing but new methodologies and tools have emerged, transmission investments through planning is a way which are increasingly helping transmission utilities to to influence outcomes that lead to the lowest overall implement proactive transmission planning processes generation and transmission costs. The first three in relation to renewable energy scale-up efforts. These sections of Chapter 3 describe new institutional tools are described in the last section of Chapter 3. approaches for planning that have been implemented Scenario and robust planning methodologies have in a number of jurisdictions to expand transmission been used before for generation and to some extent services for renewable energy. for transmission planning, and they are reemerging as a powerful tool in transmission planning for Anticipatory and proactive planning approaches renewable energy. Long-term transmission planning accompanied by simple yet efficient cost-allocation is subject to a number of uncertainties, such as rules are facilitating the implementation of technology costs, choice of regulations, carbon new regulatory models to develop transmission prices, and development in the generation market— with help from the private sector. Organizing including renewable generation—outside the control the transmission planning process is facilitating the of the transmission planner. To incorporate such development of new regulatory models to bring private uncertainties and understand the associated risk, sector participation to the transmission sector. This is scenario or robust planning methodologies are especially important, given the increased investment proving extremely useful when implementing proactive needs triggered by renewable energy and the need transmission planning for renewable energy. These to speed up and complement efforts by incumbent methodologies are useful for understanding the long- transmission utility or utilities. A public sector–led term implications of policy choices, such as the cost proactive planning effort followed by competition to implications of meeting renewable energy targets finance, build, and maintain the requisite transmission from local or regional renewable energy sources, and projects is emerging in different countries. Presented the cost and environmental implications of different in Chapter 3, Brazil, Texas, the Midwest ISO, and transmission technologies, as well as to identify priority the United Kingdom are examples of such new and sequencing of projects to achieve renewable approaches. In these countries, a proactive planning energy goals. Chapter 3 describes the application of process identifies the transmission investments, and scenario planning utilized in regional transmission the cost-allocation rules are such that competing planning efforts highlighting the case of the Midwest transmission providers have a regulated and assured ISO. Scenario or robust planning methodologies do return on the investment. In the case of Brazil, the not necessarily require new planning tools; these methodologies can be implemented with the existing Based on the emerging experience in transmission tools for transmission planning. development for renewable energy described above and on some of the established theory on transmission Helping implement anticipatory planning to determine planning and pricing, the second part of this report transmission expansion solutions to dispersed renewable focuses on proposed economic principles that should energy sites can be assisted greatly by new tools help guide designing the specific implementation of that have the capability to automatically generate transmission expansion and pricing regulations for transmission expansion options that exploit the renewable energy. The guiding objective of these geometrical location of sites to define minimum-cost principles is that renewable energy policy goals should transmission options that can serve collectively—and be achieved as efficiently and effectively as possible. not individually—all the sites. This approach has been Efficiency means achieving policy objectives—such as implemented in Brazil’s biomass cogeneration, and reducing emissions—at lowest cost, and effectiveness its application has also been shown to be useful for means attaining the final goals on time (such as a analyzing alternatives in the Philippines. Such new tools certain level of renewable generation penetration in are often able to process locational information on a given year). Chapter 4 describes how the cost of existing networks and potential renewable energy sites transmission could change the order of the lowest-cost based on a geographic information system (GIS). generation options to achieve certain objectives, such xiv as reducing emissions. It also describes the interactions Tools that are used to plan transmission, while at between energy support mechanisms, such as feed-in the same time optimize the amount of renewable tariffs and renewable portfolio standards mechanisms energy source that is tapped, are increasingly useful and transmission planning. We use the concept of for proactive renewable energy planning. Such types a Pigouvian tax—a single price on carbon—as an of tools are increasingly useful to determine longer- efficient benchmark to determine how transmission term transmission investment needs to achieve certain planning should be approached in the presence of renewable energy targets or to determine proxy different subsidy levels for different technologies, solutions to the problem of minimizing renewable which is a frequent situation in current renewable generation plus transmission costs. New tools in this energy support policies. Making appropriate trade- arena are increasingly being developed and used in offs between transmission and renewable generation the United States to determine long-term transmission cost should ideally be handled if a value of renewable needs to achieve renewable energy targets at the energy is determined by policy makers. Options to national or regional levels. Tools to assist proactive determine the value of renewable energy include planning require large amounts of data, especially valuing externalities or other benefits of renewable on the projected output of renewable generation, energy briefly described in Chapter 4. such as solar and wind power output projects that ideally must be provided with an hourly resolution to Recognizing that policy goals, sector structures, capture the complementarities of different variable existing regulations, and capabilities to implement resources across the transmission network better. new tools vary across countries, we offer some Successfully applying new approaches and tools general principles to help guide the design of requires a certain level of technical capacity that transmission planning and pricing regulations may not be available to all utilities that provide aiming at effectively and efficiently developing transmission services and other entities involved transmission for renewable energy. The principles, in the planning process. For this reason, in presented in detail in Chapter 5 and Chapter 6, are not some circumstances, it may be equally or more policy proposals per se, nor do they provide a detailed important to increase technical skills as new roadmap for implementation. Taking specific country approaches and tools are adopted. conditions and goals, these principles should help guide on designing specific implementations of transmission Maintaining overall efficiency of renewable planning and regulation options aiming at ensuring energy support policies requires that transmission renewable energy policy outcomes are as close as planners and regulators make trade-offs between possible to the ideal efficient benchmark described the cost of transmission and, ideally, a value of in Chapter 4. The principles are summarized in the renewable energy determined by policy makers. following box. Principle 1: extra transmission is often worth the cost. Renewable sources tend to require significant transmission expansion, because output—and cost—of these generators is particularly sensitive to their location. The required investment in transmission expansion is often worth the cost given that the incremental benefits of additional renewable generation frequently offset the incremental costs of transmission. This principle implies that transmission has been planned proactively, and the appropriate trade-offs and risks of Principles 2 and 3 below have been analyzed. Principle 2: Develop transmission proactively. Expanding transmission can be approached in two opposite ways: reactive and proactive approaches. In the reactive approach, the transmission provider reacts to committed renewable energy projects, and in the proactive approach, the provider builds transmission with the intention of guiding the efficient growth of the power system. Under reactive transmission development, if renewable generation providers have limited cost responsibility, the decision process is likely to produce inefficient results and cause significant delays. Proactive planning is a better policy. Proactive planning does not mean perfect planning, but the outcome should be much more efficient than the reactive approach where the transmission needs are planned based on a large number of uncoordinated and self-interested generators. Proactive planning will result in more timely provision of transmission and building transmission to higher- quality resources, balancing the trade-off. An intermediate step is to perform anticipatory planning where transmission does not guide generation investment or intend to reach the best resources, but rather attempts to build lines in minimum cost areas where generators will be located. Principle 3: Maximize the net benefit of renewable transmission. When transmission is built proactively, xv the transmission provider must strategize the network expansion; therefore, planning criteria guidance is needed. The first component of Principle 3 is to build transmission lines as if the planner had control over both the transmission and generation investment. This means maximizing the joint net benefit of transmission and generation. Even though the planner will not have direct control over generation, he can influence it through building and pricing transmission lines. Principle 4: Transmission tariffs for generation should use efficient pricing. Building the right transmission is not sufficient; appropriate transmission pricing is also needed. First, it is needed to send the right locational signals to generators. Second, it is needed to capture some locational rents—excess profits—for consumers. When it comes to renewable energy, the locational signal intends to help achieve, through pricing, that the best combined transmission and renewable generation resources are developed. The suggested renewable generation transmission prices are not meant to and will not recover the full cost of transmission, so Principle 5 explains how to allocate the part of transmission costs not covered by transmission pricing. Principle 5: Broadly allocate uncovered transmission costs. Transmission companies should recoup all efficient costs to ensure their sustainability. Any shortfall from allocation to generation should be compensated by a tariff that is fair and causes as little distortion to electricity generation and use as possible. Since the benefit of renewable energy does not come from the energy itself, but rather from the externalities it reduces, there is no rational way to charge those who use renewable energy for benefits that are not associated with it. Consequently, the additional transmission charges, beyond the pricing described in Principle 4, should be applied as broadly as possible. PArT i The neeD To ADDreSS TrAnSMiSSion iSSueS When SCAling uP reneWABle: eMerging PlAnning AnD PriCing PrACTiCeS 1. inTroDuCTion include (a) which rules should be more adequate for the allocation of transmission cost to renewable energy; The report is structured in two Parts. Part I focuses (b) which principles should be followed to understand on describing why providing transmission services the implications of transmission cost of achieving the for renewable energy represents a new challenge, as policy goals being pursued with the introduction of well as reviewing some of the approaches different renewable energy; and (c) how transmission expansion countries are using to face the challenge. Chapter 1 should be addressed to cost-effectively and efficiently describes some of the investment needs identified in help meet the goals of renewable energy policy. both developed and developing countries in the context of their scale-up efforts. Chapters 2 and 3 review 1.1. Background emerging responses from governments and regulators with regard to transmission cost allocation and pricing Renewable energy technologies, such as wind and and transmission planning for renewable energy. solar power, are becoming an increasingly attractive Planning aspects include institutional arrangements, complement to existing energy supplies, because of methodological aspects, and tools. climate change and energy diversification concerns. From 2004 to 2009, global renewable energy capacity Based on the emerging practices reviewed in Part I grew from 10 percent to 60 percent annually. In 2009, and with help from some of the established theory on 38 GW of additional wind power capacity was added 3 transmission pricing and planning, Part II of the report globally, a 41 percent increase from 2008, bringing focuses on analyzing the economic principles and global wind power to 159 GW. Additionally, solar providing recommendations on transmission expansion photovoltaics (PV) continues to be the fastest-growing and pricing for renewable energy. Chapter 4 describes power generation technology in the world, adding 7 a basic trade-off between transmission and renewable GW capacity to the grid and increasing the existing total generation that is used throughout the analysis in Part by 53 percent to approximately 21 GW globally. As seen II. Chapter 4 also describes the economic interactions in Figure 1.1, wind and solar PV are the fastest-growing between renewables support policies and transmission technologies, considering that the annual growth policy. The concepts introduced in Chapter 4 are rates for hydropower, biomass power and heat, and used to analyze the recommended principles to guide geothermal power are at 3–6 percent (REN21 2010). transmission expansion and pricing, which are described in Chapters 5 and 6, respectively. The principles Clearly, governments increased their efforts to scale are intended to help decision making on important up renewable energy. By early 2010, more than 100 issues that frequently arise in the context of delivering countries had developed policy targets or promotion transmission services for renewable energy. These issues policies, or both, related to renewable energy, figure 1.1: increase in global renewable energy generation and Wind and Solar Pv installed Capacity, 2000–08 5,000 180 160 4,000 140 120 3,000 100 TWh 80 2,000 60 1,000 40 20 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Tide, wave and ocean Geothermal Solar CSP GW Wind Solar PV Solar PV Wind Bioenergy for power Hydro Source: IEA 2011 and the authors. compared to 55 countries in early 2005 (REN21 2010). of transmission services, are becoming a larger High and volatile oil prices, the need to diversify energy impediment to achieving ambitious renewable energy services, technology development and employment targets. This report addresses the transmission barrier to generation, and the need to decisively address the renewable energy. climate challenge are driving the deployment of renewable energy in developed and developing 1.1.1. The Barriers to Renewable Energy countries. While declining technology costs for wind and solar power have helped to increase their share The barriers to the deployment of renewable energy in the global energy supply mix, the most considerable have been largely documented, especially concerning increases are linked to strong and decisive government the additional cost issue.1 Empirical evidence and support through various incentive mechanisms. analytical work describe the strengths and weaknesses of different policies and financing mechanisms— The objectives of increasing renewable energy carbon pricing, feed-in tariffs, cap-and-trade, or technologies in developing countries include not renewable energy certificates—used to address such only the reduction of emissions, but also diversifying barriers. In order to understand better other barriers to energy supplies and reducing price volatility. Aiming renewable energy, which have received less attention, at these objectives, several developing countries have it is useful to look at renewable energy from the 4 established different renewable energy goals. For perspective of a private renewable energy developer. A instance, China is pursuing integration of 20 GW of developer seeks a competitive return on its investment solar power generation by 2020. Meanwhile, Thailand commensurate with the risk. The critical aspects to a aims to achieve a 20 percent share of power generation successful renewable energy project from a developer’s from renewable sources by 2022; Egypt aims for 20 perspective are as follows: percent of electricity consumption from renewables by 2020; Kenya is planning to install 4 GW of geothermal • A site that is well suited to the renewable technology. capacity by 2030; the Mexican congress approved For example, a good wind energy site should have the National Energy Strategy in 2010, which includes persistently high wind speed and be located near a targeted 35 percent share of renewable energy in the grid or load centers. Unfortunately, more often power generation by 2024; and the Turkish government than not, good resource sites that are available tend set its target to a 30 percent share of renewable energy to be located in remote areas. Obtaining rights generation of the total by 2023. to exploit the site will depend on the concession process and related social and environmental Achieving renewable energy goal requires introducing permits. Since the transaction costs associated with different policies and regulations to address the existing the above permitting are generally high, it would be barrier of renewable energy. These barriers include, desirable for a developer to keep such transaction among others, the following: (a) addressing the higher- costs to a minimum. cost disadvantage of renewable energy by introducing • A ready buyer willing to pay a reasonable price for subsidies to renewable energy, internalizing the negative renewable energy, often higher than conventional impacts of fossil fuel options, or reducing their subsidies energy. This buyer is likely a vertically integrated when possible; (b) creating a level playing field for utility, a distribution company, or an individual renewable generation by reducing transaction costs consumer. related to land and resource concession processes; • A long-term revenue stream to cover expenses and (c) providing timely and efficient transmission and provide a reasonable return on investment. services. These barriers, discussed in more detail in the The source of this revenue stream could be a subsequent section, are being addressed in different long-term power purchase agreement (PPA) or an ways. While there is considerable theoretical and equally stable revenue source determined by a practical experience on addressing the additional cost specific regulation, which usually entails government issue, it is becoming more evident that other barriers, support. Because of renewable technology’s variable such as the lack of a timely and efficient provision output (for example, wind or solar), a stream with a 1 See, for instance, World Bank 2010a and Beck and Martinot 2004. capacity-like payment that ensures full cost recovery power sources, selecting a site to exploit certain and return would be desirable.2 renewable energy resources has few or no degrees • A transmission connection that links the project of freedom. While the decision to locate a fossil fuel to the grid. Absent connection, projects will never power plant can involve pondering two sites, given materialize. Even if a connection can be made, their differences in fuel or electricity transmission costs, high costs or delays can either modify the scale and locating a wind or solar power cannot make such scope of the project or prevent its development. trade-offs without structurally affecting the quality of the Hence, a connection process that results in a exploitable resource and its economics. In other words, reasonably fast and low-cost connection is an renewable energy technologies, such as wind and solar essential feature for a developer. power, are site-constrained. Transmission needs to get • A transmission service tariff that is cost-effective. to the source and not the other way around. Independent power generators pay for the use of the transmission network in various ways. Since Besides such location constraints, the dispersion and many renewable energy technologies (such as granularity of renewable sources, such as wind or solar, wind, solar, and hydropower without storage) adds to the transmission challenge. Large hydropower have variable output, a tariff based on peak or may have scales (for example, 1,000 MW) whose nameplate maximum output, megawatts (MW), economics can support the transmission investments could result in a prohibitive cost per megawatt- (for example, with US$100 million) required to deliver 5 hour (MWh). Alternatively, if tariffs are determined their energy production. Harnessing the same amount based on distance measures, renewable generation of energy from wind or solar power will likely require projects far from their off-takers could also face high the development of several dispersed sites, all of transmission costs. A cost-effective tariff is therefore which in turn will require transmission infrastructure. To a desirable feature. In addition to transmission understand the granularity issue, consider, for example, costs, the costs of any other systemwide services that the 26,047 MW of total wind power additions in the (system operation charges or other services, such United States during 2006–09 came from 546 different as imbalance energy or backup energy) should be sites whose average size was 90 MW (U.S. DOE 2008). competitive. Clearly, the dispersion and granularity of such renewable source is likely to trigger transmission investment Considerable attention has been given to tackling the needs whose cost could be harder to be absorbed by first three desirable features, which require making individual site developers. In addition, the dispersion appropriate policy and regulatory decisions. However, or granularity characteristics bring implementation less attention has been paid to addressing the last two challenges for transmission utilities from the planning, issues, which are increasingly appearing as a major construction, and environmental points of view. barrier to scaling up renewable energy. As discussed later in the report, providing transmission services to The combination of the factors described above has led renewable energy is complex. Investment needs are to a scenario where both developed and developing increasing, and existing expansion practices both from countries’ plans to scale up renewable energy are being the planning perspective and the regulatory perspective challenged by the need to efficiently and effectively are challenged. develop the required transmission facilities. On the one hand, some developed countries that had well- 1.1.2. Why Developing Transmission is a developed networks at the beginning of their scale- Challenge to Scaling up Renewable Energy up efforts have found that achieving more ambitious targets will require a considerable overhaul of their The most viable solar and wind renewable energy sites transmission systems. On the other hand, developing are more often than not located far away from energy countries are facing the transmission challenge even consumption centers and the existing transmission in the early stages of their scale-up efforts because of systems. Contrary to conventional fossil fuel-based the location mismatch of renewable energy, and also 2 Variable or variability is a term used to describe mostly uncontrollable power fluctuations from wind and solar photovoltaic generation that appear in the timeframe of a few minutes. Even though any generation technology output is not 100 percent and varies to some extent, the variability of new renewable energy technologies is highlighted because not all system operators are familiar yet with this different form of less controllable variability. because their transmission systems are frequently less competition and open access had been introduced developed or extended across their territories. to the industry, are often perceived as ineffective or disadvantageous for renewable generation. For While the need to scale up transmission investments example, cost allocation rules that require generators is clear, the impact of these investments on renewable to pay all transmission expansions and reinforcement energy policies—for example, on selecting the best that are triggered by the request could be seen technology options to achieve certain policy goals— as disadvantageous to the smallest renewable has not been consistently addressed. Although the developments located in remote areas. implications of transmission costs to suppliers and consumers are highly dependent on the particular This report focuses on these long-term aspects related geographical conditions and existing state of to developing the required transmission infrastructure development of the transmission network, the emerging to renewable power sources. The report describes the evidence shows that planning is an important factor in investment challenges and reviews emerging policy and ensuring that transmission investments are developed in regulatory approaches. These approaches reflect the a timely and cost-effective manner. need to change the philosophy of the planning function from a reactive to a more proactive mode and, when Short construction lead times for renewable energy required, to efficiently improve the cost allocation and 6 technologies necessitate faster delivery of the pricing rules of the transmission system. Other aspects transmission infrastructure if compared to most reviewed in this report include the need for rethinking conventional power sources. The construction of the institutional model of transmission development. transmission infrastructure for conventional power The report also describes the usefulness of new sources formerly was started after the construction of methodological approaches and tools for transmission the power plan had begun. This had been possible, planning. Finally, it defines some general economic given that lead times for most conventional power principles that can help transmission utilities and sources (a few years) are longer than for building the regulators develop transmission planning and pricing transmission infrastructure (a couple of years). A wind policies in relation to renewable energy scale-up efforts. power project of average size (100 MW) could take as little as eight months to complete from the beginning 1.1.3. Other Challenges Associated with of construction to operation. This is much less than the Transmission Not Covered in This Report time it would take to build an average, say, 100 km of transmission lines at 230 kV. Other network-related challenges must be tackled when scaling up renewable energy. In the short term, these As detailed later in this report, planning for providing challenges relate to real-time operational issues that transmission facilities for renewable energy has arise when integrating considerable amounts of variable become of paramount importance, not only for the renewable energy, such as wind and solar power. timely connection of renewable energy, but also Generation from wind and solar power is inherently to reduce its cost. The need for transmission to be intermittent, and current technologies still offer less planned and developed ahead of time for renewable controlability than traditional power sources. Even energy introduces an additional challenge. Traditional though transmission companies and system operators transmission planning practices can result in long have always dealt with uncertainty and limitations in delays in renewable energy projects. This, often called a operating various power equipments, these technologies “chicken and egg� problem, has added up to the other have brought two new dimensions to short-term power known transaction costs of renewable energy. system operations. First, wind or solar power output can change drastically, within minutes, and require The location, granularity or dispersion, and lead scheduling functions to quickly respond by pooling other times characteristic of renewable energy create some generation sources and reserves in order to maintain the challenges not only to existing transmission planning balance between supply and demand. As the amount practices, but they also bring questions to traditional of variable sources in the power system increases, pricing rules for transmission services. Traditional the operational challenges multiply. The operational planning and transmission pricing regulations, whose experience with renewable energy is rapidly increasing main principles had been designed during the era when (for example, Denmark, Germany, Spain, and the United States), and transmission and system operators are reported by different countries in the context of their learning how to deal with this form of variability. scale-up plans. Two primary avenues exist by which these investment needs are being identified. One is the Second, variable renewable generation technologies do results of long-term assessments that seek to determine not always have the same control capabilities in voltage investment needs related to specific renewable energy and frequency as other conventional, more controllable, target programs or goals. The core of such assessments power sources. In order to maintain the efficient and is usually a long-term technical planning exercise that reliable operation of the system, system operators are focuses on determining transmission investment needs implementing different software and hardware solutions and other implications of renewable targets. The other to ensure that voltage and frequency (the two vital sign avenue is transmission needs revealed from immediate of the system) remain in normal operating condition needs to connect specific projects. despite the scarcer controllability characteristics of such technologies. These solutions include the use of While the long-term assessments have different time improved forecasting in short-term dispatch operations, horizons and assumptions about the level of renewable and better systemwide controls and protections. Advances penetration considered, they demonstrate that scaling in voltage and frequency control of newer wind power up renewable energy equally requires the scaling-up plants are also playing an important role in managing of transmission investments. On the one hand, some these challenges better. These include pitch control in countries that have already reached a certain level of 7 newer wind power generation technologies, which offer scale-up of transmissions for renewable energy, such some degree of controllability of the power output. as the European Union, United Kingdom, and United States, are setting up more ambitious targets for their Besides these technical challenges, there are increasing transmission investment. On the other hand, countries complexities in obtaining rights of ways and addressing that are in the initial stages of scaling up renewable the social and environmental issues that surround the energy are finding that transmission investment needs siting of new transmission facilities. Some countries are for specific projects are also considerable and have taking measures to make more efficient the process required new treatments from the planning and of acquiring land rights and obtaining social and regulatory perspective. environmental clearances when they relate to energy projects of national importance, such as a large The following sections describe some of the needs hydropower development. identified by both long-term plans to scale up renewable energy and by immediate needs triggered by While these short-term technical operational challenges specific projects in different countries, which at the time and social and environmental issues described above of writing this report are in the early or final stages of are equally important for transmission development, construction. they require separate treatment. For this reason, they are not dealt with in this report. 1.2.1. Findings from Long-Term Needs Assessments in Developed Countries The remainder of Chapter 2 focuses on describing how scaling up investment in transmission is a major In the European Union, United Kingdom, and United effort to be undertaken when scaling up renewable States, several studies to understand the implications energy. The challenge seems equally important in of meeting different renewable energy targets on developed countries that have already substantially transmission needs have been undertaken. Each of the increased supplies from renewable energy, as well as in studies express the significant investment requirement developing countries in their initial scaling-up efforts. for transmission expansion to achieve the set renewable energy targets. Following are transmission investment 1.2. The Need for Scaling up Transmission findings from long-term needs assessments in the When Scaling up Renewable Energy developed countries. The transmission investment needs for renewable energy To meet the increasing electricity demand and reach the are increasing in both developed and developing 20 percent wind energy target, the United Sates would countries. Considerable investment needs are being need to increase its wind capacity by 290 GW by 2030 (U.S. DOE 2010b). Most of the wind energy would be biomass and wind power being the main contributors derived from the Midwestern United States, California, to this growth. To accomodate this rapid growth in and Texas—all purusing important renewable energy renewable energy, the Office of the Gas and Electricity programs. According to the study by National Markets (OFGEM 2009) estimated that the United Renewable Energy Laboratory (NREL), to accomodate Kingdom should invest about US$7.7 billion over the the increase in wind energy, the United States needs to next 10 years, based on the current investment plans invest US$60 billion for the period 2008–30 in order of the transmission companies for reducing carbon to achieve a 20 percent wind energy share in its energy emissions by 2020. The greater investment requirements supply (U.S. DOE 2008). specific to the United Kingdom are the result of interconnecting wind power generated in the north Detail assessments in certain regions within the Unitated (Scotland) and transmitted to the main consumption States are also revealing. The Midwest ISO service centers in the south. Investment in the past six years has territory covers parts of 13 U.S. states and the Canadian already been considerable. In 2006, when the allowed province of Manitoba. For the period between 2015 revenues for transmission companies for the period and 2025, each state has established varying renewable 2006–12 were established, it became evident that energy targets from 3.5 percent up to 30 percent, which investment in transmission needed to be scaled up. The we expected to be satisfied mainly through wind energy. approved capital expenditures for the three transmission 8 Based on the Midwest ISO Regional Generation Outlet companies for the 2006–12 period more than doubled Study (RGOS), the additional investment requirements from £1,676 million to £3,786 million compared to for transmission facilities are estimated to be in the the previous period. For the Scottish Power Transmission range of US$13–15.1 billion, under varying Renewable Limited (SPT) in southern Scotland, where most of the Portfolio Standards (RPSs) target assumptions for each wind power potential is located, their approved capital state, as well as various transmission overlay solutions. expenditures tripled. It is notable that the Midwest ISO is expanding its transmission significantly. In fact, the estimated investment In order to continue the development and deployment needs for 2011 are estimated to be US$5 billion—five of renewable energy technologies, the European Union times the average annual new transmission investment. adopted the 2009 Renewable Energy Directive, which included a 20 percent renewable energy target by 2020 In Texas—which leads wind power generation in for the European Union. In 2020, according to the the United States and ranks fifth overall in the world Renewable Energy Directive’s 27 National Renewable with 9,528 MW of wind power installed capacity— Energy Action Plans, 34 percent of the European transmission expansion is primarily driven by the scale- Union’s total electricity consumption should come up of renewable energy generation, especially wind from renewable energy sources, including 495 TWh power. Thus far, Texas has invested US$5.78 billion from wind energy representing levels equivalent to 14 for the new transmission since 1999, and currently percent of consumption (EWEA 2011). Strong growth US$8.2 billion are being spent under the five-year plan, of renewable electricity sources have already started to including US$5 billion solely to accommodate 18,000 cause network congestion resulting in certain regions of MW of wind power capacity (ERCOT 2010a). Spain and Germany to periodically switch off their wind turbines during periods with high winds. The European The United Kingdom, which consists of England, Union grids must be urgently extended and upgraded Ireland, Scotland, and Wales, has established the to foster market integration and maintain the existing target of 20 percent renewable generation by 2020 levels of the system’s security, but especially to transport through the Climate Change Act of 2008. As of 2008, and balance electricity generated from renewable total production of electricity from renewable sources sources, which is expected to more than double during accounted for 6 percent of total generation. This value the period 2007–20. A significant share of generation is expected to reach the level of 31 percent, overtaking capacities will be concentrated in locations farther away the target of 20 percent by 2020, provided that existing from the major centers of consumption or storage. power plants are closed in line with existing retirement Up to 12 percent of renewable generation in 2020 is dates (DECC 2009). For the past 20 years, the expected to come from offshore installations, notably renewable obligation (RO) mechanisms have been the in the northern seas, resulting in significant investment main driver behind the growth of renewable energy with in transmission expansion. According to the European Grid Study 2030/2050 by Energynautics (2010), the Energy Strategy (Secretaría de Energía 2010). The target European Union would need to invest US$66.5 billion includes achieving a 35 percent share of renewable to US$93.1 billion for its transmission by 2030, or energy in term of generation by 2024. The share of US$164.9–198.2 billion by 2050. It is evident that for renewable generation technologies in 2008 (CFE developed countries to achieve their more ambititous 2010) was 23.7 percent, from which 21.7 percent was renewable energy targets, massive investments in hydroelectricity, 1.8 percent geothermal power, and transmission upgrade and expansion are required. 0.2 percent wind power. La Ventosa, one of the richest Further details on each of the countries and regions can wind resource areas in Mexico, has the wind potential be found in Appendix A of this report. A summary of the estimated between 5,000 MW and 6,000 MW with different assessments is presented in Table 1.1. capacity factors of up to 40 percent. The region is critica to achieve renewable energy targets. Currently only 1.2.2. Findings from Immediate Investment 84.65 MW of wind power capacity are operational in Assessments from Developing Countries the area; however, projects in operation will increase to 2,745 MW by 2014 and majority of these projects Countries at their early stage of the scale-up of (1,967 MW). La Ventosa is located far away from transmission for renewable energy are focusing consumption centers and this has tirggered the need mostly on planning immediate investments for specific for massive expansion to existing transmission network transmission expansion projects. Nonetheless, similar which will be owned and operated by the private 9 to developed coutries, the immediate investment needs sector supplying large industrial consumers at privately for transmission expansion for developing coutires are negotiated energy prices. To raise the current 84.65 MW significant. Following are some of the transmission of wind power capacity to 2,745 MW by 2014, US$260 investment requirements for developing countries. millions investment in transmission network is required. These investment needs triggered a new treatment for The Government of Mexico has been increasingly the planning and cost allocation of the facilities as will supporting the development of renewable energy be described in future chapters of the report. projects by allowing private participation in the generation sector since 1992. Specific targets for While the Government of Panama has not established renewable energy generation in the electric power specific targets for penetration levels of renewable sector were introduced only until 010 by the National energy technologies, the government has increased Table 1.1: Summary of long-Term investment needs Assessments for the european union, united kingdom, and united States Country investment (uS$ billion) Assumptions Timeframe United US 60a 20% wind energy 2008–30 States Midwest ISO 13–15.3 Midwest RGOS 2015–25 Texas 4.9 CREZ TSO n.a. Scenario 2 with 18,500 MW of wind generated power United UK 7.7b 20 transmission investment projects during the period 2010–20 Kingdom 2010–20 European 66.5–93.1b Base Scenario 2030, By 2030 Union (€50–70) by European Grid Study 2030/2050 164.9–198.2b 2050 Grid without import, By 2050 (€124–149) by European Grid Study 2030/2050 Source: OFGEM 2009, U.S. DOE 2008, Midwest ISO 2010c, ERCOT 2008, and Energynautics 2010. See Appendix A for further information. n.a. Not applicable. a In undiscounted terms. b IMF foreign exchange rates applied from the year the study was done. its support to such technologies through the approval support to the utility from the government and the of different incentives. Law 45, approved by congress international financial community. in 2004, sets forth a set of incentives for small power generation projects with renewable energy technologies, Brazil has one of the world’s cleanest energy matrixes, including hydro, geothermal, wind, solar, and other with 85.3 percent of overall energy production coming renewable energy technologies. Panama has especially from hydro and other renewable sources. One of rich hydro and minihydro renewable energy resources. the most promising sites for biomass renewables in While other sources, such as wind, are expected to Brazil is the Center-West region, which includes parts increase their participation, small minihydro generators of the states of Mato Grosso do Sul and Goiás. The are the technology sources representing an increasing challenge to integrating these small renewable projects challenge for the transmission company. Post approval comes from two factors: first, their dispersed location of Law 45, 21 projects with a total capacity of 172.2 and, second, their distance to existing distribution MW in the basins of the rivers Chiriquí, Chiquiri Viejo, or transmission networks. Brazil is working on Mato and Piedra have requested interconnection to the Grosso do Sul and Goiás project to integrate about existing transmission grid. In order to interconnect these 80 biomass cogeneration and minihydro plants of total projects, the transmission company’s expansion plan capacity of 4,100 MW at an estimated cost of US$400 considers the expansion of caldera substation. which is million. The capital cost of the transmission netowkrs 10 estimated to cost US$12.29 million to interconnect with to interconnect renewable had been found to be larger a significant number of minihydro plants. While the total than the overall capital value of some of the distribtuion investment ammoutns seems small, the lack of clear ares in the vicinity of the resources. This requied a cost-recovery rules for these assets is having important new treatment to plan and develop these invesmetn by financial implication for the transmission company. new sub-transmission service companies (TSCs). The Egypt’s current energy portfolio mix consists mainly of Philippines is well known to have tremendous potential hydro, wind, and thermal generation. In February 2008, of wind, hydro, and other renewable energy sources the Supreme Council of Energy of Egypt, headed by the and recently enacted the Renewable Energy Act (RA prime minister, approved a plan to generate 20 percent 9513; Congress of the Philippines 2008). The RA of the total energy generated from renewable sources 9513 provides an institutional framework and general by 2020. To achieve this goal, New and Renewable guidance to foster the development and utilization of Energy Authority (NREA) plans to add 600 MW in wind renewable energy in the Philippine including specific power and 140 MW in hybrid solar thermal technology provisions regarding transmission expansion. With generation in the by 2012, followed by 3,600 MW support from the World Bank, the Philippines conducted in wind power and 150 MW in concentrated solar a preliminar transmission planning exercise and reached power technology in FY12–17. The Wind Atlas of Egypt a conclusion that the transmission investment needs can identifies several geographic regions with Gulf of Suez be highly considerable and depend on the planning leading the wind resource potential. One of the projects strategy used to reach biomass, wind, and hydro supported by the World Bank and currently under way potential renewable energy sites. is the 250 MW, build-own-operate (BOO) transmission project that will connect the future wind parks at Gulf As evident by the above examples, similar to developed of Suez and Gabel El-Zait to the national transmission countires, the immediate investments for specific network. To integrate the high potential wind power in transmission expansion projects in developing countired the region by connecting the Gulf of Suez-Wind farm, are significant and are creating the need to adjust Gulf of Suez-Salamut, Gulf of Suez-Gabel El-Zait, and existing planning and regulatory models to develop the extension of Salamut substations, the transmission transmsision. Table 1.2 summarizes the transmission investment is estimated at US$299.70 million. expansion projects in immediate needs for the Developing such transmission expansion required aforementioned countries. Table 1.2: immediate investment needs—Brazil, egypt, Mexico, Panama, and the Philippines Country investment (uS$ million) Projects related re source Mexico 260.00 La Ventosa project Wind Panama 12.29 Caldera substation expansion project Minihydro Egypt 299.70 Gulf of Suez and Gabel El-Zait Wind Brazil 400.00 Mato Grosso do Sul and Goiás project Biomass, Minihydro Philippines 170 or 192 Potential projects of biomass, wind, and Biomass, Wind, and hydropower for a total of 589.4 MW Minihydro Source: Various sources compiled by the authors. See Appendix A for further information. 11 2. TrAnSMiSSion CoST AlloCATion implementation of efficient transmission cost allocation AnD PriCing and pricing should follow. As mentioned above, large-scale renewable energy 2.1. Classification of Transmission Needs generation sites are often located far from the existing Triggered by Generation transmission network or load centers. Therefore, as renewable generation increases, so does the need The transmission needs triggered by the interconnection to expand infrastructure to connect these remote of generation projects, renewable or otherwise, can generation sites to the existing transmission network. be broadly categorized as either connection assets or Successful integration of renewable generation sites network assets. Connection assets are defined as assets could require extensive investments in the transmission required for the sole use of interconnecting generators network. In order to understand the implications for with the existing transmission network. Connection the renewable energy generators and transmission assets could include enabler facilities or the immediate providers better, the following section describes typical connection assets of the generator, such as the internal transmission investment needs triggered by generation substation and transformer. Connection assets could also projects. The section also overviews how the costs include the long-distance and high-voltage transmission associated with these needs are traditionally allocated. facilities required to connect the enabler facility (generator substation) to the existing network. These 13 Pricing of transmission is seen frequently as transmission facilities are known as system extensions disadvantageous for renewable energy. While (see Figure 2.1). Traditionally, the system extension is transmission pricing is a highly complex matter and considered part of the connection assets as long as the no standard pricing method is globally accepted, generator is the sole user of the extension (Scott 2007). it is important to understand the primary aspects of transmission cost allocation and pricing and their Network assets, by contrast, also known as potential impacts on renewable energy and consumers. reinforcements, refer to transmission network upgrades This chapter will review these aspects and overview beyond the connection assets, which are required relevant international experience. In the context of to accommodate the new generation capacity. this experience, Part II of the report analyzes and Reinforcement may be required because existing trunk describes some general principles that any specific lines or substations may not be able to accommodate figure 2.1: Transmission Classification Network assets Connection assets Renewable generator Network upgrades System extension Enabler facilities Connection cost Super-shallow policy allocation Shallow policy Deep policy Cost to generators-scale High ($$$) Low ($) Source: Prepared by the authors. the additional power injection under normal operating transmission provider, and the consumers. Different conditions or stay in compliance with the reliability jurisdictions have adopted varying policies to allocate standards under the new conditions. Reinforcements the cost of connection and network assets, which are could include upgrades to existing high-voltage lines or ultimately described in transmission pricing regulations. additional lines, plus additional transformation capacity In most cases, connection assets boundaries are set at at substations. either enabler facilities, system extension, or beyond network upgrades (refer to Figure 2.2). These policies Both connection assets and network assets collectively define the cost allocation boundary between the define the investment requirements for connecting generation and the transmission system operator (TSO), new generation to the existing transmission network as leading to four broad connection cost allocation policies. depicted in Figure 2.1. The way in which transmission These categories are usually described as (a) super- regulation recoups the costs of the needed investments shallow, (b) semi-shallow, (c) shallow, or (d) deep can greatly impact the viability of renewable generation. connection cost allocation policies (Scott 2007). In Chapter 2, the section on Interconnection Cost Allocation explains how connection and networks cost 2.2.1. Overview of Interconnection Cost Allocation are traditionally allocated and qualitatively describes the Policies and Practices potential impacts on renewable energy generation. 14 The following subsection describes the four cost 2.2. Interconnection Cost Allocation allocation policies and lists examples of various countries and jurisdictions that have adopted such cost As stated in the Chapter 1 section, The Barriers to allocation policies. Renewable Energy, one of the major challenges of renewable energy is the higher upfront cost of 2.2.1.1. Cost Allocation Policies: transmission investment triggered by new generation. In Super-Shallow, Semi-Shallow, Shallow, and Deep some cases, this network connection cost is allocated entirely to the project developer, while in other cases, Typically, transmission costs are allocated between the transmission investment is shared among various the project developer and the TSO using one of the stakeholders. To address this issue, countries have four cost allocation policies, which include (a) super- adopted varying policies on network connection cost shallow, (b) semi-shallow, (c) shallow, and (d) deep allocation, which will be overviewed in this section. connection cost allocation policies. In a super-shallow cost allocation policy, the connection assets boundary Traditionally, with conventional power generation, the is set at enabler facilities. With such a connection project developer would bear all transmission network cost allocation structure, the project developer is connection costs to put a generation plant online. The solely responsible for the costs of enabler facilities, economic scales of conventional power generation which in certain cases are shared by the TSO. All projects traditionally allowed for absorbing transmission costs associated with system extension and network connection costs. Additionally, conventional power upgrade are borne by the TSO and in turn shared by generation, such as fossil fuel-based generation, all the users connected to the grid, as determined by permits greater flexibility in selecting locations closer to the applicable network pricing methodology. From a demand centers and the existing transmission network. financial investment perspective, a super-shallow cost However, allocating the transmission connection costs allocation policy would be an ideal scenario for a to a renewable generation developer can have a much renewable generation developer, since it would bear the greater impact. This is especially acute when renewable least cost of interconnection to the existing network. generation resources are located far away from the existing network, for instance, offshore wind farms or In a shallow cost allocation policy, the connection solar power plants in desert areas. assets boundary includes system extension costs, in addition to enabler facilities. This is typically the case in To alleviate this impact on renewable developers, various situations where system extension and enabler facilities cost-curtailing strategies are applied to redefine what are constructed for the sole use of the renewable energy is considered a connection or network asset and how developer requesting connection. With such a connection their costs are allocated between the generator, the cost allocation structure, the project developer is solely responsible for both the system extension and enabler network, the above-mentioned connection cost allocation facilities costs. This can require significant upfront policies (super-shallow, semi-shallow, and shallow) can investments from renewable developers, especially greatly impact the economic and financial feasibility when offshore wind or remote solar power plants are of renewable energy generation. From the renewable considered. To ease the investment burden, some generator perspective, a super-shallow connection cost jurisdictions have adopted a semi-shallow cost allocation allocation policy is always better, as long as other costs policy, whereby TSOs and renewable project developers are allocated broadly through network pricing. share the costs associated with system extension. However, the costs associated with enabler facilities are Independent of the connection cost allocation policy still solely the responsibility of renewable developers. adopted, such costs are usually charged in one of the following ways. The first alternative requires an In a deep cost allocation policy, the connection assets up-front and often on-time payment of the connection boundary also includes network upgrades. With such infrastructure cost prior to any commitments from the a connection cost allocation structure, the renewable TSO to build an infrastructure. In the second alternative, project developers are responsible for all transmission connection costs are charged by means of a connection costs, including enabler facilities, system extension, and cost tariff that is paid exclusively by the interconnecting network upgrades (reinforcements) associated with new generator over a period of time. The tariff is generation. Because of the high upfront costs, the deep determined on the basis of an amortization calendar 15 connection charging policy may discourage renewable of the connection costs and is usually paid in monthly project developers and, in certain cases, render the installments, together with other network or system costs. renewable energy projects economically unviable. Table 2.1 display examples of interconnection cost While the conditions are highly dependent on the location allocation policies adopted by different countries and of the renewable resource and existing transmission regions. Some are existing policies, while others were Table 2.1: Connection Cost Allocation Policy Cost bearer Country/ infrastructure cost region allocation policy enabling facilities System extension network upgrades Spain Shallow policya G G TSO Germany Shallow policya G G TSO Denmark Shallow policy b G G TSO United Kingdom Super-shallow policyc TSO TSO TSO Texas Semi-shallow policyc G TO (CREZ) TSO Mexico Deep policy G G G Panama Semi-shallow policy G TSO TSO Brazil Shallow policy G G TSO Philippines Semi-shallow policy* G G TSO Egypt Semi-shallow policy* G TSO TSO Sources: a. Cambridge Economic Policy Associates Ltd. 2011. b. Scott 2007. c. Frontier Economics Ltd., 2009. Notes: Panama—No infrastructure connection costs allocated to generator for renewable generation < = 10 MW. Brazil—Small-scale renewable generators use integrated network and share associated connection costs. Philippines—System extensions are initially financed by the TSO. Costs are later recouped from the generator. G: Generator. TO: Transmission owner. TSO: Transmission system operator. *Denotes that the policy is under consideration and not currently enforced. recently developed to address specific renewable energy cost of maintaining and developing the transmission integration efforts. Details about cost allocation policies network, including losses and congestion. In addition for each country listed in the Table 2.1 are provided in to investment and operational costs, other costs that Appendix B. include ancillary services and system operator costs are also sometimes considered an integral part of the Several countries have adopted different policies to transmission. accommodate the higher investment costs to connect offshore wind farms to existing transmission systems. Under most regulatory regimes, the transmission owner, Table 2.2 summarizes jurisdictions that have adopted which can also be a system operator or a vertically different policies for offshore wind generation. integrated utility in some cases, will receive regulated yearly revenues to cover the above-mentioned costs. Connection cost allocation policies can have direct The regulated revenues could include an adjustment for financial implications on renewable generation projects efficiency improvements or quality of service regulations. and render them less attractive for investors. A shallower The regulated revenues will be obtained from tariffs connection cost policy would be more attractive from applied to users of the network. These charges are the perspective of generators, but such policies do not usually called use of system (UoS) charges. allocate sufficient costs to generators to recoup total 16 investment. The remaining transmission assets are Although UoS charges typically amount to a considered part of the transmission network and, as small percentage of the total costs for consumers, such, they are part of the cost base used to determine depending on the transmission pricing methodology network usage prices. The following section reviews the utilized, charges can have different impacts on network pricing methodology and qualitatively describes renewable energy generators in remote locations. In how they can impact location-constrained renewable addition to connection costs, UoS charges can also energy projects. facilitate or hinder the development of renewable energy generation. This transmission regulation 2.3. Network Infrastructure Pricing and pricing is still an ongoing debate; there is no clear answer as to the “best way� to regulate the In the previous section, we highlighted several transmission sector. This section will provide an connection cost allocation methodologies associated overview on the most important aspects that seem to with connecting generation to the existing transmission affect renewable energy. infrastructure and shared examples of connection asset boundaries established by various countries and One of the first important aspects of transmission regions. In this section, we will provide an overview network pricing is whether regulated revenues of of the costs associated with usage of the transmission the transmission system will be recouped from load network. These network usage costs are relatively small consumers or generation consumers, or both. This compared to total energy delivery costs. Transmission is one of the first design aspects that transmission usage costs reflect mainly the investment and operating pricing faces in most institutional structures where the transmission activity is separated from other activities in the sector. While the users of the transmission system are generation and demand (distribution Table 2.2: Connection Cost Allocation Policy utilities, and unregulated and regulated consumers), Country/region offshore wind policy transmission pricing methodology can allocate cost Spain Shallow policy*a either to generation or demand, or both, in varied proportions. Since in the long term all transmission Germany Super-shallow policya costs will be passed on to consumers, a line of thought Denmark Super-shallow policyb suggests that generation need not be charged for United Kingdom Super-shallow policy*,c transmission network costs. While the argument sounds reasonable, concerns still remain on the impacts of Sources: a. Cambridge Economic Policy Associates Ltd. 2011. b. Scott 2007. c. Frontier Economics Ltd. 2009. such an allocation on efficient short-term operation and *Denotes a similar connection cost allocation policy for investment by generation. These issues will be reviewed onshore and offshore renewable generation. later in the report. 2.3.1. Overview Network Infrastructure Pricing use power flow simulations, which can determine how Methodologies the flow in each network element changes as a function of a user (generation or demand). Usage-based Once the network connection costs have been allocated methods can be categorized as flow-based or distance- among the transmission users, the UoS charges to each based MW mile. The difference between these two is individual generator and load must be determined. For that flow-based methods place a heavier burden on the purpose of illustrating qualitatively how network energy transactions that “travel� a greater distance. See pricing could affect renewable energy, this report Appendix B of this report for further details. overviews the principles behind the two major broad categories in which most network transmission pricing With regard to renewables, determining UoS methodologies can be categorized. We will call these charges derived from usage-based methods can be two categories postage stamp-based methods and disadvantageous. This will be especially applicable for usage-based methods. bilateral transaction where the supplier is a renewable generator located far away, in flow or in length terms, 2.3.1.1. Postage Stamp Methods from its off-taker. If the connection cost allocation policy does not allocate the cost of the connection to Postage stamp methods refer to when all transmission a generator, but the network pricing methodology is users pay the same average rate regardless of whether based on usage, UoS charges place the full cost of the 17 the cost caused or benefit derived by that user from a connection back on the generator. While the full range given transaction varies from the average (Hempling of situations can vary greatly with the geographical 2009). This concept is similar to a postage stamp for conditions and the characteristics of the network, in-country mail, which carries a flat rate irrespective of usage-based methodologies are usually considered the sending or receiving destination. disadvantageous for renewable energy generation. Similarly to postage stamp, implementing usage- This is the simplest pricing methodology where a user based formulas in per-megawatt measures, and not is charged a flat rate based on the amount of energy megawatt-hours, would further hinder the growth of transmitted or injected on the network. Sometimes renewable energy. networks are divided into zones and each zone is priced using a postage stamp method (Stoft, Webber, and Network pricing methods often use a combination of Wiser 1997). Postage stamp methods provide a simple the above-mentioned methods to take advantage of and effective way to recover fixed costs, but they do not their desirable features for a particular application. take distance-related or network congestion conditions Sometimes when a short-term locational priced energy and associated costs into account (Krause 2003). This market is in operation, the congestion rents generated flat rate can be derived either based on the energy in the short-term market are counted toward the total (MWh) or maximum load (MW). For basic mathematical cost of transmission.3 As is well known, congestion formulation of the network pricing methods discussed in rents make up only a fraction of the total cost, and this section, see Appendix B. the majority of the costs are still determined based on any of the UoS charges mentioned above. Appendix 2.3.1.2. Usage-Based Methods B provides a brief descriptioin of infrastructure pricing methodology adopted by various countries, which is Usage-based methods refer to when transmission summarized in Table 2.3. network users are charged based on a metric that represents the extent to which they “use� the network. Figure 2.2 provides the broad categories in which While it is theoretically impossible to clearly separate interconnection costs and network costs can be allocated how different users place a burden on the network, to generation and load and depicts a qualitative there are some methods that could be used to come up representation of the cost impact on generation. The with metrics that offer good engineering-based proxies least connection cost allocated to generation (super for the use of the network. Most usage-based methods shallow policy) will have the least impact on renrewable 3 Congestion rents are the difference between payments of generators and loads in the short-term (nodal or zonal) spot energy trades. Congestion rents are zero only if the transmission network is decongested. figure 2.2: Allocation and Pricing of Transmission Costs Transmission cost Connection cost Network usage cost Allocation: Allocation: Load and/or Load and/or generation generation Usage based: Postage stamp: Deep policy Shallow policy Super shallow Flow or MW-mile MW or MWh or beneficiary based 18 + Cost grade ($) – + Cost grade ($) – Source: Prepared by the authors. energy. Similarly, the farther away renewable energy is The wind generator cost characteristics were derived located from consumption and the more usage-based using data from ESMAP (2006). A real discount rate network pricing methodologies are used, the more the of 5 percent is assumed. The costs of the substations impact will be on renewable generation. and high-voltage lines were derived from typical values using the catalogue of transmission costs 2.3.2. An Example of the Impact of Transmission published by the Comisión Federal de Electricidad Cost Allocation and Pricing (CFE) in Mexico for substations and voltage lines with similar technical specifications. The cost of the An illustrative example on the impacts of different 115 kV line connecting the wind generator to the cost allocation and network pricing methods on the main transmission system substation is considered at equivalent levelized costs of electricity for renewable US$220,000 per kilometer. energy is presented next. As seen in the example, the equivalent cost is highly dependent on the approach The analysis compared three options for connection followed. While this is also true for any discussion and network cost pricing, as shown in Table 2.4. The on the impacts of transmission pricing options for analysis assumes that the transmission connection cost conventional sources, the objective of the example is to is incurred only in the first year (up-front payment), illustrate that smaller-scale and more remote sources whereas the transmission usage cost is incurred every can be highly sensitive to transmission costs from the year for the lifetime of the wind farm, which is assumed generator perspective. to be 20 years. The analysis uses a simple financial model, which As illustrated in Figure 2.4, the highest LCOE scenario estimates the levelized cost of electricity (LCOE) from occurs when the connection costs of the transformer a 50 MW wind farm with 30 percent capacity (see and the connection line are included (option B), along Figure 2.3). Different pricing assumptions are made for with the transmission usage cost based on the flow- both the transmission connection and network usage based method (option B). The lowest-cost scenario costs. The characteristics of the network are presented occurs when the transmission connection cost is in Figure 2.3. The figure describes characteristics of considered zero cost by incorporating super-shallow both the existing transmission and generation system. policy (option C) and the generators are not allocated Table 2.3: Connection Cost and uoS Pricing Summary by Country/region Transmission pricing locational or cost allocation (%) Country/ Connection cost network nonlocational region allocation policy pricing policy (zonal or nodal) generator load Spain Shallow policyb Postage stampf Nonlocational—n.a.b 0b 100b Germany Shallow policyb Postage stampb Nonlocational—n.a.a 0a 100a Denmark Shallow policyf Postage stampf Nonlocational—n.a.c 2–5c 98–95c United Kingdom Super-shallow policye Hybride Locational—Zonala 27a 73a Texas Semi-shallow policye Hybride Locational—Nodala 0a 100c Mexico Deep policy Hybrid Two-voltage zones maximum 100 0 Panama Semi-shallow policy Usage flow-based Locational—Zonal 70 30 Brazil Shallow policy Usage-flow-based n.a. 100 0 Philippines Semi-shallow policy Postage stamp n.a. 50 50 19 Sources: a. Wilks and Bradbury 2010. b. CEPA 2011. c. ENTSO-E Working Group Economic Framework 2010. d. López and Ackermann 2008. e. Frontier Economics Ltd. 2009. f. Scott 2007. g. Farias 2010. h. Pérez-Arriaga, n.d. Notes: (i) Spain—Network UoS charges are uniform nationally. (ii) Germany—UoS charges are postalized within each separate TSO region. (iii) United Kingdom—UoS Hybrid charges include Locational (zonal) plus Usage (flow-based). Additional Balancing Service UoS charges are applied and equally shared. (iv) Texas—UoS Hybrid charges include locational and postage stamp. The charges have recently shifted from zonal to nodal in the last quarter of 2010. (v) Mexico—UoS postage stamp-based charges only apply to wind farms, otherwise flow-based usage for nonrenewable energy. (vi) Panama—UoS charges do not apply for renewable generation <= 10 MW. (vii) Philippines—UoS postage stamp charges are determined based on megawatt-hours of consumption/generation. (viii) Brazil—Small scale renewables using the integrated network use Distance MW-mile UoS methodology. (ix) Philippines—Refers to existing UoS charges for any type of source main interconnected network. (x) New policies in the Philippines are under consideration. n.a. Not applicable. figure 2.3: Transmission infrastructure—Connecting a Wind farm to an existing Transmission network Wind Connection line 50 MW 100 MVA 30% capacity Wind substation 115 KV 100 MVA 69 KV/115 KV Transformer High voltage line NGCC 50 MW 80% capacity Substation A 200 MVA Line A B Substation B 115 KV/400 KV 300 KM 200 MVA 400 KV 115 KV/400 KV Subcritical coal 100 MW 80% capacity 50 MW Peak demand 150 MW Peak demand Source: The authors. Table 2.4: Transmission and usage Cost options option Transmission connection cost Transmission usage cost A Deep connection policy: Includes costs of transformer, Postage stamp-like, usage-based method connection line from wind farm, and upgrade substation B Shallower policy: Includes costs of transformer and Flow-based method (average participation connection line from wind farm method) C Zero cost (super-shallow policy) Zero cost (0% network cost to generation) Source: The authors. any network costs (option C). The difference in the network pricing approaches. Not only that, there is no LCOE between the highest- and lowest-cost scenarios standard solution. is 15 percent. A 15 percent cost adder could easily consume, from the generator’s perspective, a great part While the example is not a suggestion that pricing of an incentive for the production of renewable energy options that lead to lower costs are better, the example 20 received by the generator. illustrates the importance of transmission costs in the economics of renewable energy. The following section This type of result is highly subject to the specifics of will describe the great diversity of approaches that have each situation—distance, voltage levels, existing network been used to deal with cost allocation and pricing. condition, and the composition of the other generation In a broader context of achieving renewable energy sources, as well as to the specific implementation details policy objectives efficiently, Part II of the report will of the network pricing options. In fact, such variability explain some general principles that specific pricing is what leads to frequent disagreements when selecting implementations should follow. figure 2.4: lCoe Scenarios 9.6 9.4 LCOE Driven by Usage Cost BA BB 9.2 AA 15% increase AB 9.0 AC 8.8 CB BC 8.6 CA 8.4 8.2 8.0 CC 7.8 7.8 8.0 8.2 8.4 8.6 8.8 9.0 9.2 9.4 9.6 LCOE Driven by Connection Cost Source: Authors’ calculations. Note: AB means Connection cost option A and Usage cost option B. 3. ProACTive PlAnning AnD oTher investment needs required to integrate renewable inSTiTuTionAl ArrAngeMenTS energy. Using shallower connection cost policies and To exPAnD TrAnSMiSSion for allocating little or no network costs to the renewable reneWABle energy generator evidently helps renewable generation, but it does not ensure that transmission costs to consumers 3.1. Summary are minimized. In this chapter, we will present how better transmission planning practices can help The previous chapters described how scaling up reduce the transmission investment needs to connect renewable energy requires a considerable scaling- renewable energy. New proactive transmission planning up of transmission investments. The chapters also processes are emerging, which combine new open and described how different cost allocation and network participative process and improved analytical tools to pricing methodologies can impact the development of make the connection process more time effective and in renewable generation. Emerging transmission pricing turn reduce transmission costs to both generation and practices introduced to support the integration of demand. renewable energy have also been described. These practices focus on reducing the cost of transmission The chapter will first describe some of the specific burden faced by renewable energy providers. planning solutions implemented in different countries Besides network connection and UoS costs, there is to address the timely and cost-effective extension of 21 another barrier to renewable energy associated with networks for renewable energy. Second, the chapter transmission. The barrier refers to costs associated with describes new analytical tools that are increasingly the interconnection-queue process. Traditionally, where useful in transmission planning for renewable energy. the transmission sector has independent regulators Finally, the chapter also presents some concepts on or where a vertically integrated utility acts as the transmission planning in general that are required to transmission counterpart, a renewable energy generator illustrate the above concepts. must request an interconnection. 3.2. Proactive Planning Practices and The objective of the interconnection-queue process is New Institutional Arrangements to identify the needs that will be required to adequately and reliably interconnect the requesting generator. Transmission investments needs have historically The investment needs determined in this process are been driven by the increase in electricity demand and used to establish what constitutes a connection or a the reliability criteria used in the planning process. network asset as described in the previous chapter. Geography (topology and location) has always been a While the interconnection-queue process can work well factor that greatly affects transmission. For instance, the for circumstances when just a few generation additions development of large hydropower complexes in remote are made over a given year, the process can be highly locations has historically required huge transmission challenged if large numbers of generators request investment needs. At the same time, the location of interconnection. Scaling up renewable energy usually the primary consumption centers and fossil fuel import requires managing tens or hundreds of interconnection or production locations has always been an important requests, which can clog the interconnection queue. driver of transmission needs. Tapping into large amount This situation can lead to project delays and great of newer renewable sources, such as wind and solar burdens on human resources for the technical planning power, requires bringing transmission services to department of transmission companies. This chapter multiple dispersed locations. As described in Chapter will describe how moving away from a queue of a “wait 1, tapping into these sources warrants considerable for request� strategy to a process where investment increases in the investment needs of transmission. needs are identified “proactively� can greatly reduce the However, as evidenced by country and regional transaction cost to interconnecting generators. At the experiences shared in this chapter, if the planning for same time, planning proactively leads to a more timely transmission is organized to collectively and proactively delivery of the requisite transmission investments. address the needs of different generators, transmission costs can be reduced and the effectiveness of the In addition to reducing waiting times, a proactive process to develop the requisite transmission can be planning process can greatly reduce the transmission greatly improved. The following sections share examples of varying planning practices adopted by different for transmission for the requesting renewable energy countries/regions. providers was greater, in terms of size and capital cost, than the current distribution network managed by many 3.2.1. Brazil distribution companies in the area. To circumvent the human resource capacity challenge, the renewable Brazil offers one of the world’s cleanest energy mixes developers were held responsible for preparing a with 85.3 percent of overall energy production derived transmission plan to interconnect all developers to the from renewable sources, including hydropower. In the existing networks. The plan is elaborated under technical last five years, biomass, small hydropower (SH), and specifications provided by the EPE, which authorizes the wind energy have entered the renewable energy mix and plan prior to submission and approval of the electricity significantly increased their share because of shorter regulatory agency ANEEL. By allowing the generators construction times, the need for smaller investments, and to take the lead on network planning, the EPE and lower overall investment risk. In fact, Brazil is the world’s distribution companies are able to ease their capacity largest producer of sugar and ethanol. One of the most burden, yet regulators are able to keep control and promising sites for renewables in Brazil is the Center- provide oversight on transmission network expansion and West region, which includes parts of the states of Mato upgrades. Additionally, by participating in the planning Grosso do Sul and Goiás. As shown in the Figure 3.1, process, all costs associated with transmission are known 22 hundreds of candidate bagasse cogeneration and SH by the generators. This is crucial, since renewable energy projects are spread over 200,000 square kilometers. developers contract their energy output in a government- However, because of their dispersed and remote run energy auction. Winners of the auction receive a locations away from the existing grid, integrating these long-term energy purchase contract. By knowing the small renewables has brought some challenges to costs ahead of time, generators can safely bid in the existing transmission planning and regulatory practices. auction and ensure a sufficient return on their investment. The entire process of planning, allocating costs, and From the procedural standpoint, Empresa de Pesquisa developing the transmission network is built around is the Energética (EPE)—the government planning agency— energy auction process. has no mandate to plan distribution level investments. By the same token, both the EPE and the distribution The process is similar to the Open Season Process companies in the zone where transmission services implemented in Mexico discussed in the Chapter 3 had been required, lacked the personnel capacity to section, Mexico. However, in the case of Brazil, the plan network expansion. In certain cases, the need generators are competing to sell their energy to an figure 3.1: location of Bagasse Cogeneration and Sh Plants (left), renewable Candidate Projects in Mato grosso do Sul (right) Source: World Bank 2010. auction, and the resulting transmission needs are potential changes derived from more or less interested developed by a new transmission company following interconnecting parties after the energy auction. a competitive procurement mechanism. Figure 3.2 highlights the Competitive Process to Develop Shared Once the final shared transmission network is defined Transmission Networks (CPDST) for Renewable Energy and approved, ANEEL initiates a competitive bidding adopted in Brazil. process to select a new transmission owner to finance and maintain the shared transmission network utilized From a high-level overview, renewable developers by the renewable energy developers. Similar to the interested in developing generation within a particular process used for the expansion of the main transmission region prepare a technical plan that is supervised and system, the bid is awarded to the participant that approved by the EPE. Once finalized, these plans are requires the lowest allowed annual revenues to submitted to ANEEL for review and approval. Renewable develop and maintain the line. The winner receives a generators express their intent to pay for the connection transmission concession for a period of 30 years. The costs and network prices that result from the shared allowed revenue (resulting from the bidding process) is network. ANEEL is responsible for reviewing and fixed for the first 15 years and reduced by 50 percent ensuring regulatory compliance for all submissions. If for the remaining 15 years. The revenues for the approved, the renewable developers turn toward the transmission concessionaire are derived from network energy auction market where they compete to win the charges applied only to the renewable generators 23 energy contracts. At this point, the renewable developers connected to the shared network as described in the are aware of the transmission connection costs and UoS Chapter 2 section, Overview Network Infrastructure charges they will incur from the shared transmission Pricing Methodologies. networks. Winners in the energy auction reaffirm their need for transmission services, at which time the final An energy auction in Brazil, similar to the development shared transmission network is designed to include any of the shared networks based on the above described figure 3.2: Brazil’s Competitive Process to Develop Shared Transmission networks for renewable Technical EPE consultant RE Generator Determine optimal ANEEL – Ensure Submit transmission transmission extension regulatory RE Generator plan & a letter of intent and reinforcement compliance needs & costs $/MW RE Generator Approved Re-determine (if needed) optimal transmission extension and reinforcement needs & costs $/MW. RE developers Resubmission to EPE Successful bids proceed to energy auction bid No Generators ANEEL holds an New TSO commit to reserve auction to select constructs and End Yes Successful bidder transmission new transmission maintains the owners for transmission capacity shared facilities network Source: Prepared by the authors. process, is triggered on an as-needed basis. The CPDST The consideration in the act and in the implementing process not only helped develop transmission needs rules and regulations touches on three important that were outside the scope of existing regulations subjects related to the development of transmission for (regulatory “void�) or institutional capacities of existing renewable energy: first, the need to make sure these distribution utilities, but it also helped create certainty connections are considered and planned for by the for renewable energy developers about the process that transmission company (TRANSCO); the need to price should be followed to fulfill their needs. transmission services for variable renewable energy on a per-megawatt-hour basis; and last, recognition that The process also has important implications for cost recovery of interconnection plays a major role in minimizing infrastructure and operational costs needs, the economic viability of remotely located generation including system losses. By developing shared networks, projects. All these provisions are being designed in whose development requires an organized process, detail at the same time the main support scheme, feed- renewable generators can greatly reduce connection in tariffs for renewable energy, are being designed. costs by sharing the integration network costs. In addition to the Renewable Energy Act, the National Using an anticipatory approach to plan an integrated Renewable Energy Board (NREB), the Energy Regulatory network eliminates the need to develop individual Commission (ERC) in the Philippines, and the 24 connections exclusively for each renewable generator to transmission company formed a technical group to the high-voltage grid and also reduces the higher costs address the aspects of planning for renewable energy. associated with such exclusive connections. Generators The objective of this group is to organize and plan the are responsible for bearing the enabling facilities and development of transmission based on interconnection system extension cost to the shared network. The shared requests for different zones where service contracts for network, which makes for the bulk of the costs, is renewable energy have been awarded. Such planning allocated among all the renewable generators sharing is aimed not only to reduce the inefficiencies in the the facilities based on distance MW-mile methodology, process of interconnection requests, but also to reduce as described in the Chapter 2 section, Overview the significant transmission investment needs triggered Network Infrastructure Pricing Methodologies. by renewable generation. In addition to reducing overall transmission costs, the A comparative case study assessing the transmission existing model in Brazil, which awards new transmission connection impacts for renewable energy in Luzon concessions using a competitive scheme, has been Island using the traditional reactive (wait-for-connection- extended to the shared facilities to reduce the burden request) approach against anticipatory planning, of up-front costs from renewable energy developers. which was conducted recently by the World Bank. The procurement process helps reveal the efficient cost The objective of this study was to obtain an indicative of delivering such infrastructure, and private sector quantitative assessment to compare the impact of the participation is attracted. two planning approaches. Anticipatory planning would systematically look at given regions where the private 3.2.2. The Philippines sector has expressed interest in developing renewable energy sites. For each of these regions, a special The Philippines, as mentioned earlier, has tremendous planning model identifies minimum-cost transmission potential for renewable energy sources, and the networks that can deliver transmission services to a enactment of the Renewable Energy Act (Congress group of projects rather than serving individual projects. of the Philippines 2008) provides an institutional framework and general guidance to foster the A summary of the results of the approach is provided in development and utilization of renewable energy. Table 3.1. Although in all subsystems, the net present Advancing the development of transmission networks to value (NPV) of total transmission connection costs is connect the renewable energy potential would represent similar or lower in the anticipatory planning approach, an important challenge, for which the act made some the impact varies depending on the characteristics of specific provision, as was discussed in the Chapter 1 each subsystem. Average reductions in each subsystem section, The Need for Scaling up Transmission When range from about US$3,000 per installed megawatt (La Scaling up Renewable Energy. Trinidad Subsystem) to about US$247,000 per installed megawatt (Tuguegarao Subsystem). There is an average investment costs are based on traditional capital costs for reduction in NPV of total connection costs for the area transmission costs in other regions, the results highlight around US$37,000 per installed megawatt, calculated by the importance of the planning approach. The proactive dividing the total reduction of US$22 million in the total planning approach leads to overall improvements to most NPV by total installed capacity of 589.4 MW. While the of the renewable projects’ internal rates of return (IRRs), Table 3.1: Summary of results—nPv of Total Costs and irr renewable energy project nPv, total costs [ku$] irr [% p.a.] Subsystem name reactive Proactive reactive Proactive Tuguegarao TAREC 2 23,671 22,128 6.1 6.3 TAREC 4 16,898 9,684 2.6 5.5 DUMMON 7,964 1,831 1.2 4.7 PINACAN 7,692 5,546 3.4 4.1 ALL PROJECTS 56,225 39,189 — — 25 Mexico SWEET CRYSTAL 4,547 4,737 3.5 3.3 BASECOM 3,624 3,181 4.1 4.7 BATAAN 2020 5,744 5,744 8.7 8.7 ALL PROJECTS 13,914 13,661 — — Laoag PAGUDPUD 11,129 12,260 8.6 8.3 BURGOS 10,967 10,575 9.5 9.6 ENERGY LOGICS 10,725 8,636 9.9 10.1 ALL PROJECTS 32,821 31,471 — — Bacnotan SABANGAN 14,028 12,675 4.4 4.5 LOMBOY/SUYOC 5,994 5,848 3.9 4.0 LON—OU 19,635 18,789 4.8 4.8 MAN-ASOK 3,663 3,080 0.6 1.3 SAN GABRIEL 2,838 2,846 3.1 3.0 ALL PROJECTS 46,158 43,239 — — La Trinidad AMPOHAW 4,781 4,778 5.0 5.0 KAPANGAN 13,865 13,865 4.8 4.8 OMINONG 2,802 1,792 2.9 3.9 EDDET 3,586 4,238 4.0 3.7 KABAYAN 13,972 13,972 4.4 4.4 BINENG 3,616 3,614 5.0 5.0 ALL PROJECTS 42,622 42,260 — — ALL SUBSYSTEMS 191,739 169,820 — — Source: World Bank 2010. Note: Results intent to compare reactive vs. proactive approach using cost assumptions, resource quaility, and financial parameters by the authors. Results should not be read as expected project’s financial performance, which will depend on each project terms and conditions. except for a few projects (Sweet Crystal, Pagudpud, San include incentives for transmission connection costs. Gabriel, and Eddet). In some regions, cost reductions are This regulation is still under consideration, although considerable. Take, for instance, the Tuguegarao region, incorporating such a policy, along with the proactive where the total cost of transmission was reduced by more planning currently utilized, can significantly reduce than half and indicative IRR almost doubled. the interconnection investment costs for renewable generation and further facilitate its growth. The difference between the reactive transmission plan and the anticipatory transmission plan for the 3.2.3. Mexico Tuguegarao region can be appreciated in Figure 3.3. The left side displays the transmission network layout The government of Mexico, under the National Energy connecting each of the four projects individually Strategy, has established a target of reaching 35 (reactively), and the right side presents the transmission percent of the nation’s energy mix from renewables. network that results from the anticipatory planning As mentioned in the Chapter 1 section, The Need for process. More details of this case can be found in the Scaling up Transmission When Scaling up Renewable Madrigal and others (2010). Energy, one of the richest wind resource areas in Mexico is located in southeastern state of Oaxaca. The area Currently in the Philippines, the costs of transmission has long been named La Ventosa, with estimated wind 26 are borne by the developers. However, there are power potential between 5,000 MW and 6,000 MW mechanisms by which the transmission company can with capacity factors of up to 40 percent. Approximately finance and build the interconnections and recoup 2,745 MW of wind power capacity projects are the investment through monthly installments from estimated to be online by 2014. The majority of these the generators. Such mechanisms ease the upfront projects, approximately 1,967 MW, will be owned investment burden on the renewable developers and and operated by the private sector to supply industrial encourage growth. Furthermore, the NREB is working consumers at privately negotiated energy prices—hence, on defining the draft regulation to establish feed- this is considered nonpublic service demand. However, in tariffs for renewable energy providers that may La Ventosa is located away from the consumption figure 3.3: reactive vs. Anticipatory Transmission Plan to Connect renewable energy Sites Source: World Bank 2010. Note: green = 230 kV; orange = 115 kV; blue = 69 kV; dark gray = 34.5 kV; light gray = 11 kV. centers and requires approximately US$260 million in figure 3.4: Wind Power Capacity in transmission network expansion and upgrade costs to operation in la ventosa region connect these wind farms. 3,000 2,665 Mexico follows a deep connection policy whereby 2,500 2,745 generators are responsible for all transmission 2,745 2,000 connection costs, including reinforcement. Additionally, the CFE—a vertically integrated, 1,500 1,256 state-owned utility—owns and operates the entire 1,000 transmission network in the country and currently 500 519 has no legal responsibility to expand its networks, 86 85 415 2 including reinforcement, for generation projects that 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 will not be supplying public service demand. This creates a regulatory void, whereby neither party— Source: CFE 2010. neither renewable generators nor the CFE—can Note: All projects are committed or under construction. move forward unless the other party can guarantee its commitment. On one hand, generators are not 27 able to secure the required financing until there is a zone, size, and expected time to enter into operation, commitment from the CFE that sufficient transmission as well as other relevant technical information. infrastructure will be developed to accommodate their Once this period is over, all project proposals are generation. On the other hand, the CFE requires taken into account by the CFE, which performs the generators to commit prior to commissioning the technical planning studies to determine the lowest-cost construction of any transmission expansion. This is transmission network to serve all generators that have commonly known as the chicken and egg dilemma. expressed interest. Once the transmission network is defined, the price of the firm transmission services To resolve this dilemma, Mexico, similar to Brazil’s agreement is determined by dividing the total cost by CPDST process, implemented an Open Season generation capacity in megawatts of all generators to Transmission Planning Process. The process, mandated be served by the network. Such prices and infrastructure by the Ministry of Energy, is managed by the regulator development plans are shared with all involved parties. (CRE) and triggered on an as-needed basis. The entire If renewable developers are interested in moving forward process from start to finish the takes approximately six with their development plans after reviewing the costs, months to complete and thus far, the process has been they must submit a letter of commitment to the CFE, carried out twice solely for the La Ventosa region. The along with a payment of 5 percent of the total costs to objective of Open Season Process is (a) to identify the enter into the firm transmission service agreement. transmission investment needs to serve all wind power projects in the Ventosa region, (b) to determine the best Once the letter of commitment reserving firm minimum-cost expansion strategy for such needs, and transmission capacity is received by the CFE along (c) to define the cost-sharing ratio or firm transmission with the 5 percent payment, the CFE includes the rights price for wind developers. The introduction of network expansion and upgrade in the official budget the Open Season has been seen as one of the major and overall investment planning of the utility. If at breakthroughs that had led to the financial closure and any time during the process a renewable developer commitment of several wind power generation projects backs out its commitment, the CFE must re-evaluate in the area. By 2010, 2,745 MW of wind power projects the transmission extension, along with the needs and will be in operation in La Ventosa region (see Figure 3.4). associated costs, and communicate these changes with all parties. If no changes are necessary or if The first step in the Open Season consists of a period developers accepted all changes, developers are in which all interested renewable generators within la required to submit 25 percent of the payment related Ventosa region must express their interest in entering into to their transmission service contract (investment a firm transmission service agreement with the utility (see costs) once the shared network appears in the Figure 3.5). Generators specify their location within the official government budget that approved the utility figure 3.5: Transmission Planning open Season Process—Mexico RE Generator’s letter of intent CFE determines shared RE Generator’s transmission extension letter of intent and reinforcement needs & costs $/MW RE Generator’s letter of intent Communication of $/MW Changes (firm transmission cost) RE Generators submit No Letter of Commitment and 5% payment End Yes 28 CFE includes RE Generators CFE reviews Bidding for network expansion any changes RE Generators construction submits 25% Yes No submits 100% Yes in official budget down payment on changes of and overall commitments of the costs transmission investment lines planning No No Source: Prepared by the authors with data from the CFE and CRE. investments. Once the budget has been officially for the transmission system have been developed with published, the utility starts the preparatory work to bid the participation of the private sector. This is supported out for the construction of the transmission facilities. under an existing regulation of general application to A month prior to the bidding, wind power producers all sectors, which allows for public and private sector commit fully by submitting 100 percent of their shared participation in developing projects with productive costs and signing the firm transmission services uses. The CFE owns and operates the transmission agreement with the CFE. lines, while the renewable energy developers pay for firm transmission service agreements that are necessary Both Brazil and Mexico follow an anticipatory approach to finance the infrastructure. At the conclusion of to planning transmission. however, it is important to the process, which has been launched twice up to emphasize that, unlike Brazil, the renewable developers 2010, a total of 1,927 MW of wind power generation contract their energy sales directly with industrial projects have committed to sharing the cost of the consumers (self-supply) and do not participate in an transmission infrastructure that was identified by the energy auction. Additionally, investment costs of the CFE as necessary for all projects. Out of the 1,927 shared network are paid upfront by renewable energy MW, 406 MW will be owned and operated by the developers. The costs are shared on a per-megawatt utility, and the majority, 1,521 MW, will be owned and basis and are due along the way through the Open operated by the private sector under the scheme of Season Process with full payment due before the self-supply.4 Figure 3.6 presents high-level details of the bidding process for construction of the transmission transmission infrastructure that will be built as a result lines starts. This is the first time large investment needs of the Open Season. 4 Self-supply is a form of private participation in the generation sector in Mexico, by which a group of consumers implement a generation project to exclusively supply their consumptions needs. Generation cannot be sold to third parties or the utility. figure 3.6: Transmission infrastructure to Connect re as result of the open Season 29 Source: CFE 2010. Note: Transmission open season infrastructure is indicated by dashed lines. 3.2.4. The United Kingdom for 2006–12 period for the SPT tripled because of the higher investment needs needed for transmission As mentioned in the Chapter 1 section, The Need for network expansion resulting from increasing renewable Scaling up Transmission When Scaling up Renewable generation. Energy, the Renewables Obligation mechanism has been the main driver behind the growth of renewable As part of the decarburization strategy in the United energy in the United Kingdom for past 20 years. In the Kingdom and in Europe, the regulator entered into a United Kingdom, under the existing framework, the lengthy process to review the existing regulatory models regulator assesses the transmission expansion plan and for energy networks (electricity and gas, transmission issues the final decision on the allowed capital and and distribution). The main driver of this review was operation expenditures for the transmission utilities for to identify a new regulatory model to respond to the a period of five years. These expenditures are recouped new context of the industry driven by the need for by transmission utilities by applying transmission charges lower-carbon development. The review has led to to network users. However, because of the significant two significant changes; first, the introduction of a increase in renewable generation from RO mechanisms, procurement process for the development of offshore investment needs in transmission and distribution networks and, second, the approval of a new regulatory have drastically increased. The higher investment model for onshore transport energy networks that will needs specific to the United Kingdom are the result apply starting in the year 2013. Each of these changes of interconnecting wind power generated in the north in are discussed in detail below. Another review is (Scotland) and bringing it to main consumption centers focusing on determining if changes to the connection in the south. In fact, the capital expenditures approved and network cost allocation methodologies are required. 3.2.4.1. Offshore Networks Development the projects, their size, and their completion date, which were included in Round One. OFGEM and the Department of Climate Change established a new regulatory scheme to develop the Round Two: OFGEM commenced the second transmission needs for offshore power development. The transitional round of bidding on November 17, 2010. scheme seeks to ensure that new transmission networks Unlike in Round One, transitional bids in Round Two for offshore renewable generation are developed are for projects where the transmission assets have been efficiently and economically. The main feature of the or will be constructed by the offshore developer, then scheme consists of granting transmission licenses to transferred to the OFTO (OFGEM n.d). The decision on finance, build, and maintain networks to connect preferred OFTO for the projects in Round Two will be offshore development. The concessions will be awarded issued in July 2011. Table 3.3 list the projects and their under a competitive procurement process to be size, as included in Round Two. conducted by the regulator. The procurement process is seen as a mechanism that encourages innovation, 3.2.4.2. New Regulatory Model for Onshore Energy new sources of financing, and technical expertise to Networks ultimately reduce costs for generators and consumers. Thus far, two rounds of procurement have commenced, Traditionally, the U.K. transmission networks have been 30 although only Round One has concluded. regulated by an incentive mechanism known as RPI-X. Under this process, capital and operational expenditures Round One: OFGEM commenced the first submitted by transmission owners are assessed by transitional round of bidding in June 2009. the regulators using several audits and technical Transitional bids are for projects that have been or studies to determine consumer tariffs on five years’ are being constructed by developers meeting certain duration. Once transmission companies respond to the preconditions. These are projects in the transitional assessment, the regulators release the final decision regime, where the assets will be transferred to an on the price control review. This review determines the offshore transmission owner (OFTO) upon completion capital and operational expenditures that are deemed of construction. Successful bidders were granted necessary and efficient for the companies to provide licenses in June 2010 (OFGEM n.d). Table 3.2 lists their services. The RPI-X process has been conducted four times thus far, although the last regulatory period (2007–12) was extended until March 2013, when the Table 3.2: round one Projects—u.k. regulation will take effect. Transitional Procurement Regulators in the United Kingdom recognized the Completion challenges faced by transmission and distribution no. Project name Size (MW) date networks driven by huge and rapidly growing investment 1 Barrow 90 Operational needs. For instance, the expected investments in 2 Robin Rigg East and 180 Operational transmission and distribution networks are estimated West to be £32 billion by 2020, which is nearly double 3 Gunfleet Sands 1 164 Operational the expenditures of the last 20 years. The new RIIO and 2 4 Sheringham Shoal 315 April 2011 5 Ormonde 150 March 2011 Table 3.3: round Two Projects—u.k. Transitional Procurement 6 Greater Gabbard 504 November 2010 no. Project name Size (MW) 7 Thanet 300 May 2010 1 Gwynt y Mor 576 8 Walney 1 178 October 2010 2 Lincs 250 9 Walney 2 183 August 2011 3 London Array Phase 1 630 Source: Compiled by the authors with data collected from Source: Compiled by the authors with data collected from the OFGEM website. OFGEM website. model (revenue = incentives + innovation + outputs) The overall review will be guided by the principles has been designed specifically to meet the needs of the new regulatory model, which is to encourage of delivering expanding networks required for the network companies to play a full role in the delivery of a sustainable and low-carbon development of the power sustainable energy sector and to deliver valuable network sector. The RIIO model will place more emphasis on services for existing and future consumers (OFGEM the long term by first extending the regulatory review 2011a). On network pricing, the review recognized period from the traditional five-year to eight-year period that all options are still open, from eliminating the and will first be implemented in 2013 to determine short-term locational component of transmission consumer tariffs for 2013–21 (OFGEM 2006. One of pricing, but improving the long-term location signal, to the main considerations of the new model is to make further improving the short-term locational signals in an up-front determination of revenue requirement by transmission prices (OFGEM 2011a). transmission operators to guarantee financial viability, timely delivery, focus on timely and efficiently delivery of 3.2.5. Texas services, transparency and predictability, and balancing costs paid by current and future consumers. The new As mentioned earlier, Texas currently not only leads the model will be implemented by means of incentives, nation with 9,528 MW of installed wind power capacity innovation, and transparency and predictability, and will (ERCOT 2011) and its success is partially attributed to balance the costs of existing and future consumers and the RPS. The RSP was first introduced in Texas as part 31 provide clear definition of expected output. of the state’s electricity restructuring legislation in 1999 under Senate Bill 7 to ensure continuous growth in In addition to the review of the regulatory model, the renewable energy generation in Texas despite the OFGEM initiated a process to review the network pricing increasing competitiveness in the electricity markets. The mechanisms for electricity and gas transmission networks. RPS in Texas mandated that electricity providers generate The review will assess whether existing connection and 2,000 MW of additional renewable energy by 2009. This network pricing mechanisms, largely based on cost- 10-year target was met in just over 6 years and, in part causality measures, are adequate to facilitate a timely because of its success, Senate Bill 20 was introduced in move to a low-carbon energy sector while providing 2005. Senate Bill 20 increased the targets and mandated safe, secure, and high-quality network services at a good that the state’s total renewable energy generation must value for the money for existing and future consumers. reach 5,880 MW and 10,000 MW by 2015 and 2025 The process began in September 2010 and, after a first respectively. The bill also mandated that 500 MW of the round of consultation, some priorities were identified. On 2025 renewable energy target be derived from nonwind interconnection cost pricing issue, the priority objective sources. However, because of the relatively low cost and is to review the existing interconnection commitment abundance of wind resources, wind power dominates arrangements between interconnecting generators and renewable energy generation in Texas. By instituting the the network. The existing user comments arrangement , RSP wind power development in Texas has more than describes the amount of guarantees that interconnecting quadrupled and, because of its competitive pricing, generations should provide from the time they request available federal tax incentives, and the state’s immense interconnection to the time the facilities of individual are wind resources, wind power is expected to remain commissioned for construction. competitive with coal- and gas-fired plants (SECO 2011). The objective of the guarantee scheme is to protect Introduction of the RPS has led to concentrated efforts in transmission operators from incurred costs in case developing wind farms, although inadequate transmission the interconnecting generator withdraws (OFGEM was cited as the most significant obstacle to development. 2010b). The review process is focused on ensuring that Wind-endowed regions, such as around McCamey, the risks between new and existing network users are Texas, which has a tremendous capacity to generate balanced, as well as the risks between any user and the renewable energy, have been handicapped from the transmission companies. The objective is to ensure that lack of transmission infrastructure. To further prevent excessive or inappropriate connection costs do not fall such hindrances, and to respond to the tremendous to consumers and they are transparent, proportionate, transmission needs triggered by renewable generation, and nondiscriminatory, and do not act as a barrier to Texas has adopted proactive transmission planning entry to any generator, including renewable energy. (discussed later) as part of their legislative strategy. In 2008, the PUC issued a final order designating the transmission constraints that are most likely to five renewable wind energy zones and a transmission limit the deliverability of electricity from wind energy expansion strategy to transfer renewable energy from resources. The report is prepared in consultation the zones to the load based on the most optimal and with independent system operators (ISOs), regional cost efficient way. This transmission expansion plan transmission organizations (RTOs), utilities, and would interconnect 18,456 MW of wind power from other independent organizations, and also includes West Texas and the Panhandle at the total project cost analysis of wildlife habitats that may be affected by of approximately US$7.8 billion. Table 3.4 summarizes renewable energy development in any candidate the capacity, cost, and total distance for each zone provided by the Texas Department of Parks and competitive renewable energy zone (CREZ). Wildlife. Within six months of the report submission, the PUC issues a final order designating a CREZ. Senate Bill 20 laid the groundwork for large transmission For each CREZ designated, the PUC must also lines in order to accommodate present wind industry specify (a) the geographic extent of the CREZ, (b) the needs and to further accelerate the use of wind power major transmission improvements needed to deliver in the state. The bill requires that CREZs be designated the renewable energy in a cost-effective manner, in the best wind energy resource areas in the state and (c) an estimate of the maximum generating capacity that an electric transmission infrastructure be constructed of the region that transmission is expected to 32 to move renewable energy from those zones to markets accommodate, and (d) other requirements included where people use energy (SECO 2011). in the Public Utility Regulatory Act. • Level of financial commitment by generators A CREZ is meant to get transmission out to prime for designating a CREZ: Once the CREZs are wind energy areas before wind farms have even been designated, various documents that include pending developed. This overall CREZ process is managed or signed interconnection agreements for planned and regulated by the PUC and follows the procedures renewable energy resources, as well as leasing described below and pictorially defined in Figure 3.7 agreements with landowners in a proposed CREZ, (PUC 2009b): are reviewed to determine the financial commitments of generators for the designated CREZ. In addition, • Designation of CREZs: In the initial step, the PUC financial commitments from investors to build initiated a contested case hearing that allowed any transmission facilities dedicated to delivering the interested entity to nominate a region for CREZ output or renewable energy in a proposed CREZ are designation. Simultaneously, the Electric Reliability also assessed. Council of Texas (ERCOT) initiated a wind study, • Plan to develop transmission capacity: After the commissioned by the PUC, detailing wind energy level of financial commitment is assessed, the PUC production capacity statewide in conjunction with is responsible for developing a plan for transmission Table 3.4: Texas Transmission expansion Projections CreZ Wind capacity (MW) Total cost of project (uS$ million) Total CreZ miles Panhandle A 3191 833 523 Panhandle B 2393 444 258 Central West 1859 280 186 Central 3047 1,098 704 McCamey 1063 5,188 320 Base case capabilities* 6903 n.a. n.a. Total 18,456 7,843 1,991 Source: Compiled by the authors with data obtained from (PUCT-CREZ 2010) and Cross Texas Transmission. n.a. Not applicable. Note: Base case: the generation capacity was either operational or had signed interconnection agreements. figure 3.7: CreZ Process, Texas Input from Designation of Stakeholders – any CREZ by PUC – interested entity Texas Input from ISO, RTOs, ERCOT – State Changes utilities, Gov’t dept. wide wind study and private consultants PUC – Texas designates CREZ ERCOT – Conduct multiple- scenario transmission study 33 Select TSO CCN winners PUC – select based on CCN (TSP) build and best trasnmission comprehensive Winners granted own expansion performance by PUC transmission option evaluation network Source: Prepared by the authors. networks that will accommodate renewable energy in two-part, sealed-envelope bidding process, in Texas the designated CREZ in a manner that will be most the TSOs are selected based on a comprehensive beneficial and cost effective to the customers. The performance evaluation performed by the regulator. PUC is also responsible for selecting one or more To further elaborate, Rule 25.216 states that entities responsible for constructing and upgrading in order to become a qualified TSC, the TSC the transmission network. All parties interested in must demonstrate that it is capable of building, construction of transmission improvements are operating, and maintaining the facility identified required to submit expressions of interest to the PUC in the CREZ plan. The PUC will then select TSCs after the issuance of final order. based on their ability to provide the needed CREZ • Certificates of convenience and necessity transmission facility in the manner that is the most (CCNs): One of the main features of a CREZ is a cost effective and beneficial to consumers (PUC CCN. A CCN guarantees that all costs associated 2009b). The decision factors include the “TSP’s with building and maintaining the transmission [TSC’s] ability to finance, license, operate, and network will pass through to consumers via tariffs. maintain facilities; the TSP’s [TSC’s] cost projections All (100 percent) of the transmission costs are and proposed schedule; its use of historically passed on to the load. Hence, TSOs recover their underutilized businesses; and its track record investments through the postage stamp method and understanding of the project� (Diffen 2009). from consumers (Diffen 2009). Each TSC selected The PUC ensures sufficient financial commitment to build and own transmission facilities for a CREZ from renewable generators prior to granting the is required to file a CCN application. Rule 25.216 certificate of convenience and necessity to the TSC. in the Texas legislature dictates that incumbent TSCs may propose modifications to the transmission utilities or owners will be responsible for the facilities at this time if those modifications can upgrades for all existing facilities, unless there is a reduce cost or improve capacity for the CREZ. good reason or owner’s request otherwise. Unlike All modifications are reviewed by ERCOT based in Brazil where TSOs are determined based on a on the PUC’s directions. Approval by the PUC is permitted through CCNs that grants permission to potential with Zone 1 having the strongest and zone 25 TSC to move forward with constructing the project having the weakest wind resources (Diffen 2009). These and exercise the power of eminent domain where sites were selected based on a complex meteorological necessary (RS&H 2011). To protect the TSO or and terrain model that provided localized prediction of utilities responsible for building the transmission wind patterns and resulting wind power output across from developers backing out, the developers are the state (ERCOT 2006b). required to post a deposit, which is returned when the generation plant is complete and ready for Once the zones were identified, ERCOT developed interconnection. In return, CCN guarantees TSOs several transmission plans to accommodate the zones that they will recoup their cost via a postage stamp with various transmission options. These data were method through consumer tariffs. used by the commissioners in the CREZ proceedings to help make well-informed decisions. During the Although this process may seem similar to the legal proceedings, 65 parties intervened and more anticipatory planning in the case of Brazil and Mexico, than 1,400 documents were filed, including financial the differences are quite significant. Texas uses a commitment testimony to support more than 24,000 proactive approach determined on the basis of RPS. MW of CREZ projects across 16 zones. Because of the The RPS sets the state’s renewable energy targets and high volume of materials filed and the breadth of the 34 forces regulators to aggressively plan ahead in order issues presented during the hearings, the final order to reach those targets within the set timeframe. As deadline was extended. However, an interim order was opposed to a reactive approach where transmission issued designating the five competitive zones for which networks are extended in response to the request various transmission options would be investigated to filed by the renewable developers or an anticipatory derive accurate cost estimates. From the initial 25 zones approach where the network is efficiently designed suggested by the study, 9 were eliminated because of based on a specific region to exploit the immediate no evidence filed, and 8 others demonstrated a lower needs of investors, the regulators in Texas ambitiously level of financial commitment. The commissioned plan cost-efficient transmission network strategy five ensured that the remaining 8 zones displayed sufficient years in advance. The transmission network expansion renewable energy resource and suitability for wind strategy is based on comprehensive research and development. There also needed to be nonrenewable stakeholder participation to determine the optimal generation available to provide ancillary services, such renewable energy zones, which allows for maximum as backing up the wind by ramping up as wind output generation capacity and cost efficiency for consumers decreases. And finally the PUC also factored in system and transmission. Based on the process described reliability, environmental sensitivity, economics, and above, the transmission network is extended to geographic diversity (Diffen 2009). These eight zones the designated CREZ prior to the development of were combined to form the five CREZs identified in renewable generation facilities to prevent delays and Figure 3.9. facilitate growth. Once the CREZs were designated, the PUC’s interim final This proactive transmission planning approach has order outlined four scenarios for building transmission enjoyed phenomenal success in Texas. In response to capacity for wind generation specified in the Table 3.5, this legislative action, the PUC issued a final order in depending on cost and the number of wind farms to be Docket No. 33672 in 2008, establishing five CREZs built. Table 3.5 summarizes the four scenarios. in Texas and designating a number of transmission projects to be constructed to transmit wind power from After evaluating all four scenarios based on total the CREZs to the highly populated metropolitan areas of and incremental cost, transmission system capacity, the state (RS&H 2011). congestion, economies of scale, incremental costs, environmental benefits, and fuel cost savings, the Initially, the study conducted by ERCOT presented the PUC issued its order selecting Scenario 2 on October top 25 wind regions in the state based simply on the 7, 2008, with its associated transmission plan to wind capacity factor and did not take into account the interconnect 18,456 MW of wind power from West availability of transmission. The zones (displayed in Texas and the Panhandle. The total cost of these Figure 3.8) are numbered according to wind generation projects is estimated to be approximately US$7.8 billion figure 3.8: Potential Wind resources, Texas 35 Source: Woodfin 2007. related to new renewable generation technologies as enables proactive planning, which includes stakeholder summarized in Table 3.4. consultation, and it provides transparency, reduces cost, and ensures optimal network expansion benefitting Based on the April 11, 2011, quarterly CREZ progress TSOs, generators, and consumers. report (PUC 2011), a number of the CREZ projects have been completed and others are in various stages 3.2.6. Midwest ISO of completion. Based on information provided by TSCs, the estimated schedule completion date for the last The Midwest Independent Transmission System project is December 31, 2013, which is in alignment Operator, Inc. (Midwest ISO) is the first RTO approved with the PUC’s stated program completion goal of the by the Federal Energy Regulatory Commission (FERC). close of 2013. However, many projects are still in the It serves as an independent, nonprofit organization early stages of development, which can cause delays in responsible for the safe, cost-effective delivery of the overall timeline. Additionally, the estimated cost of electric power. Midwest ISO provides unbiased grid the CREZ program based on current reported data is management and reliable transmission of power in 13 US$6.5 billion, a decrease from the initial estimate of states and the Canadian province of Manitoba. US$7.8 billion. With a massive footprint that covers 93,600 miles Texas legislature set ambitious renewable energy (920,000 square miles) of transmission with a targets to RPS while simultaneously laying the necessary combined market generation capacity of 138,556 groundwork to enable proactive, planning which has MW, Midwest ISO manages one of the world’s resulted in tremendous success. The CREZ process largest energy markets using security-constrained figure 3.9: Texas CreZ Map 36 Source: PUC 2010. economic dispatch of generation, clearing more energy through its annual Transmission Expansion than US$23 billion in gross market charges annually. Planning. Furthermore, Midwest ISO also serves as However, Midwest ISO does not generate or buy the region’s balancing authority, providing oversight electricity. Nor does it own transmission; instead, it to 25 local balancing authorities, 26 TSOs, and 3 operates at a regional dimension and administers regulatory bodies. Figure 3.10 details the balancing the market for electricity producers and users on a authority alignment. This is a complicated task, wholesale level and provides reliability to the electric since some transmission owners are vertically grid. Besides its responsibility of operating the gird, integrated and regulated by individual states, while the Midwest ISO facilitates value-based regional others are independently owned and regulated planning for reliable generation and transmission of by FERC. In addition, only a few states within the Table 3.5: Megawatt Tiers for erCoT CreZ Transmission optimization Study Scenario 1 (MW) Scenario 2 (MW) Scenario 3 (MW) Scenario 4 (MW) Panhandle A 1,422 3,191 4,960 6,660 Panhandle B 1,067 2,393 3,270 0 McCamey 829 1,859 2,890 3,190 Central 1,358 3,047 4,735 5,615 Central West 474 1,063 1,651 2,051 CREZ Wind Capacity 5,150 11,553 17,956 17,516 Source: ERCOT 2008b. figure 3.10: Balancing Authority Alignment ATC ALTE UPPC WEC MECS NSP WPS MECS MGE DECO NSP NWEC CONS ATC ALTW MRO RFC MP ITC DECO OTP METC CONS GRE SMP OTP MPC FE IPL MDU SERC AMIL AMMO 37 NIPS CIN CWLD CWLP HE SIGE SIPC Transmission Operator (TOP) Local Balancing Authority (LBA) Regional Reliability Organization Midwest ISO BA (MAB) Midwest ISO Balancing Authority Area (MBAA) Source: Chatterjee 2010. Midwest ISO offer retail choices, and each state has Figure 3.12 summarizes the percentage of renewable varying recovery mechanisms for new transmission energy requirements on yearly basis for respective states investments. within the Midwest ISO. In addition to the structural and operational differences Ambitious legislative renewable energy requirements in the energy market within each state, renewable energy or goals have been a significant driver for transmission targets established by individual states vary in specific expansion efforts led by Midwest ISO where the majority requirements and implementation timing (Midwest of the renewable energy requirements would be met ISO 2010c). This adds further complexity, since some through wind energy. To build the optimal transmission states within the Midwest ISO purview—that is, Illinois, expansion plan that will offer the lowest delivered Iowa, Michigan, Minnesota, Missouri, Montana, Ohio, dollar per megawatt-hour cost, Midwest ISO, with the Pennsylvania, and Wisconsin—currently have RPS assistance of state regulators and industry stakeholders, mandates. North Dakota and South Dakota do not have conducted the Regional Generator Outlet Study an RPS, but they do have renewable goals, while Indiana (Midwest ISO 2010c). and Kentucky currently have neither RPS mandates nor goals (Midwest ISO 2010c). Figure 3.11 displays the The study evaluated 14 different renewable generation RPS and renewable goals for individual states within the options, which included (a) only local generation, which Midwest ISO. requires less transmission to be delivered to load centers; figure 3.11: rPS and renewable goals for individual States 38 Source: Midwest ISO 2010c. figure 3.12: rPS or renewable goals for respective States within Midwest iSo Mn Mn (w.o (w.o Wi xcel) xcel) il Mi oh Mo MT PA SD nD (% of (% of (% of (% of (% of (% of (% of (% of (% of (% of (% of iA year energy) energy) energy) energy) energy) energy) energy) energy) energy) energy) energy) (MW) 2015 10.00 12.00 18.00 10.00 10.00 3.50 5.00 15.00 5.50 10.00 10.00 105 2016 10.00 17.00 25.00 11.50 10.00 4.50 5.00 15.00 6.00 10.00 10.00 105 2017 10.00 17.00 25.00 13.00 10.00 5.50 5.00 15.00 6.50 10.00 10.00 105 2018 10.00 17.00 25.00 14.50 10.00 6.50 10.00 15.00 7.00 10.00 10.00 105 2019 10.00 17.00 25.00 16.00 10.00 7.50 10.00 15.00 7.50 10.00 10.00 105 2020 10.00 20.00 30.00 17.50 10.00 8.50 10.00 15.00 8.00 10.00 10.00 105 2021 10.00 20.00 30.00 19.00 10.00 9.50 15.00 15.00 8.00 10.00 10.00 105 2022 10.00 20.00 30.00 20.50 10.00 10.50 15.00 15.00 8.00 10.00 10.00 105 2023 10.00 20.00 30.00 22.00 10.00 11.50 15.00 15.00 8.00 10.00 10.00 105 2024 10.00 20.00 30.00 23.50 10.00 12.50 15.00 15.00 8.00 10.00 10.00 105 2025 10.00 25.00 30.00 25.00 10.00 12.50 15.00 15.00 8.00 10.00 10.00 105 Source: Midwest ISO 2010c. figure 3.13: Total generation and Transmission Cost for each option, Midwest iSo 130,000 120,000 transmission costs ($M) Total generation and 110,000 100,000 90,000 80,000 70,000 60,000 Local Combination Regional generation (local & regional) generation generation Source: Midwest ISO 2010c. 39 (b) only regional generation where generation is placed area; (b) 765 kV: overlay allowing the introduction of in the regions with the highest wind capacity; and 765 kV transmission throughout the study footprint; and (c) several combinations of local and regional generation. (c) Native Voltage with DC: transmission that allows for Transmission overlays were developed for each of the 14 the expansion of direct current (DC) technology with the scenarios in consultation with the transmission owners on study footprint. Figure 3.14 provides the summary of a high-level, indicative basis. The graph in Figure 3.13 transmission cost based on each transmission expansion illustrates the capital cost of each of the 3 options. option. These costs represented the comparative Based on the RGOS, it was determined that the least- measure of total megawatt-hour cost if wind served cost approach to developing renewable generation and as the only energy source relative to RGOS wind and expanding the corresponding transmission network would transmission (Midwest ISO 2010c). be option 2 where a combination of local and regional wind generation locations. This approach was affirmed Based on the results indicated by the study, the optimal and endorsed by the Upper Midwest Transmission and most cost-efficient approach for the states to meet Development Initiative and the Midwest Governors its renewable energy targets would be a combination Association (Midwest ISO 2010c). of local and regional renewable energy generation efforts. These options represent a potential investment The RGOS also narrowed its focus to the development of US$16–22 billion over the next 20 years and consist of three transmission expansion scenarios that met of new transmission mileage of 6,400–8,000 miles. respective state renewable energy targets by integrating Midwest ISO is leading the charge on coordination and wind from the designated zones: (a) Native Voltage: development to achieve the renewable targets of all overlay that does not introduce new voltages in the states within the region. figure 3.14: Transmission Cost Based on Three expansion Scenarios, Midwest iSo (US$ millions) Category graphic purview native voltage 765 kv native DC Transmission Total $1,686 $2,064 $2,188 Midwest ISO $1,419 $1,537 $1,304 PJM $209 $424 $227 Joint/DC* $57 $102 $656 Source: Midwest ISO 2010c. Planning for these large investments and Criterion 1 specifically relates to transmission expansion geographically diverse transmission portfolios is to meet the RPS within Midwest ISO states. The high-level very different from the traditional planning driven steps involved with the first MVP study were as follows: by load growth. To tackle this challenge, Midwest ISO established a more comprehensive planning 1. Short-Term Energy Delivery Analysis: The main approach—Value Based Planning illustrated in objective of this analysis was to ensure that with the Figure 3.15. transmission expansion portfolio, the incremental increase in deliverability of wind energy was adequate Through its stakeholders, Midwest ISO developed a to meet the state mandates in the planning horizon strategy to decrease total system cost by combining 10 year out. The critical first step in this study was to generation deliverability, loss of load expectation, model the geographically diverse wind regions (wind generation and future transmission costs, system zones) at the agreed-upon appropriate amounts. economics, and market rules with existing and The National Renewable Energy Laboratory (NREL) future policy needs. This strategy deals with complex published spatially diverse hourly wind generation questions by constructing a series of scenarios output (developed by AWS True Wind, LLC). Wind representing alternate futures that can be used by zones in Midwest ISO were then modeled using planners to design system enhancements, and by these same hourly wind profiles. The study relied 40 policy makers to understand the context of the choices heavily on hourly security-constrained economic they are asked to make. The value-based planning dispatch simulations that measure congestion and process takes a long-term view of system needs to curtail generation, including in this case wind to establish an efficient plan that is value driven and, relieve congestion. The same wind curtailments were when integrated with shorter-term needs, endeavors then measured using the model, which included the to produce the most efficient and reliable transmission transmission expansion. A comparison between the system achievable. Similar to CCNs in Texas, cost without and with new transmission simulation results recovery policy for Multi-Value Projects (MVP) allows provided the incremental increase in wind energy 100 percent of the transmission cost to be passed delivery. In addition, these simulations also provided onto load. A postage stamp method based on per- both pre- and post-contingent hourly thermal loading megawatt-hour charge is applied for load-serving on the new transmission lines. entities, export transactions, and pass-through 2. Short-Term System Performance Analysis: Various transactions to recover costs. studies were included in this analysis—Steady State, Transient Stability, Voltage Stability, Short figure 3.15: The value-Based Planning Approach used by Midwest iSo Step 1: Create Portfolio Assessment Develop multiple scenarios of Process (PAC Sponsored) alternate futurs fro both planning Determine long-term and policy needs generation profiles by Future Step 2: Incorporate generation from futures into models Develop process to site generation in all models Step 3: Develop long-term Analyze policy driven questions transmission plans from regulators Step 4: Evaluate long-term plans Step 5: Perform MTEP reliability Step 6: MTEP final design of under weighted future scenarios assessment long-term plans Source: Chatterjee 2010. Circuit, and Production Cost. The objectives of ISO projects that the MVP starter projects developed these studies were to (a) ensure the transmission within the first 5 to 10 years following approval of the expansion meets all applicable reliability standards; proposed MVP cost allocation methodology are expected and (b) if not, to include within the portfolio to generate between US$400 million and US$1.3 billion mitigations to identify constraints or, in other in aggregate annual adjusted production cost savings. words, develop an alternate transmission plan. The In addition to production cost savings, the Midwest ISO production cost simulations were intended to help estimates development of the MVP starter projects to compare benefits in the case of multiple reliable result in an annual reduction of approximately 2 million transmission alternatives. MWh in transmission system losses. About US$104 3. Long-Term Economic Analysis: While the short-term million of additional savings are attributable to this analysis focused on a 5- and 10-year-out planning reduction in losses. Moreover, reducing system losses horizon, the long-term analysis incorporated a also reduces capacity reserves required to maintain 15-year-out horizon in addition to the short-term reliability, resulting in an estimated US$110 million models. The objective of this analysis was to ensure savings from deferred capacity investment. The reduction that the selected transmission expansion was a in system congestion resulting from construction of “best-fit� robust plan when tested against a range the MVP starter projects could also lower the planning of modeled future scenarios. These future scenarios reserve margin (PRM) requirement for the Midwest ISO. developed with stakeholders essentially investigated Even a relatively small reduction of 0.5 percent in the 41 different generation portfolio mixes and their impact PRM would result in the deferral of about 500 MW on the developed transmission expansion. Some of capacity investment, saving approximately US$500 examples of these future scenarios are a 20 percent million. In addition to the projected savings in congestion federal renewable mandate, carbon cap legislation, costs and losses, development of MVP projects will high energy growth rates. provide regional reliability and other benefits. By adopting the Value-Based Planning, Midwest ISO As set forth in Midwest ISO Attachment FF (Midwest ISO is able assess scenarios based on performance and 2010a) per the approved FERC order, in order for a short- and long-term economic analysis to ensure that , transmission project to qualify as an MVP it must meet the proposed transmission expansion plan meets all at least one of the following three criteria: regulatory standards, as well as satisfies all current and future regulatory and consumer demands. • Criterion 1: The project must be developed through the transmission expansion planning process for While the planning processes in Midwest ISO and the purpose of enabling the transmission system other RTOs noted above have been long established to deliver energy reliably and economically, and processes, requirements to plan proactively to meet state support documented energy policy mandates or laws mandates have increasingly become more urgent and that directly or indirectly govern the minimum or have pushed Midwest ISO to make significant revisions maximum amount of energy that can be generated to its planning process. The Midwest ISO is currently by specific types of generation in a manner that evaluating its first Candidate Multi-Value Projects Portfolio is more reliable and/or more economic than it targeted for recommendation to the board for approval otherwise would be without the transmission upgrade. in its 2011 planning cycle. This group of projects (MVP • Criterion 2: The project must provide multiple types starter projects) includes transmission lines in every of economic value across multiple pricing zones region of the Midwest ISO footprint and represents about with a total project benefit-to-cost ratio of 1.0 or US$4.6 billion in investments in the Midwest ISO region, higher, as defined in Section ILC.6 of Midwest to be developed over the next 10 years. In addition to ISO Attachment FF (Midwest ISO 2010a). In advancing the integration of renewable energy projects conducting the benefit-to-cost analysis, the reduction necessary to meet defined public policy requirements, of production costs and the associated reduction the Midwest ISO has determined that the MVP starter of locational marginal prices resulting from a projects would alleviate major areas of congestion transmission congestion relief project are not additive in the Midwest ISO, which would allow for the more and are considered a single type of economic value. efficient delivery of energy to load and also would • Criterion 3: The project must address at least one result in substantial production cost benefits. Midwest transmission issue associated with a projected violation of a North American Electric Reliability ensuring that transmission reaches the zones where the Corporation (NERC) or Regional Entity standard and renewable energy potential is more effective. at least one economic-based transmission issue that provides economic value across multiple pricing Anticipatory or proactive planning for transmission zones. In this case, the project must generate total requires new tools and an open participatory process to financially quantifiable benefits in excess of the total implement the transmission planning function. On the project costs based on financial benefits and project tools side, determining transmission expansion options costs, as defined in Section ILC.6 of Midwest ISO for a large number of projects in a wide geographical Attachment FF (Midwest ISO 2010a). area becomes a challenge. The number of possible combinations of high-, medium-, and low-voltage The flow chart in Figure 3.16 summarizes the planning solutions to create shared or unshared networks that save process followed by Midwest ISO at a high level. on cost could be so high that heuristic methods—trial and error or experience-based—would be very limited 3.2. New Technical Planning Options or could not be used to find good solutions. In addition, proactive planning to bring transmission for the zone As described in the previous chapter, transmission with the best resource potential requires tools that can planning plays an important role in ensuring that link resource assessment with combined generation and 42 transmission costs for renewable energy are reduced transmission planning methods. Additionally, geospatial and that interconnection requests by renewable energy information becomes a crucial tool to determine providers are addressed more effectively. For instance, resource potential zones and integrate such zones more using the anticipatory approach to develop shared effectively in transmission planning methods. When the networks for renewable energy providers in a given costs involved in expansion options to achieve long- resource zone can greatly reduce the costs, as shown term renewable energy plans are considerable and in the case of Brazil and the Philippines. Similarly, subject to uncertainty, transmission planning needs are as shown in the case of wind power development in implemented using risk-based or robust assessment La Ventosa region in Mexico, an organized planning options. Gathering the information required for all the process helps by responding more effectively to all modeling approaches, ensuring that opportunities are interconnection requests in a given region rather than not being left out, and making sure that other important treating them individually. Furthermore, as displayed parts of the planning function are not forgotten requires in the case of Texas and Midwest ISO, transmission an open and participatory process for planning. planning can be further optimized by proactively This section initially will provide a brief overview of traditional transmission planning methodologies, followed by explaining some of the new analytical figure 3.16: Midwest iSo Transmission tools and implementation processes. These tools and Planning Process processes are emerging as highly valuable to determine low-cost expansion options and to effectively expand RE Generator transmission services to renewable energy zones. Midwest ISO State Regulators/ 3.3.1. Basics of Transmission Planning designates Renewable Gov’t Energy Zones Until about a decade ago, transmission planning Other was primarily driven by one or more of the following stakeholders needs: (a) the need to interconnect single developers’ Transmission options large power plants to the grid, (b) the need for load growth, or (c) the need for reliability improvement. The time needed to take generation planning to Multi-Value TSO commissioning was generally well over the time projects selected needed to take transmission planning to transmission construction. Now wind farms, for instance, can get Source: Prepared by the authors. commissioned within as little as six months. In addition, these wind farms may be built by multiple developers Cost minimization has historically been the driver for located generally in rural areas where transmission planning transmission; it is always desirable for the networks are intended to bring power to remote necessary buildup proposal to be the minimum-cost loads, not to carry power to the main interconnected option to avoid wastage of resources. Since supply system or load areas. Transmission congestion or must meet demand instantly, the interconnected the lack of transmission became a big hurdle in the network needs to be designed in such a way that the interconnection process. The traditional “reactive� loss of an element in the networks does not necessarily transmission planning approach to integrate native lead to large disconnections of load or, worse, to generation just does not work within the renewable systemwide blackouts. The reliability of the network planning context. Waiting for generators to express will ensure that despite anticipated or unanticipated their interest in interconnecting to network and events, the transmission system will be able to provide attending to such requests individually can strain utility the service required to deliver electricity to consumers. resources and finally delay the interconnection process. The construction of transmission infrastructure can In addition, reacting to interconnection requests also have important implications for the environment. individually can lead to significant cost inefficiencies. Analyzing alternatives with less environmental and social impact is also an important principle of the These issues have challenged the entire transmission transmission planning function. Avoiding impacts on industry to rethink planning studies and processes. natural parks and reserve zones, or minimizing impacts 43 Some of the most important improvements will be on vegetation and diversity can also affect the on the described in this paper. While some adjustments have selection of alternatives. been made by introducing new techniques and tools, some of the main principles behind transmission There are trade-offs among the principles that planning remain valid and important. These principles transmission planning usually follows, especially have been guiding transmission planning for a number when it comes to cost and reliability. A highly reliable of years and are described next. network will be more costly (see Figure 3.17), since it will require more investment to achieve redundancy 3.3.2. Overall Principles and Methodology of and extra equipment to ensure that a wide range of Traditional Transmission Planning unexpected events can be handled by the network without disrupting electricity services. A low-reliability Historically, the objective of transmission planning is to network will be less costly, but it could lead to determine the required transmission equipment to satisfy high economic losses. To manage these trade-offs, the needs of transporting energy from supply to demand reliability criteria are traditionally established by following certain requirements. These requirements the planning or regulatory agencies. Transmissions are usually driven by specific guiding principles, such planners internalize these criteria in the planning as cost minimization, reliability, and environmental methodologies to ensure that these trade-offs are considerations. managed properly. There are different ways to determine such criteria, but the basic principle is to Transmission planning can have different time scopes. balance between costs and benefits. That is, criteria Short-term planning focuses on determining immediate can be set as high as society can afford. needs, while midterm planning focuses on determining needs for the next two to five years. Usually short- term or midterm planning is carried out in connection figure 3.17: Cost and reliability Trade-off with regulatory requirements for cost recovery of the transmission assets. Short-term planning could focus Cost on immediate reliability and interconnection needs in specific areas of the system or the system as a whole. Long-term planning refers to identifying transmission needs for usually a 5- to 20-year timeframe. This type of planning is usually carried out in connection with Reliability generation expansion planning to identify a long-term development vision of the network as a whole. Source: The authors. Reliability can be separated into two groups, steady- could be summarized as follows: (a) generation state and dynamic-state reliability. Steady state refers and demand projections; (b) reliability criteria to the operation of the system at a given point in time considerations; (c) analysis of alternatives or minimum during normal operating conditions—a snapshot of cost selection; and (d) reliability or trade-off analysis the system once the dynamic behavior of the network (see Figure 3.18). Practical implementation of the has settled. Dynamic state refers to the behavior of building blocks will depend on the key characteristics the system after system, generation, or load changes, of the system that can impact the planning of usually from a few milliseconds to seconds and before such a composition of generation sources and the system may reach a steady state. Steady state interconnection with other regions or countries. Refer is reached if voltages and frequency in the network to Appendix B for an illustration of the building blocks reach their normal operating levels without any further of technical planning used by the planning agency in variations in time and little or no load shed. Colombia. One of the most widely known steady-state reliability Given the uncertainties involved in longer-term planning criteria is the so-called N-1, which means that the studies, more emphasis is usually placed on the economic transmission systems should be able to deliver all analysis of alternatives and on steady-state reliability electricity from generation to demand despite the loss criteria. For shorter-term planning studies, more detailed 44 of any single network element. For instance, if a city steady-state and dynamic reliability criteria are required, is supplied from a major transmission substation, it while the economic alternatives to expand transmission would be desirable that the substation be fed from two may be limited to fewer options and exhaustive different transmission routes, so that the loss of one identification of alternatives may not be required. line does not leave the city without electricity. In some systems, such reliability criteria is extended to the N-2 contingency, which means the transmission system should be able to supply all the load despite the loss figure 3.18: Building Blocks of a Basic of two network elements. To verify that such criteria are Transmission Planning Methodology being met by a proposed transmission buildup, steady- Generation Demand Reliability state or power flow models must be used. projecions/plan projections criteria Dynamic-state reliability criteria usually verify that, after loss of an element or fault in the systems, the Transmission minimum – cost system voltages and frequency fluctuations cede to a optimization or alternatives generation stable condition with minimal load loss. The dynamic behavior of the systems depends on the severity of the Steady – state relieability analysis changes in the system, the time and place in the system where it occurs, and the way the load, transmission, generation, controls, and protections in the system interact. The transmission system plays a more critical Pass? role in certain dynamic behaviors of the system than others. Appendix C lists some steady-state and dynamic reliability criteria. As mentioned before, choosing a Dynamic reliability analysis larger number of criteria or stringent criteria will always require understanding the implications. Utilities in developing countries have implemented alternatives to manage such trade-offs and determine the right level of Pass? reliability given the specific system conditions.5 While planning methodologies can be highly complex, the basic building blocks of any methodology Source: The authors. 5 See, for instance, the regret analysis implemented in Peruvian electricity in Cámac and others 2009. 3.3.3. Overview of Tools to Assist Traditional The selection of tools depends on a number of factors, Transmission Planning including cost, capability of the models, and the knowledge of the users. More importantly, the specific Unlike generation planning, the technical process characteristics of each system will play an important of transmission planning will always require several role in selecting the model. For instance, planning for tools. The different stages in a transmission planning a small and radial system may not require sophisticated methodology (alternatives, reliability analysis) models to generate hundreds of alternatives, since most require different modeling approaches. For instance, of the alternatives will be evident to the experienced identifying expansion options for particular areas of planner. If the transmission planer is also responsible for a small network in a short-term planning process generation planning, new generation and transmission could be done by means of load-flow simulations with planning tools are becoming increasingly available. inputs from the planner experience. However, for a large meshed network, and especially for long-term Technical planning, as described above, is just part planning processes, the number of alternatives could of the overall planning process. The overall planning be exponential, and tools for automatic selection process (see Box 3.1) depends on the industry or generation of minimum-cost alternatives might regulatory framework, as well as on the characteristics be required. Analyzing the economic implications of the transmission system in question. Systems of transmission projects would, in addition, require with considerable connections to other neighboring 45 production simulation models. Unlike load flow regulatory jurisdictions (states or countries) should models, production simulation models do determine require full interaction with the planning processes of the operation cost of the system, given a specific the neighbors. In addition, especially for short-term combination of generation, demand, and transmission and midterm planning, all generation stakeholders, network. They are useful for determining the economic environmental agencies, and consumers groups should benefits of transmission additions. ideally become part of a consultative process. An open and consultative process is important for making sure Analyzing the reliability of the network requires different that all interested network users provide their inputs to tools. Refer to Appendix B for a table describing the the planning process. A more open process ensures objective of various models and how they assist in that opportunities to reduce costs further are not missed the planning function, including the names of some and that other forms of transmission development, such commercially available models. All steady-state reliability as merchant transmission, if allowed by the regulatory criteria can be analyzed using load-flow models, which framework, are also considered in the process. can determine the loading condition of all elements Transmission planning in most regulatory frameworks in the system and the steady-state conditions after serves a specific purpose; it is rarely a pure, indicative elements are taken off the system. However, analyzing process. The final stages of the planning process are the dynamic behavior of the system during disturbance usually related to regulatory or budgeting approvals by conditions requires different tools. These tools include the respective regulatory or other agencies. angle stability models, voltage-stability models, and time and frequency domain simulation of small-signal Independent of the body that is responsible for planning, frequency and voltage analysis. the process should be consistent and well established. A Box 3.1: The Overall Transmission Planning Process Main inputs and Technical Planning Stakeholder assumptions Alternatives/Minimum Consultation Demand/Generation Final Plan for decision Cost & Reliability Environmental Reliability Criteria analysis Regulatory Environmental Criteria well-established transmission process should be repeated and operations tools, which have been available annually. The preparations for the next year’s planning commercially for a number of years. However, process should traditionally commence before the uncertainties, such as the cost trend of new technologies, current year’s process has culminated. the introduction of a new regulation, and other decisions outside the reach of the planner, cannot be easily 3.3.4. New Useful Modeling Approaches for modeled. Risk or trade-off scenario planning is a better Transmission Planning with Renewable Energy tool for incorporating such risks in long-term planning. The existing modeling tools and approaches described In addition to the above uncertainties, policy makers above can be used effectively to plan transmission for require better tools for understanding the trade-off of systems with and without renewable energy. Combining strategic decisions or inputs to a planning process. short-term simulation models with long-term simulation Examples of such strategies could include considering models can suffice to provide an understanding of that renewable energy targets can also be met with the impacts of the variability of renewable sources in imports, incorporating new technologies to a system line utilization and provide adjustment to the solution (such as DC tie-lines), or requiring that transmission identified with long-term planning models, whose across borders be limited or not to a given size. Risk highest resolution tends to be monthly or seasonal. bases or scenario planning is an extremely useful tool 46 In addition, when planning to integrate a number for understanding the long-term implication of such of projects in a given geographic area or even for choices in terms of their cost, benefits, and risks. That longer-term targets, it will be necessary to evaluate a is, scenario planning is a framework for more robust tremendous amount of network options to interconnect decision making. Scenario planning does not substitute high numbers of small and dispersed sites. In such the tools that are necessary for transmission planning. conditions, models that can automatically generate Scenario planning is a framework for robust decision transmission expansion options using geospatially making based on the results of such tools. That is, referenced coordinates and greatly speed the planning scenario planning does not necessarily require specific function. Long-term planning is subject to a number additional planning tools. of uncertainties that cannot be easily modeled. These include technology prices, regulation regarding carbon Table 3.6 briefly describes a number of applications prices, and the timing of investment decision outside the where scenario planning has been used for different control of the planner. Even though risk-based planning transmission planning problems, including the has been already embraced for a number of years combined planning of transmission and renewable in power planning, it has become increasingly useful energy zones. when planning for long-term integration of renewable energy targets. This section briefly overviews these 3.3.6. Long-Term GIS-Enabled Generation and modeling approaches and provides examples of their Transmission Planning with Hourly or Sub-Hourly applications, as well as pointers to the tools. Resolution 3.3.5. Risk or Trade-Off Scenario Planning Another helpful characteristic of new planning models is their ability to process geographical information Risk and uncertainties are constantly present in the data that contain the location of the renewable energy energy sector. When it comes to making long-term sources that will be considered in the planning process, planning decisions, not incorporating uncertainties and as well as the exact location of existing transmission understanding the associated risks of decisions can infrastructure. Given the territorial dispersion and lead to incorrect decisions. While some uncertainties the huge number of renewable energy sites that are better understood and can be models, other need be explored, the use of geospatial information uncertainties are less understood and harder to model. systems and of planning models that can process such For instance, the seasonal variability of hydropower information has become critical. If planning models production has long being considered in hydropower can handle time-step resolutions in their simulations planning, dual stochastic dynamic approaches have that can represent the most important variations of been developed in the power industry to incorporate new renewable sources, such as wind and solar, such risks in long-term and short-term planning transmission-size decisions will be more efficient. Table 3.6: risk-Based and Scenario Planning Approaches in Transmission and renewable energy Planning Planning large interconnections across countries: The case of the SiePAC interconnection in Central America. Planning problem. Determining the right size of the transmission line that had to be built among the six countries in Central American (Costa Rica, El Salvador, Guatemala, Honduras, and Panama) in order to increase the benefits of integrated operation and trade in a market environment. * Uncertainties. Since power generation development is outside the control of the transmission planner and each country has its own mechanism to ensure generation adequacy, assumptions on generation development and the level of generation trade that could happen in the future are highly uncertain. Other uncertainties, such as the availability of natural gas in the future and the development of large hydropower plants, are also considered. Strategic options. Decisions on introducing different transmission line strategic options, such as 500 kV, 400 kV, and 230 kV lines with different capacities. Risks. The uncertainties and major risks that are associated with selecting a strategic option can lead to wasting resources, such as a transmission line whose expected benefits are not realized. This includes avoiding construction of a transmission line whose capacity is too large if the assumption (for example, availability of hydropower) does not materialize. Trade-off analysis and decision approach. The trade-off analysis is based on comparing the cost and benefits 47 (reduction in operational and investment costs) of all strategic options and determining how these benefits change with different assumptions concerning the primary uncertainties. The most robust option is whose benefits are more conservative (or less regrettable) among all possible uncertainties. The costs and benefits are computed with production simulation models. Other benefits of the approach. Robust analysis is a framework that facilitates strategic decision making by policy makers who are not necessarily familiar with all complexities of power system planning and operation. This gives a clear description of the attributes of each strategic option and how these attributes (costs and benefits) could change, given major uncertainties. This framework avoids biases by planners toward higher buildup options and effectively incorporates uncertainties that cannot be easily modeled. Proactive scenario-based planning for joint wind zone and transmission development—the case of Midwest iSo Planning problem. Determining the most cost-effective way to expand transmission and achieve varied-state renewable energy across the 13 states in which Midwest ISO is the system operator. Trade-offs. The main trade-off to analyze is whether renewable energy mandates in each state should be met with renewable energy produced inside the state, possibly at lower transmission costs, or if it should be met by outside the state, possibly at higher transmission costs. Alternatives. Fourteen different generation production options were developed to meet state renewable targets. There are options in each extreme—targets met only with in-stage generation and targets met with best regional sources—and options in between. Scenarios. For each generation alternative, transmission plans were developed using inputs from all transmission- owning companies and guided by production simulation models. For each scenario, the combined generation and transmission cost is computed. Analysis and decision. The total cost of each alternative is compared, and the trade-off becomes evident, as presented in the figure. Meeting targets with local generation would be costly, but so will meeting targets with regional generation. Given the specicic conditions of the Midwest ISO region (existing transmission, location of demand, resource site locations), it is most cost-effective (transmission and generation cost) to meet targets with a combined in- and out-of-state generation mix, even if transmission needs to be built up. See Figure 3.13. Other benefits of the approach. The approach does not necessarily require specialized tools to generate combined generation and transmission plans. The two-stage process is a proxy to combined generation and transmission planning, subject to renewable energy targets. *More details of the approach can be found in de la Torre and others 1999. Intrahourly or hourly wind power variations can only be These approaches can consider an hourly simulation captured if the models have such resolution. Introducing resolution and geographical information data within relaxed reliability criteria would be very helpful for the context of long-term planning problems. These analyzing when “spilling� wind or solar energy would be models have been developed for the specific purpose worth saving the extra transmission costs. of addressing a transmission planning issue related to renewable energy and have been used to inform These modeling approaches lead to problems that are policy decisions or to identify actual transmission needs computationally hard to solve (for example, nonlinear for a number of projects in a given region. While a combinatorial problems). For this reason, most of these combination of existing models (see Box 3.2) can also models have limitations on accurate modeling of the be used to generate expansion options—for example, transmission network. For instance, most models in using operator experience aided by production this category will consider DC or other linear-network cost simulation and load flows models—the approximations of the load-flow equations, which models presented in this section have some useful cannot determine voltage and reactive power behavior characteristics that are worth highlighting, because their of the network. This will require the use of other more characteristics speed up the planning process and make complete models (such as load flows) to verify that it more efficient. other technical viability factors are complied with (for 48 example, overloads resulting from voltage variations). Since some of the models described above have In most cases, these models are extremely useful for the capacity to automatically generate transmission providing a long-term vision of investment needs expansion alternatives to bring transmission to different and the best overall technological and transmission sites, they tend to be highly useful when it comes strategies (for example, identifying voltage levels and to designing shared networks for renewable energy the type of technology—alternating current (AC) or projects in a given zone. Appendix C presents the DC—and defining strategic corridors). mathematical model of shared network planning as implemented by the PSR model in Box 3.2. Box 3.2 presents some of these modeling approaches and describes the renewable energy integration 3.3.7. Methods for Developing Renewable Energy planning studies that have used them. Most of the Zones for Planning Studies investment needs presented in the first chapter of this report were obtained from studies using this Long-term proactive planning to identify the best or a similar type of long-term modeling approach. combined renewable generation and transmission Box 3.2: Some GIS-Enabled Transmission Expansion Models with Emphasis on Renewable Generation united States: nrel Wind Development System (WinDS) Model description. A multiregion, multiperiod, GIS, and linear programming model of capacity expansion for the electricity sector.* The model, developed by NREL, is focused on the United States. The model’s main objective is to assess the cost of transmission to integrate a large amount of renewable energy into the system and to understand some of the intermittency issues of wind power. The model is a linear programming formulation whose objective is to minimize the cost of generation and transmission, including capital and operational costs, as well as the cost of ancillary services. The model considers 25 2-year periods. Each year is divided into 16 subperiods, and each day is subdivided into four subperiods. The latter subdivision allows for understanding some of the short-term variability aspects of wind. Primary model application. Used to produce a generation and transmission expansion for the United States that will achieve a 20% wind energy penetration by 2030. Based on the combined cost of generation and transmission (plus operational cost), the model determined that 293 GW of new wind generation capacitys need be installed. The model determined the optimal renewable energy sites to develop, along with the required transmission lines. The figure below describes the new (optimal) transmission corridors required to develop this much wind. (continued on next page) Box 3.2: Some GIS-Enabled Transmission Expansion Models with Emphasis on Renewable Generation (continued) 49 Source: U.S. DOE 2008. Investments of approximately US$60 billion in transmission to achieve the 20% wind penetration by 2030 were identified by the WinDS model. This would be approximately US$3 billion per year over the next 22 years. As can be seen, the transmission capacity that has increased in high-quality wind resource areas in the Midwest is the result of the generation and transmission combined-cost minimization method. PSr—netplan Suite Model description. A transmission planning model whose objective is to find the minimum-cost transmission network to connect a set of generators in a geographical area. The model minimizes both capital and operational costs (losses) of transmission and uses GIS data as inputs to generator locations. The model is a mixed integer quadratic formulation and, as such, it can evaluate a number of industry standard transmission voltage and conductor size options to define the best interconnection to a group of generators. The model generates an optimal arrangement of collectors and intermediate substations to connect generators. A detailed description of the model can be found in Box C.1. Primary model application. The model has been used to determine the subtransmission network to interconnect baggage cogeneration in certain regions in Brazil, specifically the zone described in Chapter 3 of this document. The model has also been used to determine the best connection strategies for potential renewable generation projects in the island of Luzon in the Philippines, which was also presented in Chapter 3. *For a detailed description of the model and documentation, consult the WinDS website, http://www.nrel.gov/ analysis/winds/. options requires new data previously not collected by reasonable assumptions in planning study, as well as planning studies with conventional generation. Such quantification of a range of benefits commensurate data refer to reliable projections of the renewable with transmission investment. An organized energy source potential and their locations. Creating stakeholder process is a prerequisite for obtaining reliable projections of renewable potential is a task all the relevant information on potential renewable that requires handling huge amounts of data that generation development that is required to perform need to be preprocessed to create manageable and proactive cost-effective planning. meaningful data for long-term planning purposes. The characterization of the resource (for example, wind 3.4. Combined Impact of Transmission speed and solar irradiance variation), together with Planning and Pricing on Renewable Energy their locations, needs to be transported into power Development production patters by considering specific technologies. For a large territorial area, wind or solar projections The last two chapters highlighted the impacts of will identify thousands, or millions, of sites that are connection cost allocation, network pricing, and good candidates for generation installation because the planning practices on delivering transmission for wind and solar irradiance there can be considered of renewable energy. On the pricing side, it is evident that good quality. However, from the planning perspective, low, or not at all, transmission charges that are applied 50 it would be unrealistic and computationally intractable to renewable generation can lead to more effective to manage millions of sites as individual candidate (rapid) development of renewable resourced in settings power stations. For this reason, most proactive long- where renewable generation is provided by multiple, term renewable integration studies need to perform public or private, participants. On the planning side, large amounts of preprocessing to identify only a subset it is also clear that planning proactively plays a key of the areas with the highest potential in order to be role in reducing cost and improving the effectiveness considered candidates in the power planning scenarios. of transmission companies to provide the requisite This basically reduces the number of variables and transmission. makes the setup of the model more credible and manageable. A survey performed in the context of this work for 14 transmission jurisdictions in North America and Europe Box 3.3 summarizes the process followed by Midwest concluded that jurisdictions where cost allocation is low ISO to identify the wind power resource and process and planning practices are more proactive have larger all the information until it becomes usable for shares of renewable in their systems. While this result traditional planning models. The main objective of may be mainly influenced by the policy mechanisms zone development is to reduce the number of sites used to support renewable (such as FIT or RPS), as to be considered in the transmission planning study, found also by additional research at the Bank (World which would make the problem tractable. In doing so, Bank 2010a), it is clear that transmission cost allocation the process already identifies zones that are of higher and planning practices play a role in reducing the resource quality and at the same time avoids zone that transmission barrier, which leads to greater development are evidently nonexploitable for other reasons or for of renewable sources (see Figure 3.19). their evident high transmission costs. The review found that this result does not depend on the 3.3.8. Open and Participative Stakeholder market structure of the jurisdiction under review, such Process to Improve Planning Outcomes and Broad as the level of unbundling or the size of the market. A Stakeholder Process detailed description of this survey is presented in the Madrigal and Energy and Environmental Economics The value of stakeholder input in the transmission (2010). planning phase simply cannot be overstated. Planning around large-scale renewable energy is driven by a Part II of the report will focus on proving some general number of factors besides reliability cost, reduction in principles to help design transmission pricing and emissions, and renewable energy targets. A diverse planning policies that should seek both efficiency and stakeholder group is critical in providing input on effectiveness. Box 3.3: Site Selection Methodology Midwest ISO Transmission Planning Study • Developing a Wind resource Dataset: • Using the data compiled from state and regional sources, a detailed map of 11 years of wind speeds at 80 meters was developed. The data were used to estimate the net capacity factor for a composite IEC Class 2 wind turbine. In addition to the capacity factor, other layers, such as land area, topography, lakes, rivers, cities, metropolitan areas, state and federal lands, airports, and slope, were incorporated. • Using the capacity factor map and an assumption for how many wind turbines could be placed in a specified area, a total potential wind capacity and energy in the eastern United States was estimated. Any areas deemed undesirable or impossible for locating wind turbines were excluded from consideration. • Several methodologies, such as geographic diversity and maximum wind park size, were used to further prioritize the wind farms. From the 7,856 sites in the site selection list, NREL identified 1,513 sites totaling 651,091 MW, for AWS Truewind to apply the three years of 10-minute mesoscale (a three-dimensional numerical weather model) wind data. These 1,513 sites are referred to as the “selected sites.� • The mesoscale model was validated for various potential configurations based on temperature, pressure, wind speed, wind direction, wind density, turbulent kinetic energy at five heights, specific humidity, incoming long-wave and short-wave radiation, and precipitation. • From this reviewing process, Midwest ISO identified an additional need outside the scope of the original request of AWS Truewind. Midwest ISO performed a gap analysis of the wind sites selected and identified additional sites where it wanted mesoscale wind data developed. NREL was able to work with AWS Truewind to incorporate these additional sites, and the data are included on the NREL website. 51 • generating Wind Plant output: • AWS Truewind ran a simulation model to convert the mesoscale wind data to the selected sites. Blended power curves were then created and used to calculate the power output of each site based on composites of various turbines. • The 10-minute data may be converted to hourly data by taking the average output for each hour. This methodology was accomplished by Midwest ISO and NREL in their studies.The bulk of the sites fall between 200 MW and 600 MW in size. A small number of megasites located in the Great Plains with rated capacities exceeding 1,000 MW were also chosen. • Developing a renewable energy Zone Scenario: • Several capacity factor metrics were calculated to analyze the wind data to determine the appropriate measures for ranking the renewable energy zones. This was to answer the questions about the variability and timing of wind production and also to determine whether there were areas where wind energy performed better. • A range of statistics was created based on time and applied to each site, which included correlation of wind to load, ramp, and correlation of wind sites to distance from each other. • Based on the above steps and procedures, RE zones were considered options for generation expansion in planning models. Sources: World Bank with information from Midwest ISO 2008. figure 3.19: impact of Transmission Planning and Cost Allocation on renewable energy Penetration 35% Renewable penetration (% of installed capacity) RPS jurisdictions FIT jurisdictions 30% 25% 20% 15% 10% 5% 0% 52 APS PJM NYISO ISO-NE BPA CAISO ERCOT National grid REE IESO Energinet.dk E.ON-Netz Transmission planning process Reactive Anticipatory Connection High cost Medium allocation Low PArT ii reneWABle TrAnSMiSSion DeveloPMenT: eConoMiC PrinCiPleS 4. TrAnSMiSSion AnD reneWABle generator, so costs can be assigned unambiguously in energy, The BASiC TrADe-off proportion to power flows. Part I of the report discussed the increasing need to The second type (Type 2) is Unregulated Merchant develop transmission for renewable energy scale-up. Transmission Investors. These are unregulated Emerging cost recovery and pricing practices, as well as transmission private investors that develop lines and new planning approaches, have been reviewed. These charges for their use at negotiated (not-regulated) experiences provide important insights on the different prices. So far this activity is almost completely limited efforts to improve the effectiveness and cost efficiency to DC lines because the flow on these lines can be of delivering transmission services for renewable energy. controlled easily, while the flow on AC lines is expensive Taking from the emerging experience described in Part to control. I, Part II of the report focuses on developing general economic principles that could guide transmission Type 3 comprises Independent System Operators and expansion planning, pricing, and cost allocations for Transmission Service Companies and is similar to the renewable energy in different contexts. previous case in that its business is only transmission and not generation. Type 3 includes these regulated 4.1. Different Types of Entities that Provide TSCs. Usually they are paired with a deregulated Transmission Service generation market. A prime example is the National 55 Grid Company in England. Independent system Some transmission companies build and maintain operators are regulated private companies that run transmission, but have no role in deciding what electricity markets. They also often play the role of transmission will be built or what prices will be transmission provider. They are similar to TSCs, but charged for transmission. Such companies are not of have somewhat different incentives because of their interest in the present context, because this report is greater concern with market power in the wholesale concerned only with transmission investment decisions power markets they regulate. They also do not own the and the design of transmission tariffs. There are, wires, as regulated transmission providers do. however, many types of private and government entities that do make transmission investment Lastly, Type 4, or Vertically Integrated Utilities and decisions. To understand their behavior, it is useful Government-Owned Power Companies both typically to group them according to their incentives. Four own most of the generation they need and the entire different types are briefly described in this section, transmission system within their territory. This gives them and some of the incentives or functions regarding the best incentive for co-optimizing generation and transmission planning are described. transmission. However, they may have poor incentives for providing transmission for independent power The first type (Type 1) comprises unregulated generation producers. These independent producers may be viewed owners that supply some of the transmission facilities as competitors with the utility’s own generating facilities. that are specific to their needs. These include connection costs, and sometimes “shallow� transmission Each of these four types of transmission investors has investments as well. Second, in Brazil, there is an different incentives and different limitations. Within example of a number of renewable investors working the regulated types, each implementation has its cooperatively to build shared lines. These two categories own individual set of rules and incentives. Because of investors comprise our first type of transmission of this variety, no attempt will be made to specify provider (World Bank 2010b). Cost-sharing agreements particular incentives that could be applied to induce require cooperation among competitors, so cooperative a transmission provider to build the right transmission transmission investment should not be expected to upgrades. Instead, Part II will investigate only how to be generally successful even for shallow transmission determine which upgrades should be built. Upgrading needs. However, the Brazilian scheme takes advantage transmission wisely requires transmission planning. This of a natural focal point for cooperation that occurs should be possible for Types 3 and 4. However, any of when transmission is radial and serves only generation. the Type 3 or 4 transmission providers will need to be In this case, there is no ambiguity about how much instructed as to their appropriate goal, and some form power flowing on each line is attributable to each of incentive will need to be provided. 4.2. Primary Objectives: The Reduction of Another reasonable objective would be to produce as Fossil Fuel Externalities much renewable energy as possible for a subsidy of US$30 per megawatt-hour or less. This objective is Two of the main reasons that renewable energy is called a price target, and the previous objective is a pursued are its global climate benefits and its fuel quantity target. In either case, however, it is important diversity benefits. There are other benefits, such as to maximize renewable output for a given cost and to job creation, which are not necessarily particular to minimize cost for a given output. These are two ways of renewable energy. In the case of global warming, the saying the policy should be economically efficient. This benefit of emitting 1 ton less carbon dioxide is constant, may seem obvious, but, in fact, it rules out many policies regardless of how much renewable energy is generated. that simply fail to take into account standard methods of In this case, renewable energy should, in theory, receive reducing costs. This idea is captured in Chapter 5, which the same subsidy per ton of emissions avoided regardless discusses how the transmission provider can maximize of how much renewable energy is produced in total. the net benefit when making the basic trade-off between transmission costs and generation costs. Fuel diversity is a different objective. As the percentage of fossil fuel used by a given region is reduced, the Having said this, it must be admitted that other political value of increased fuel diversity is also reduced. Hence, and institutional strengths are required to avoid the 56 it makes sense for a subsidy rate to decrease as the adoption of non-least-cost policies. However, it is overall production of renewable energy increases. important to keep this central economic efficiency However, at low levels of renewable penetration, this principle in mind when designing a renewable effect is generally too small to consider. transmission policy. When such principles are violated by design, it is important to be aware of this fact and Although reducing CO2 emissions (which will also the resulting inefficiencies. increase fuel diversity) is the primary motivation for a renewables policy, policies should not be judged to While the impact of transmission costs in end user be more successful simply because they “accomplish energy prices may be low if compared to the cost of more.� Any level of emissions reduction can be achieved support mechanisms to support renewable energy, these by spending enough. A more comprehensive policy transmission costs could change the least-cost order of objective requires balance and trade-offs. A useful alternatives to achieve certain policy objectives, such as objective might be to obtain a certain level of renewables emissions reductions. An example that illustrates such a use, say, 20 percent at the least possible cost. situation is described in Box 4.1. Box 4.1: Transmission Cost and Choice of Greenhouse Gas Mitigation Options The cost of power transmission can alter the economic viability of generation technology choice to abate greenhouse gas (GHG) emissions as illustrated by the simplified marginal abatement cost analysis example below. The simplified marginal GHG abatement cost analysis uses a bottom-up approach to compare five- generation technology-based GHG emissions mitigation options and their costs adjusted for transmission. The analysis compared subcritical coal without carbon capture and storage (CCS), combined-cycle gas turbine (CCGT), hydropower, wind, and concentrated solar power (CSP) plants with 400 MW installed capacity each.* The generation technology’s baseline cost characteristics, fuel costs, and technical specifications were derived from existing technical and economic studies (ESMAP 2007; CSP Today 2009). A real discount rate of 12 percent, an auxiliary consumption of 11 percent, and a lifespan of 30 years were assumed for all generation technologies. Capacity factor of 80 percent was assumed for subcritical coal and natural gas, 50 percent for hydro and 30 percent for CSP and wind power. The transmission infrastructure cost characteristics for all the generation technologies were derived from IEA estimates for the United States (IEA 2011). Additionally, the 400 MW of wind generation was assumed to consist of four 100 MW wind farms with a cumulative 330 km of 230 kV transmission lines. Similarly, the 400 MW of CSP generation was assumed to consist of four individual 100 MW parabolic trough sites with a cumulative 400 km of 230 kV transmission lines. The analysis estimated the levelized cost of transmission (LCoT) to be US$18.5/MWh for wind, US$3.15/MWh for CCGT, US$5.87/MWh for hydro and US$13.43/MWh for CSP . (continued on next page) Box 4.1: Transmission Cost and Choice of Greenhouse Gas Mitigation Options (continued) A 400 MW subcritical coal plant without CCS was assumed to be the reference case scenario in estimating the GHG emissions reductions from the generation technologies. The carbon dioxide (CO2) and nitrogen oxide emission factors, as well as the heating value for coal and natural gas, were obtained from NETL and the U.S. DOE (U.S. DOE/NETL 2007). Methane emissions were assumed to be negligible from the CCGT plant. The emissions from the subcritical coal and the CCGT plants with 80 percent capacity factor each were estimated to be 828 Kg CO2eq/MWh and 318 Kg CO2eq/MWh per year, respectively. As illustrated by the charts below, adjusting the marginal abatement costs (US$/ton CO2) of the generation technologies for transmission swaps the economic attractiveness of the wind and CCGT technologies. Wind generation was a more economic alternative for GHG emission mitigation than the CCGT plant prior to the transmission adjustment. However, inclusion of transmission capital and operating costs resulted in the CCGT generation’s becoming a marginally cheaper alternative to wind. Prices of US$18.1/MWh associated with 325 km of transmission line for wind and US$3.5/MWh associated with 120 km of transmission line for CCGT are the threshold at which wind technology becomes a less economic GHG abatement choice. While the costs of transmission are highly circumstantial, this example shows that transmission can modify the abatement cost associated with generation technology. GHG abatement cost by generation GHG abatement cost by generation 57 technology without transmission cost technology with transmission cost $140 $150 $/tonne CO2 $/tonne CO2 $90 $100 $40 $50 –$10 $0 Wind CCGT Hydro CSP CCGT Wind Hydro CSP Source: U.S. DOE/NETL 2007. Subcritical coal, CCGT, hydropower and wind technology’s baseline cost characteristics, fuel costs and technical specifications were derived from ESMAP 2007. The cost and technical characteristics of the CSP parabolic trough technology with storage were derived from CSP Today 2009. *Subcritical coal, CCGT, hydropower and wind technology’s baseline cost characteristics, fuel costs and technical specifications were derived from Technical and Economic Assessment of Off-Grid, Mini-grid and Grid Electrification Technologies (ESMAP 2007). The cost and technical characteristics of the CSP parabolic trough technology with storage were derived from CSP Today 2009. Note: The natural gas cost of 4.12 U.S. cents/kWh used in the analysis was based on the price of natural gas at US$7/ MMcf (ESMAP 2007). CCGT results in 62 percent GHG emission reductions whereas wind, hydro, and CSP result in 100 percent GHG emission reductions. 4.3. Interactions Between Renewable-Policy 4.3.1. A Pigouvian Tax as a Benchmark “Subsidy� and Transmission Efficiency Policy This section describes some economic principles for A Pigouvian tax is the standard economic policy dealing with negative externalities, as well as the solution to the problem of a negative economic concept of a Pigouvian tax, which is the basis of many externality, such as carbon emissions. An externality modern approaches. These concepts will be used is an effect that is external to the market and to understand how different support mechanisms for consequently is not included in the market price renewable energy affect the design and application of of the good or service whose production causes sound transmission expansion policy. the externality. The classic negative externality is environmental pollution, which was the concern of the to burn a unit of fossil fuel (as under a cap-and-trade English economist Arthur Pigou who formulated a tax system), and the permit costs $X, that is equivalent to for addressing such a problem. a tax of $X per unit. So this is also a Pigouvian tax. Subsidizing specific alternatives to the product that A carbon tax is a Pigouvian tax, and cap-and-trade is a reduces the externalty can be shown to be inefficient; modern variation of such a tax. It is simply a Pigouvian the same can be said about mandating certain tax whose rate is set by the market to ensure that a amounts of specific alternatives. quantity target is achieved. Some form of a Pigouvian tax is advocated by almost all economists in preference Subsidies are less efficient than a tax for several reasons. to direct subsidies, which are considered more First, subsidies are likely to create an uneven playing distortive in nature. This view was well testified to by the field for all alternative products because there are “Economists’ Statement on Climate Change,� which simply too many such products. The cost and other was signed in 1997 by more than 2,600 economists, characteristics are not well known to regulators. Second, including 9 recipients of the Nobel Memorial Prize alternative products substitute for the offending product in Economic Sciences. It concluded that “[t]he most to different degrees. For example, wind generation may efficient approach to slowing climate change is take place more at night so it may replace more coal through…market mechanisms, such as carbon taxes or than solar power, which takes place in the daytime 58 the auction of emissions permits.� when gas is on the margin. A solar plant in one location might replace more fossil fuel generation than Some renewable policies make transmission planning it would in another location. A Pigouvian tax handles more efficient and consequently make renewable these variations better by focusing on the undesired generation cheaper and hence more likely to succeed, product (such as fossil fuel generation) instead of but if transmission efficiency comes at the cost of the myriad of alternatives to reduce the output of the less-efficient subsidies for renewable generators, the undesired product, all of which have a different level policy that improves transmission planning cannot of effectiveness. Subsidies would need to be extremely be recommended without careful study of the trade- complex to take account of these effects. off. However, if a policy modification will improve the efficiency of the renewables subsidy and also Furthermore, taxing carbon will directly encourage improve the efficiency of transmission investment, no other, more cost-effective, alternatives, such as complicated trade-offs need to be examined. conservation. However, even though a carbon tax (or a cap with traded permits) is the most economically We now take a look at why a tax, or equivalently, a efficient proposal, it may not be politically feasible. In carbon price established by a permit market, is favored such cases, it may be better to subsidize alternatives in by economics. The purpose of this section is not to an efficient way than to do nothing at all. suggest the use of such a policy, but to understand it so that it can be used as a benchmark against which Since current renewables policies are mainly subsidy to compare the various policies that are in use. If these polices, we will focus on those instead of the more policies are found to make renewable transmission efficient carbon tax. However, understanding a carbon policy more difficult, but for a reason more aligned tax still serves as a useful benchmark. The closer with an efficient economic benchmark, the transmission a policy comes to mimicking a fossil tax, the more policy should be considered adequate. However, if efficient it is likely to be. In other words, the more the support policies exacerbate transmission planning similar in effect it is to a fossil tax, the more it will difficulties and thus reduce economic efficiency, there is accomplish for any given cost. The Pigouvian tax is the an indication to consider alternatives. least-cost renewables policy. As mentioned above, a Pigouvian tax is the standard 4.3.2. The Effects of Different Renewable Subsidies economic remedy for this type of problem. If a unit of on Transmission Planning product does $X of damage, that product should be taxed at the rate of $X per unit. The term tax should be A number of systems are in effect throughout the interpreted broadly, as any charge that makes using the world for subsidizing renewable power. Perhaps the product cost $X more per unit. So if a permit is needed most popular of these is the feed-in tariff (FIT), which generally sets a different energy price for each type of If the wind generator is only in competition with coal- renewable energy project. A related approach is the fired generation (either in a wholesale market or in a production subsidy, which adds a constant subsidy on regulated setting), this is equivalent to about a US$20/ top of a fluctuating market price for energy, so the ton tax on CO2, assuming coal-fired power plants emits combined payment fluctuates. A third approach is the 1 ton of CO2 per MWh produced. However, when RPS, which determines a fluctuating, market-driven wind is competing with gas, which is much less affected subsidy (similar to cap-and-trade), and which is then by a carbon tax, a US$20/MWh production subsidy added to a fluctuating market price. This is a riskier for wind is equivalent to a tax of between US$30 and form of subsidy from the investor’s perspective, but it is US$40/ton of CO2. If wind is competing mainly against designed to meet a quantity target and, if fully enforced, a combination of nuclear and solar, with much lower it will meet that target. emissions, the production credit would be equivalent to a much higher carbon tax. This indicates inefficiency These different approaches and the variations on in the production tax credit, since it would be more them have different implications for what renewable efficient to reward any renewable generation type in generation will be built and how hard that will be direct proportion to its reduction of CO2 emissions—as to predict, and hence how hard it will be to plan does a carbon tax. transmission for what will be built. Box 4.2. presents some of the main implications of the different subsidy A production subsidy causes no special problems for 59 mechanisms on transmission planning. The following transmission development. However, if the production discussion examines in detail this question and also subsidies are unpredictable, they will create more compares the subsidy mechanisms with the efficient uncertainty in the transmission planning process. benchmark. Since transmission must be planned years in advance and will last for decades, planning for unpredictable 4.3.3. Production Subsidies generation investments is quite risky, and can lead to significant errors even if such risks are properly Production subsidies have been used in many countries, considered. If too little transmission is planned and including in some specific wind projects in Mexico and built, this will discourage investment in wind, as well also in the United States. For example, in the United as cause the investments to be poorly located. If too States, the largest wind subsidy has been the federal much transmission is planned and built, the cost of the production tax credit, which is currently set at about transmission could inefficiently rise. Of course, besides US$20/MWh. For the purpose of simplicity, we will the regulatory risk of changes in the subsidy, there is assume that the credit is simply a direct payment for also the market risk of changes in the price of electricity energy produced. caused by changes in fuel costs and capital costs. Finally, it should be noted that a production subsidy could easily be extended to other renewable Box 4.2: Subsidies and Transmission Planning technologies. If the credit were given to all fuels in proportion to how much less CO2 they emitted A transmission planner will find it simplest to plan than coal, it would come close to the efficiency of for a renewable policy that specifies the quantity of renewable energy that will be subsidized and built. a carbon tax. This would make it more efficient and would significantly reduce the cost of achieving the Policies that required the planner to predict quantities twin objectives of less CO2 emitted and greater fuel from price are more difficult for the planner, and the diversity. more quantities (for different technologies) that must be predicted, the more difficult the planning process. 4.3.4. Uniform Feed-in Tariffs If, however, the policy maker targets price for a sound reason, such as that the externality cost Some of the earliest feed-in tariffs (FITs) were simpler of emissions is known, or to mesh with a global emissions policy, the resulting planning burden is than the present-day FITs, because they treated most justified. However, if the renewable subsidy approach sources of nonfossil power equally, giving them the is inefficient and causes planning difficulties, it should same price for the electricity produced. We will call this be replaced. a Uniform FIT. These FITs can be thought of as leading to a level playing field, since they do not give greater approach could lead to implementation delays and less incentives to higher-cost technologies. timely connection of generation providers. The difference between a FIT and a production subsidy Present-day feed-in tariffs are rarely uniform. Instead is that a FIT sets the price paid for energy, while a they set a different price for each type and scale of production subsidy is added on top of the market technology in a manner designed to make all of them price or regulated price. In other words, a FIT can break even—that is, be profitable, but without excess substantially reduce market risks by disconnecting profits.6 This concept is not well defined, because, for renewable energy from the market price of electricity. any technology, the break-even tariff will differ with This means a FIT can be less risky than a production location and other factors. For example, if a US$100/ credit. A Uniform FIT is fairly similar to a carbon tax MWh price makes a wind turbine in the location because it treats all renewable energy in a similar with the best wind resource break even, it will not fashion. This means it does not provide far higher be sufficient for wind turbines in other locations with subsidy levels to projects that are far more costly. poorer resources. Therefore, it will impractical, if not Consequently, it is reasonably efficient, although it impossible, to determine break even for any location. cannot compensate for variations in (a) the value of power with different time profiles or (b) variations in the The point is, however, that there is no one price that 60 carbon content of the power replaced. It also will tend makes wind turbines break even. The higher the FIT to underreward conservation. tariff is set, the more renewable generation will prove to be profitable and the more will be built. Picking This reduction in risk makes predicting the amount the “break-even price� could mean that only the best of renewable investment somewhat easier and hence generator will break even, or that the tenth best will should make planning transmission for that investment break even, or the one hundredth best, and so on. somewhat less risky. A uniform FIT can also simplify So when the designers of a FIT set a subsidy level for renewable transmission investments because it will each technology at “the break-even level,� this provides encourage only the most economical technologies— little, if any, guidance for the transmission planner or many fewer than a standard FIT (described below). transmission regulator. So the transmission planner Lower risk benefits the transmission planner, but it also must, instead, rely for guidance on the level of the benefits renewable investors and consumers, both of FIT and attempt to predict from this level how much which find the market risks associated with electricity renewable generation will be built. However, this level prices costly. may change long before transmission can be built if the resulting level of renewable investment proves to be too 4.3.5. The Standard Feed-in Tariff far from the goal of the FIT designer, as has sometimes happened. Feed-in tariffs typically “guarantee transmission service,� but usually fail to specify the meaning of this guarantee It would be helpful for transmission planning if the FIT’s clearly. They do not specify whether the guarantee target investment level were explicitly announced, along means providing the service regardless of the cost or with an assurance that the FIT would be adjusted to how quickly the service must be provided. Sometimes achieve that target. Transmission planners would then this requirement even conflicts with preexisting know how much generation to plan for. transmission regulations. Besides such problems, this requirement makes proactive transmission When FITs vary for each technology, planners can planning more difficult. If transmission services need still attempt to implement anticipatory planning. See, to be individually guaranteed to each FIT generator, for instance, the cost reduction method of grouping inefficient solutions are likely to be picked. In addition, requests used in the case of Brazil and the Philippines as explained in Part I of the report, such a reactive presented in Chapter 3, both of which can be 6 It is claimed that “[a] feed-in tariff drives market growth by providing developers long-term purchase agreements for the sale of electricity generated from RE sources. These purchase agreements, which aim to be both effective and cost-efficient.… Cost-efficient refers to offering per-kWh payment levels that are sufficient to cover project costs, while allowing for a reasonable return� (Couture, Cory, and Kreycik 2010). Of course, it should be remembered that cost-efficient does not mean this, but the mis-definition is required to explain how a FIT is structured. implemented under a FIT scheme. A step forward in Brazil, as explained in Chapter 3. A quantity-like would be for planners to follow the transmission- target facilitates selecting projects whose combined generation trade-off by checking that only transmission generation and transmission costs are lower. In the that is worth a predetermined, uniform, value for case of Brazil, the energy price is determined in an renewable energy is built. This concept will be auction where transmission costs have been previously presented in Section 4.4. minimized for potential winners of the energy auction. If a particular energy provider is not competitive because 4.3.6. The Renewable Portfolio Standard its combined generation and transmission costs are not competitive, the auction will not award it a contract. An Renewable Portfolio Standard (RPS) is a quantity- This leads to a solution that is closer to the efficient based approach. Under an RPS, utilities are typically benchmark. required to buy a certain number of renewable energy credits (RECs), also called renewable energy If RECs are traded over a wide area and targets can certificates. These can only be supplied by renewable be met with resources from other jurisdictions (for generators. Such programs have been adopted widely example, states or countries), transmission planning in the United States, but they differ in every state, and can still be handled in a way that efficient outcomes the rules for trading RECs are quite complex.7 Since are pursued, but the outcome will be less accurate. a large number of technology types can supply RECs While planning across borders is a more complex 61 and since 1 MWh of RECs is worth the same amount task, the emerging experience in the Midwest ISO no matter what technology generates it, this creates presented in Chapter 3 is an example of how state a level playing field among the major renewable quantity targets facilitate the analysis of recommending technologies, at least within each state. In this sense, least-cost transmission solutions that will be required to an RPS is akin to a uniform production subsidy or a achieve such targets. Uniform FIT. While transmission planning is better facilitated by The value of selling RECs adds to the value of selling some subsidy policies (RPS) than by others (FIT), electricity, so in that sense, it is like a production credit. the main principle to follow remains the same. The In the long term, however, if the price of electricity total cost of generation and transmission should be increases, the price of RECs should decrease, which minimized. The process of doing this is called the would tend to stabilize the total payment to renewable basic trade-off. The next section describes this trade- electricity the way a FIT does. However, the price off, which is the basis for all the other principles of RECs tends to be quite volatile because of the recommended in this report. inelasticity of both the supply and demand for RECs, so the REC price does not provide anything like the 4.4. The Generation-Transmission Basic risk reduction a FIT can provide. The unpredictable Trade-Off of REC prices not only imposes a high risk premium on renewable generators, but seems to make the The trade-off between the cost of generation and the achievement of RPSs unpredictable. If the penalties for cost of transmission is a standard one, and for renewable missing these standards were sufficient, the standards transmission, it is the key to good transmission planning. would be complied with. In this report, it is a central focus of Part II and will be called the basic trade-off. One way to understand this A quantity target makes transmission planning trade-off and to make it efficient is to view transmission much easier by facilitating transmission solutions as a source of renewable power. This is not literally that are more accurate. A planner would select the case, but it helps focus attention on the value renewable energy projects to minimize generation and of transmission, and it is equivalent to the standard transmission costs as the target is gradually achieved. least-cost approach. From this perspective, changes in This is the case with the process to launch auctions generation costs are summarized as the amount and as-needed for certain quantities of renewable energy value of renewable energy “produced� by transmission. 7 RPS subsidies have also been implemented in other countries. 4.4.1. Viewing Transmission as a Renewable Power as producing the extra 20 MW and ask how much Source the extra power will cost. Its cost is clearly the cost of the line. Suppose the levelized cost of the transmission The same renewable generator may have quite line is US$5/MWh. Since the line transmits 120 different costs per megawatt-hour if placed in different MW of renewable power, that comes to US$600 locations. Because of this, it may be cost effective to per hour (120 MW × US$5/MWh). So the extra build longer, more-expensive transmission. But how 20 MW (120 MW–100 MW) that the line produces much is it worth paying for the extra transmission? To costs US$600 per hour. That comes to US$30/MWh answer this question, it is useful to change perspectives. (US$600/h divided by US$20 MW). If this is less Transmission itself can be viewed as a source of energy. than the value of renewable power (as it may be), From this perspective, the trade-off question has a producing renewable power with the transmission line simple answer: the final stretch of transmission should is a good idea, and it should be built—at least if there cost no more than the value of the renewable energy it is not an even better alternative. produces. Renewable energy is worth more than nonrenewable Consider an example showing how this perspective will system energy. So in order to evaluate transmission for be used. Suppose a generator—perhaps a wind farm renewable generation, it is necessary to have a value 62 or solar array—will produce 100 MW on average if for renewable energy. This will be discussed shortly, located on the present system, but if located remotely, but first we consider the cost of transmission-produced it will produce 120 MW on average. (Box 4.3 energy in more detail. describes the unit sytem that will be used throughout this part of the report.) However, this requires a 4.4.2. Finding the Cost of Renewable Power transmission line. In this case, we can think of that line Produced by a Transmission Line To find the benefit of a transmission line, the output of generators at the remote end of the line must be Box 4.3: An Important Note on Measuring the compared with their output at some other point. The Cost of Transmission point at which the remote transmission line departs from the system may be particularly inappropriate It will be useful in this analysis to compare for renewable energy production, so comparing transmission costs and energy costs. This can be the remote location to that poor location would not done most conveniently by measuring both in $/ be a fair comparison. Instead, for mathematical MWh. convenience, it is best to pick a sight where the Although the cost of a generator is often stated as renewable generator would just break even, given a cost measured in $/MW, it is common practice to the price paid for renewable energy.8 And since reduce this to an amortized (levelized) cost per year, there will be many of these, the one with the lowest which is then measured in $/MW-year. If this value transmission costs should be chosen. This will be wresult is a levelized cost in $/MWh. called the best break-even site (BBS).9 Producing at the Similarly, the cost of a transmission line can be BBS might require internal (deep system) upgrades, amortized (levelized) and stated as a cost per and these should be included in the cost of generation year. This can be divided by the energy, in MWh, it when determining the (cheapest) BBS for renewable transmits annually to find an average cost in $/MWh. generation. Throughout Part ii, generation and transmission capacity, as well as power, are We can now write down the formula for the quantity measured in MW. energy is measured in MWh and cost of renewable energy produced by renewable and all costs in $/MWh. transmission. but first, we must define some variables: 8 Renewable generation will not deliberately be built at worse sites, and generally will be built at better sites. 9 This concept is quite similar to the “comparator projects� used to evaluate transmission to and projects on the Scottish Islands of Shetland, Orkney, and Western Isles. The comparator projects are “on the mainland situated in relatively close proximity to the islands� (IPA Energy 2008). Choosing a site that differs somewhat from the true BBS will not result I a larger error because it will shift all transmission benefits up or down by a similar (though not identical amount). K = the MW capacity at both the remote and BBS. other cost factors, the calculation of cost involves C = the cost of K in $/MWh. complexities that are described in the next two chapters. In any case, the cost, CQT, of renewable energy fR = the capacity factor at the remote site. produced by this remote transmission is QR = the average MW power output at the remote location (fR ·K). CQT = CT ·QR /QT [measured in US$/MWh] (2) CR = the cost of producing QR per MWh (= C K/QR = C/fR). This can be understood by example. Suppose the cost of transmission is US$10/MWh, and it is transmitting fB = the capacity factor at the BBS. 100 MW on average. This is a cost of CT × QR = QB = the average MW output from K at the BBS US$1,000/h. However, if it is only “producing� 25 MW, (fB ·K). it is costing US$1,000/h to obtain these extra 25 MW, CB = the cost per MWh of producing QB per MWh so the cost is (US$1,000/h)/(25 MW) = US$40/MWh. (= C K/QB = C/fB). In the previous example, transmission costs US$5/MW for 120 MW, but only 20 MW was produced by the QT = QR – QB = the average MW output line, so that comes to 5 × 120 / 20 = US$30/MWh, produced by the transmission line. just as before. Note that as QT approaches zero, the CQT = the cost per MWh of producing QT. benefit of the line approaches zero and so the cost per 63 CT = the cost per MWh of transmitting QR over megawatt-hour produced approaches infinity. the new remote transmission line. In general, it will be necessary to specify a value for In this analysis, transmission increases the output of renewable energy, and we will denote this by V. This renewable energy by increasing the capacity factor of value should be the value of nonrenewable energy plus the renewable generators, but the generating capacity the value of reduced carbon emissions plus the value of itself does not change. It only moves to a more fuel diversity. This value may vary somewhat by source favorable (remote) location. In reality, the move could for two reasons. First, electricity varies in value quite change other cost factors as well, and this is treated dramatically with the time of day, week, and year. So, in Chapter 4. The current analysis, however, captures for example, disregarding externalities, wind power may only the main effect—a change in capacity factor, which be considerably less valuable than solar power because changes the average output from QB = fB·K at the BBS wind power tends to be slightly greater at night when to QR = fR K at the remote location. Solving for K at the the value of electric power is low, while solar power remote site and substituting that for K at the BBS gives peaks in mid day when the value of electricity is greatest. QB = (fB/fR)QR, which says that less is produced at the Second, different types of renewable energy may BBS if fB > fR, as expected. So the average output of replace electricity with different fossil or carbon content. renewable energy produced by transmission equals Although this varies significantly by time of day, it may vary even more by location, depending on the types of QT = QR – QB = QR (1 – fB /fR) generation that are prevalent in various locations and [measured in MW] (1) the geographic extent of the transmission system. Note that the cost of renewable energy equals the Once the value, V, of renewable energy has been cost of capacity, C·K, divided by the amount of power determined and the cost, CQT, of the renewable power produced, f K, or C/f. So, the cost of renewable energy produced by the transmission has been determined, we is inversely proportional to f. This leads to another have an indication of whether the line should be built: version of equation (1): If CQT < V, then the renewable transmission should be QT = QR – QB = QR (1 – CR /CB) built. That is, the remote source should be connected. [measured in MW] (1a) Of course, it should not be built if there is a better way This version holds more generally than under the to serve the same purpose. Because there are many present restriction that only the capacity factor is uncertainties in transmission planning, the values of affected by location. However, when location affects CQT and V need not be determined with precision, but estimating their values should provide a good be built? If is the answer is yes, its carrying costs will check on the economics of transmission projects under be US$20,000/h, or US$20/MWh. The result will be consideration. the delivery of 1,000 MW instead of 900 MW of solar power to the grid. So to make the question concrete, is 4.4.3. Using the Value, V, of Renewable Energy to the extra 100 MW of solar power worth US$20,000/h? Solve the Generation-Transmission Trade-Off The answer, of course, depends on the value of the Renewable generation subsidies have evolved into solar power. First note that since delivering the extra 100 systems that subsidize zero-carbon electricity differently, MW costs US$20,000/h, the extra power is costing us depending on the technology that generates it. This is US$200/MWh. Assuming the renewable policymaker is most extreme in the case of FITs, but many RPS policies willing to pay US$400/MWh to generate solar power, now use “carve-outs,� which have the same effect. one could assume this value is the social benefit. So at a These multisubsidy approaches present transmission cost of US$200/MWh it is worth expanding transmission providers with a paradoxical situation. The source of the to a remote site that yields extra energy at lower cost seeming paradox is the apparent ambiguity in the value than the social benefit of renewable energy (US$400/ of renewable energy when some of it has a high cost of MWh). Since the remote site is worth exploring, it would production and some a low cost of production. also be a better alternative than the local site (BBS), 64 since it yields 1,000 MW at a cost of US$420/MWh as 4.4.3.1. An Example of the Multisubsidy Paradox in compared with 900 MW at a cost of $444/MWh. Transmission Planning To illustrate the multi-subsidy paradox, suppose wind Consider a solar PV generator that can produce generators can produce power for a price of US$125/ power at a cost of US$400/MWh in a good location. MWh. That would indicate that the renewable energy Suppose, however, that this location requires US$20/ could be worth only US$125/MWh (or possibly less), MWh transmission, so the full cost is US$420/MWh, so there is no use in paying US$200/MWh for it. In but the same solar array could be built at the BBS. In this case, the transmission should not be built. The this location, its output will be only 900 MW instead of apparent contradiction between these two answers is the 1,000 MW. This information is presented in Table 4.1. multisubsidy paradox. The two different subsidies seem to imply two different values for identical renewable Note that the levelized cost of generation shown in power.10 We assume, for explanation purposes, that the Table 4.1 is the same at the BBS and at the remote different subsidy policy is not self-contradictory.11 site. The question we wish to answer is a fundamental one for transmission planners. Should this transmission To resolve the paradox, it is necessary to take a close look at the rationale for a multisubsidy policy. Looking at the literature on FITs, one finds that a frequent objective is the motivation to be a key player Table 4.1: Cost and value of Solar in the market for a particular new technology, say, Pv-generated energy photovoltaic technology, and to contribute to cost BBS remote site reduction. For this reason, a country may be willing to pay a high subsidy for purchasing PV arrays. Average power generated 900 MW 1,000 MW Levelized cost of $400,000/h $400,000/h We can continue using our example to resolve the generation paradox. Assuming that the high subsidy rate for solar Total cost of transmission $0/h $20,000/h PV is not simply a contradictory valuation for renewable Total cost of energy $400,000/h $420,000/h power, we can conclude the solar PV power is worth the same as wind power and that the extra subsidy is energy cost per MWh $444/MWh $420/MWh a subsidy for solar PV manufacturers to achieve other 10 There are, in fact, some differences between wind power and solar power, primarily related to predictability and time of day. However, this is not the reason for the difference in subsidies, so if the power were identical, the example would still hold. For simplicity’s sake, we assume it is identical. 11 As already noted, standard economics argues for a single price of the externality. objectives described in the previous paragraph. For 4.4.4. Obtaining an Estimate of the Value, V, of simplicity, we will assume that the subsidy for wind Renewable Energy power contains no such manufacturer subsidy, and so the US$125/MWh paid for wind power reflects the The policy maker that sets renewable subsidies should value of the power itself. In other words, the true value do so based, at least partly, on the value of renewable of renewable energy, V, is US$125/MWh. energy. In fact, for FITs, as discussed above, the tariff is apparently related to V as follows: Once we separate out the cost and output effect of the remote transmission, the resolution of the paradox FIT Price(energy type T) = V + (subsidy to becomes clear. The transmission results in an additional manufacturer type T) (3) 100 MW of renewable power and costs US$20,000 per hour. So the renewable power produced by the In other words, there are two named reasons for transmission costs US$200/MWh, but this is more subsidizing a particular type of renewable energy: than the US$125/MWh value of renewable energy. So first, because all renewable energy reduces certain the transmission should not be built, since there is a negative externalities, and second, because subsidizing cheaper alternative. This is the correct resolution to the a particular type of energy helps the manufacturers of paradox. Transmission should be built to the extent that the generators of that type of energy to achieve perhaps it accesses renewable generation below the renewable other objectives. Equation (3) provides two insights. 65 energy value. First, since the policy makers are setting FIT prices to the sum of V and another subsidy, they should have A price of US$400/MWh for solar PV power is some idea of the value of V; otherwise, they could explained, since it contains a two-part subsidy, one for not determine the appropriate sum. Second, equation the power produced itself and the other to help solar (3) indicates that PV manufacturers achieve other industry development objectives. Building transmission to connect the remote V ≤ FIT Price(energy type T), (4) solar site does not help PV manufacturing at efficient costs in our example. The example illustrates that for all energy types, T. So the lowest FIT puts an upper expanding transmission at the price paid for different limit on V. technologies cannot be used to determine whether transmission should be built. Crediting the extra energy Because of this close connection between renewable resulting from the transmission in the example as being energy subsidies and the value of V, it is clearly the worth US$400/MWh would make the transmission role of the renewable policy maker, and not the role appear cost-effective, although it is not. That is, any of the transmission provider, to estimate V. However, renewable subsidy that is greater than the value of the transmission provider does have a strong interest in renewable energy should not serve as a reason to build obtaining a value for V from the renewable policymaker, more transmission. The extra subsidy is intended to because this value is essential to making reasonable induce the purchase of more renewably technology and and defensible decisions on what transmission to build not the purchase of more transmission. for renewable energy projects. This way of viewing the transmission planning problem Determining V can be a difficult problem, but there is helpful, given the complexity of FITs and all of are several alternatives. For instance, there is a vast the many complex renewable subsidy policies. The body of literature (see, for instance, Octaviano 2010) transmission planner may have to look to these when and actual practical applications on determining local estimating how much renewable generation will be externality costs of renewable energy, which ca be used built, but once that estimate is made, transmission to determine the social cost of power and, therefore, a planning should not take into account these different value for renewable energy. These values could easily subsidy rates. Instead the planner need only take be applied in any region simply by finding the cost of account of three things: (a) the cost of transmission; electricity production from coal, oil, and gas, and their (b) the increase in renewable output transmission share of production. An example of such a calculation achieves; and (c) the value, V, of renewable energy. is shown in Table 4.2. Table 4.2: estimating the value of renewable energy Private cost per externality adder Social cost per Share of output Contribution to social cost fuel MWh (uS$) (%) MW (uS$) (%) (uS$/MWh) Coal 105 100 205 40 82 Oil 140 100 380 10 38 Gas 100 30 130 20 26 Other 60 0 60 20 12 Total social cost of current system power, V = 158 Source: Private costs of new coal and gas generation built in 2016 are estimated from U.S. DOE (2010b) data. Note that this value for renewable energy will only of the United Nations. Suppose a developing country be used to calculate the value of renewable energy decides that one of these is a good benchmark and 66 produced by transmission. Even using such off-the- selects, say, a €30/ton price of carbon. Then, in a shelf standardized externality adders should provide power system that emits on average 2/3 of a tonne of an estimate of V that is much better than using no CO2 per MWh generated, renewable energy would be estimate at all.12 Without such an estimate, the planner valued at US$20MWh more than the average price of is likely to make inconsistent decisions that would not nonrenewable energy. be appropriate with any value of V. Or, the planner, because of inadequate knowledge, may implicitly Alternatively, if it is found that 10,000 GWh per year choose to employ a far less appropriate value of V. of renewable energy would reduce the risk of fossil fuel costs by US$300 million per year, 1 MWh of One final look at estimating V may be helpful. The first renewable energy would be worth US$30/MWh more step is to note that V has two parts: than the average price of wholesale power. And if both calculations were applicable, then renewable energy V = (value of nonrenewable energy) + would be worth US$50/MWh more than the wholesale (value of reducing externalities) (5) cost of power in the country in question. Fortunately, the value of nonrenewable energy is likely There may be other methods of valuing renewable to be at least as large as the externalities part of V for energy and other reasons that renewable energy may some time to come, so the bulk of the estimate is made be valuable, but it is important to consider only the fairly easily. If V is mainly based on climate policy, then reasons for which the energy itself is valuable. The perhaps the externality part of V should be set at the policy maker setting subsidies for renewable power global price of carbon emissions. Although this is not should be the one to take these considerations into well established, there is a price for U.N. CERs, and account. Disclosing this value to the transmission there is a price for European carbon credits (EUAs), as planner is essential to make sure the planner makes well as a price for the Assigned Amount Units (AAUs) more efficient decisions. 12 It should be noted, however, that the cost of externalities are not, in fact, related to the cost of fossil fuel, as assumed by these factors. 5. eConoMiC PrinCiPleS on 2010b) estimates that an increase in hydropower in TrAnSMiSSion PlAnning 2016 will require US$5.70/MWh of new transmission. New coal plants (if any are built) would require Each section of this chapter explains one problem and US$3.60/MWh. New wind power will require US$8.40/ draws a conclusion about the main principle that should MWh, and new solar PV will require US$13/MWh.14 be used to solve it. These principles are presented in the order in which they are needed to develop a While these costs are substantial, as Box 5.1 shows, transmission planning framework. It may be helpful the benefits of locating renewable generation in areas to start with an overview of that framework. This does with higher-quality resources can easily be even greater. not include any implementation details, which will be In other words, transmission increases output, just as if numerous. It is only meant to provide a clear view of it were producing renewable energy itself, by moving how the principles work together. generators to where there is a better renewable energy resource. First, the basic trade-off between the cost of transmission and the productivity of renewable generators is reviewed. This renewable power that is, in effect, produced by Because transmission is less costly when compared with the additional transmission should be compared to generation, and because renewable resources vary the cost of that transmission. When this is done, it will dramatically with location, this trade-off often favors often be found that additional transmission produces 67 building more than the minimum transmission. This renewable energy more cost-effectively than any other can happen in two ways. Most simply, the transmission technology. provider can provide access to renewable generators wherever they locate. This is called reactive transmission Any policy that seeks cost reduction is preferable; it planning. Unfortunately, this will not produce renewable will have other positive impacts on aspects, such as energy at least cost, and may cause waste. A better affordability. Affordability of renewable energy, and any approach is for the provider to plan transmission other costs such as transmission, is something that policy proactively.13 This will result in a lower total cost of makers should consider when implementing any policy. renewable energy and will provide transmission for However, any policy that does not seek reduction will renewable generators in a more timely fashion. further negatively affect affordability. Funding options are always limited, which in turn must limit how much If transmission is planned reactively, it is still important renewable energy can be afforded. The energy, however, for the provider to minimize the cost of providing should always be produced as cheaply as possible. This transmission. In this case, however, there will be no means building all the transmission that saves money concern with the effect of transmission on the cost or and that is effectively used, but not more than that. productivity of renewable generation, so the problem is relatively straightforward. However, when transmission 5.1.1. Defining the Benefit of a Better Renewable is planned proactively, the transmission provider must Sources calculate the costs and benefits of the basic trade-off and maximize net benefit. The basic trade-off requires knowing how much more renewable energy will be produced if a renewable 5.1. The Cost-Effectiveness of Extra generator is moved to a remote location that becomes Transmission accessible with additional transmission. There are some subtleties to this question because a different generator As more generation is added to a power system, the design may be appropriate in the remote location. In transmission grid must be expanded to handle the addition, the best local design must be compared with power it delivers. And sometimes, for example, with the best remote design if the comparison is to be fair. large new hydroelectric projects, long new power lines For example, some wind turbines are better for low must be built. The U.S. Department of Energy (U.S. DOE wind speeds, and some are better for high wind speeds. 13 Note that this is not an argument in favor of planning instead of a market-based approach. Both approaches are planning approaches. The point is to plan thoughtfully instead of making ad hoc, last-minute plans. Of course, thoughtful planning can still go astray, and it is important not to assume too much is known about the future. 14 Baldick (2010) estimates that US$20/MWh is needed for transmission for wind energy in Texas. Box 5.1: Example of the Basic Trade-Off: Why Building More Transmission Can Easily Save Money According to the U.S. Department of Energy (US DOE 2010b), in 2016, wind energy will cost US$150/MWh, of which US$5/MWh will cover the cost of extra transmission needed to reach locations with better wind resources. So a 3.3 percent increase in wind power will pay for the extra transmission cost. Because wind power increases with the cube of the wind speed, a 1.5 percent increase in wind speed will generate about 4.5 percent more power—more than enough to cover the cost of the extra transmission. This is such a small increase in wind speed that it seems certain that the US$5/MWh cost will have been much more than paid for by the improved wind resources it provides access to. Of course, the U.S. DOE values may be optimistic, and the value for renewable energy can be less than its cost. Suppose wind energy has a value of only US$100/MWh, and transmission to a windier location costs US$20/MWh. This is a pessimistic scenario. In this case, if the wind were 7 percent stronger, it would impart 22 percent more power to the same wind turbine. If the wind turbine could make use of this extra power, the extra power “produced� by the transmission would cost less than US$100/MWh, and so the transmission would be worthwhile. A 7 percent improvement in wind speed, say, from 25 kilometers per hour to 27, is not much to ask for from transmission costing so much. So even in this pessimistic scenario, it seems that the transmission could easily save money by reducing the total 68 cost of generation and transmission per megawatt-hour generated. Similarly, a solar array may be more difficult to install in of peak capacity to measure success. Peak capacity one location than another, so the installed cost may vary. rather than output is often used to measure both the cost and the magnitude of renewable generation. A The precise question that will need an answer is how wind farm with a peak capacity of 100 MW may well the ratio of output to generation will cause changes have an average output of only 30 MW. In addition, between the local and remote locations. These extra transmission will not increase capacity, and the considerations will need to feed into the calculation of cost of transmission will only increase the total cost QB, QR, CL, and CR, as defined in Chapter 4. per megawatt of installed capacity. Instead, whenever policy analysis is undertaken, renewable generation The increased output needed to justify even a very should be measured in terms of energy produced. expensive transmission project is fairly small. An accurate This will focus attention on the critical importance of estimate deserves to be made in each individual case, good locations and the need for good transmission but in general it should be worth building wind and solar planning.16 generators where the renewable resource is excellent, even if this requires long transmission lines. Exceptions 5.2. Developing Transmission Proactively could happen in offshore generation where costs can be much greater.15 While offshore generally provides much FITs often include “guaranteed transmission access.� better wind resources, the cost of generation itself is While this is intended to be exceptionally supportive, it much higher. So this is a case where both the cost and can actually make high-quality renewable investment output of generation vary, and the increased cost may more difficult and result in less investment and poorer- outweigh the increase in output. Detailed analysis should quality investment. We first discuss the source of these be undertaken to determine the answer. difficulties and then suggest that proactive transmission development is a better principle than the poorly defined Sometimes the basic trade-off has been ignored. “guaranteed-access� provision frequently found in This may be partly attributable to the frequent use standard FITs. 15 According to U.S. DOE (2010a), offshore wind costs an extra US$40/MWh, but this may be paid for by the higher capacity factor. 16 “While the goal level was based on a capacity value (MW), in implementing the program the *Texas+ PUC very intelligently decided that the system must use energy values (MWh) in order to function effectively� (Diffen 2009). 5.2.1. Reactive Transmission Investment figure 5.1: Anticipatory Transmission Planning Guaranteed transmission access is the best transmission Remote policy from the perspective of the renewable energy transm ission A provider, but this policy has a built-in problem.17 Access sounds like it is just a matter of allowing a renewable B generator to connect, but the best renewable sites are C most often in places where there is no transmission Main grid to connect to. So the only way to implement such a D guarantee to is to wait until investors have made a firm First generator E decision and then to build transmission for them. But since transmission often takes much longer to build than Source: The authors. it takes to build renewable generators—especially wind turbines—this leaves the investor waiting, possibly for years, for the guarantee to be fulfilled. This discourages will be assured of being connected to the grid quickly. In renewable investment in many of the best locations. this sense, the longer, more expensive line is somewhat Instead, investors will tend to build where transmission proactive—it serves to guide generation investment. already exists, so they can be sure of timely access to 69 transmission. The locations with ready transmission, Although this approach may guide generation however, may not often be the best locations. investments into clusters, it will not do much if anything to improve the basic trade-off, so it can only be 5.2.2. Anticipatory Transmission Investment considered minimally proactive. Such an innovative transmission plan, and one that is not called for by Without proactive planning, it is still possible to “guaranteed access,� may be a risk for the transmission plan transmission more economically than under provider. In addition, the provider may have little or no the purely reactive approach. This can be done by motivation to be innovative in this way. Nonetheless, if a either anticipating where generators will locate or by transmission provider has the approval of its regulator, it postponing investment decisions until there is a sizable may be able to be somewhat anticipatory in its provision backlog of renewable generators seeking connection. of transmission, in spite of the way a FIT is designed. Both of these approaches will be referred to as “anticipatory.� Although the wait-and-see approach A safer approach for the transmission provider is to first might be considered a bit like anticipating the past, the accumulate a number of generation applications for two approaches have much in common and are both connection. In the above example, the provider might in between the purely reactive and the purely proactive wait for generators A–E to all apply for connection. approaches. This is the approach already taken in Brazil, Mexico, or California in the United States where groups of projects A creative transmission provider can improve a are treated altogether to reduce transmission costs. This reactive planning situation by anticipating where requires organizing the transmission planning process future generation providers will wish to locate. This is in batches and not necessarily guaranteeing immediate illustrated in Figure 5.1. access on an individual basis, which could lead to a more costly solution. See Chapter 3 with numerical Figure 5.1 shows a remote line built to the first examples from the studies performed by the World Bank committed renewable generator, E. Notice, however, for the Philippines (World Bank 2010b). that the line does not take the shortest route. The purpose of such a line is to anticipate other renewable By waiting for a large number of applications for generators that will likely locate at sites A through D. connection before planning the lines, the provider can In fact, building the line in this manner makes it highly group the generators and then build fewer lines that likely that investors will build at these sites, because they are planned more efficiently. This might be called wait- 17 We assume that access means the obligation of the transmission company to provide transmission services, regardless of the cost of such services, to consumers (assuming consumers will pay all of it at some point in the future). and-see anticipatory planning, but it has the advantage transmission. As will be seen shortly, the planning of being more accurate, although slower, than genuine principle used by integrated utilities carries over to a anticipatory planning. setting with a transmission planner and competitive, independent power producers. So the recommendation Notice that the optimization problem for either a for proactive transmission planning principle will be reactive or an anticipatory transmission provider is the same, from a technical point of view, since the old simply to minimize transmission costs, taking the vertically integrated planning principle—updated, of location of generators as given. This means that course, with a new value for renewable energy. neither type of transmission planner engages in the basic trade-off between the cost of generation and There is, however, a compromise proactive approach transmission. If it is known that renewable transmission that can be used; something related to this is in fact used will definitely be built at sites A–D eventually, the line in Texas (see Chapter 3). The planner can collect data on shown in Figure 5.1 is simply a clever way to minimize renewable resources and make estimates of transmission transmission costs by anticipating future generation costs to the various regions with good resources and projects. However, the sites for these projects may be then check the financial commitment level of generators poorly chosen because generation investors have no in the various regions. If generators know they will be reason to make the basic trade-off wisely, since they are required to pay the bulk of the transmission cost, they will 70 guaranteed transmission. make their commitments on the basis of optimizing the basic trade-off. This harnesses some of the knowledge 5.2.3. Proactive Transmission Planning of investors to help make the transmission planner optimize the basic trade-off. Of course, the investors Proactive transmission planning solves the “chicken will not coordinate well, so the planner will still need to and egg problem� for renewable development. The select the regions that seem most popular and focus its problem is that transmission providers do not wish to transmission plan on those regions. start building a line until generation developers have committed to using it, and developers do not wish This shows that various approaches to proactive to commit until transmission access is assured in the transmission investment are possible. They will not all be near future. Proactive planning can also speed up optimal, but what makes them proactive are two features: transmission access compared with the wait-and-see version of anticipatory planning, or a purely reactive 1. The transmission planner attempts to improve the approach. Finally, because it optimizes the basic trade- basic trade-off. off, it will generally provide more efficient solutions and 2. The transmission planner guides the location of cheaper renewable energy. generation investments. A fully proactive investment policy is at the opposite There is no presumption in this definition that the plan extreme from a purely reactive policy. Under a proactive will be optimal or that it will follow the procedures policy, the transmission provider will plan and build described below. The second feature actually follows transmission without taking any account the specific from the first. In Texas, switching to a proactive approach plans of individual generation investors. This does not that follows these two principles is apparently having a mean that the transmission provider ignores the needs very beneficial effect on renewable generators. Under and profitability of generation investors—far from it— a reactive approach, “most Texas wind farms have but what the transmission provider takes into account is been built in regions that have only a marginal wind the set of conditions faced by investors in general and resource as opposed to the good wind resource areas� not the actions of specific investors. (Diffen 2009). Under the new proactive CREZ approach, however, “the goal of the CREZ process is to build This is, of course, how transmission planning is done transmission to where the best wind resource is located.� by vertically integrated utilities. In these, there are no independent decisions by generators requesting Although a proactive approach is defined by its guaranteed access regardless of the location. Instead, qualitative characteristics, it makes sense, as a next the utility considers the full optimization problem step, to ask what conditions would be met by an and minimizes the combined cost of generation and optimal proactive approach. Specifically, the provider should attempt to minimize the combined cost of in having two complementary goods supplied by transmission and generation for any given amount of different industries, for example, auto makers and steel renewable energy supplied by the system as a whole. manufacturers. (The auto makers are analogous to However, minimizing the combined cost of transmission generators; they require steel the way generators require and generation when the provider has direct control wires.) So we can expect the normal economic results of only transmission costs, and no direct control over for competitive markets to apply in our hypothetical generation investment, requires a well-thought-out competitive market for generation and transmission. approach and transmission pricing. This is discussed In a competitive market, the competitive transmission next and in the following chapter, respectively. providers would supply and price transmission without having any direct control over the generation suppliers. 5.3. Maximize the Net Benefit of Renewable In spite of this, both transmission and generation would Transmission be optimized by the market’s price signals, and the total cost of production would be minimized. There is The planner should plan for transmission as if it could no need for a central planner to coordinate investment minimize generation, as well as transmission cost. The in the two types of assets. In a competitive market, that goal of a well-designed power system should be to coordination is supplied by transmission pricing and minimize the total cost of serving load—the total cost of by the way generation investors respond to it with their transmission and generation. This view is complicated investment and dispatch decisions. 71 by the introduction of subsidies for renewables, which constitute an additional cost. However, if we introduce Because of network externalities, it is presently not the cost of subsidies, we should also introduce the cost possible to have a competitive market for building of the negative externalities associated with fossil fuel. transmission. However, the economics of a competitive Doing this simplifies the cost-minimization problem, market teach an important lesson. If the transmission provided that the subsidies are set correctly. For now we planner builds and prices its transmission as if it were assume that they are.18 in the hypothetical competitive market just discussed, a competitive power generation industry will build the As explained in the previous chapter, renewable cost-minimizing generation—just as if it were in that transmission brings a net benefit if its cost is less than same hypothetical competitive market. The transmission the value of the renewable energy it produces. Normally location and prices will send the proper locational the transmission planner would only need to consider signals to the generation developers, but how should nonrenewable system energy, which has a lower value. the transmission provider know what transmission would With renewable energy in the mix, however, the planner be built in this hypothetical competitive market, and must also use the value, V, of renewable energy what prices are competitive transmission prices? How produced by transmission. does a transmission provider mimic what it would do in our hypothetical market? Next we must solve a puzzle for the transmission planner. A proactive planner should minimize the The answer is reassuring. To build the competitive lines, total cost of generation and transmission. The planner all the transmission provider needs to do is to reduce has control over what transmission is built, but not costs as much as possible—in other words, minimize the over generation. So what should the planner assume production and delivery cost of energy to consumers. regarding generation when it plans transmission? It also needs to set competitive prices, but there is a helpful theory of competitive transmission pricing, which Consider, for a moment, a hypothetical system in is discussed in the next section. which both transmission and generation are supplied by competitive markets. While not realistic, it is a Building lines to minimize the total cost of delivered helpful setting to consider. There is nothing unusual electricity is the same as building the lines that a 18 The correct subsidy for a megawatt-hour of renewable energy equals the reduction in the cost of the negative externality caused by the generated renewable energy. With this subsidy, when the subsidy costs increase by €1, the negative-externality cost decreases by €1. As a consequence, with accurately-set subsidies, the costs of subsidies and externalities simply cancel out, and the transmission planner can treat the cost minimization problem in the normal fashion—it can ignore the cost of subsidies and externalities. competitive market would build. This follows from renewable generators. This approximation is far simpler standard economic theory that shows that truly than real-time congestion pricing and will capture the competitive markets minimize total cost. There is only most important benefit of the pricing signal required one way to minimize cost.19 So if the transmission by Step 2. While technical planning can take different provider seeks a minimum-cost plan, it will automatically forms and tools are varied, the next section will current be guided toward the competitive outcome. It must, examples that describe the main principle that should however, remember that a competitive market minimizes be achieved with Step 1. the total cost of transmission and generation, so the transmission provider must attempt to minimize that 5.3.2. A Transmission Planning Example same total cost, and not just the cost of transmission. In other words, the transmission provider must try to make Renewable energy subsidies will likely have one of two the basic trade-off in the least-cost manner. goals—producing all renewable energy up to a certain price or producing a certain quantity of renewable 5.3.1. The Need Planning and for Pricing of energy. Quantity is the more common goal, although Transmission it is often disguised as price until the price is clearly seen to be achieving the unstated quantity goal. Then Planning by itself does not guarantee a perfect outcome. the price is adjusted administratively to bring actual 72 There will be planning problems on the transmission side renewable energy quantities closer to the unstated and market imperfections on the generation side. The quantity objective. In any case, transmission planning point is, however, that planning optimal transmission needs to be able to address both types of goals. The and pricing it in a way similar to competitive pricing is following example assumes a quantity goal of Q MW a reasonable course of action. In principle, it does what of renewable energy produced on average, but the end we want, and in practice it should work fairly well if the of this section will show how a slight modification of the planning and pricing are reasonably accurate. planning process can tailor it to a renewable-energy price target. So in a system with renewable subsidies set correctly, we now have a reasonable, two-step prescription for how Step 1, above, requires building the right lines. This to minimize the total cost of providing power to satisfy example shows how new lines should be analyzed. It the load customers: would be convenient if there were a way to tell if one specific line should be built or not, just by examining 1. The transmission provider should build the same that line, but there is not. There is, however, a way to transmission that would be planned by a planner make quite a good decision by focusing on just the with control over both transmission and generation renewable lines and generators. (a vertically integrated utility). 2. The independent power producers should be The proper question is whether a certain combination charged competitive prices for transmission services. of lines and renewable generation should go forward as a complete package. Planning must proceed in cycles. Fortunately, the theory of competitive transmission The previous chapter developed a formula (equation pricing has been well developed in recent years and 2) that calculates the cost of power produced by the is known as “congestion pricing,� “nodal pricing,� transmission line itself. This is the additional power or “locational marginal pricing.� Implementing such available to the system because the generator is located options is not without complexities.20 However, the at the far end of the line instead of on the existing grid. next chapter will elaborate on Step 2 and present an If this cost is less than the value of renewable energy, it alternative way to approximate the long-term average would seem that the line is worth building. For example, of congestion prices for transmission built for remote if the line produces power for a cost of US$90/MWh 19 Of course, there may be several plans that are near minimum cost. This is not a problem because each will be close to an outcome that a slightly imperfect competitive market would produce, and all these outcomes will be quite efficient. 20 This is a theory of how to price transmission services from existing transmission based on a competitive auction in which generators bid for those services. This theory does not describe how such prices could induce optimal transmission investment—only how to price it optimally once it exists. Derivative financial products, such as financial transmission rights, are based on these prices, but are used just to manage risk. Congestion pricing is simply an application of marginal-cost pricing to transmission services. when the value of renewable energy is US$135/MWh, Having defined net benefit, NBT, we can restate the the line should be built. transmission planner’s problem in more practical terms. The technique used is to think of power lines as We now extend the analysis of the cost of renewable producing renewable energy. If this energy costs less energy produced by a remote transmission line to a than its value, V, the difference is its net benefit. The framework for comparing transmission plans. This will planner’s objective is to find the set of transmission lines allow us to select the least-cost plan. The first step is that maximizes total net benefit while producing the to compute the net benefit generated by a remote line. target renewable output, Q. It is necessary to include Net benefit is, of course, value minus cost. We have all the renewable transmission, even the deep-system already discussed the renewable energy value in the upgrades that are deemed to be for renewable projects. previous chapter, where we defined V to be the value It is not necessary, however, to include anything more of renewable energy. There we found that renewable about the cost of renewable generation, because this is energy prices under a FIT can be composed of two included correctly in the savings from the transmission parts: a uniform value of renewable energy, V, and lines. (Note that a deep-system upgrade is considered as a renewable manufacturing subsidy. The definitions producing no renewable energy, and will therefore only required by the new cost-saving equation are contribute to cost.) The transmission planning rule can then be summarized as follows: Build the transmission set QR = the average MW output of renewable power that maximizes the net benefit—the value of renewable 73 produced at the remote location. energy produced by transmission minus the cost of new QB = the average MW output that could be produced transmission, including the cost of deep-system upgrades. at the BBS for the same cost. This is just a more practical version of Step 1 above. QT = QR − QB = the average level of renewable power “produced� by the transmission line (MW). The transmission planner’s problem is then to find the CQT = the cost of “producing� QT ($/MWh). plan that maximizes the net benefit, which can be either V = the uniform value (across technologies) of positive, if the remote savings is large, or negative, if renewable energy ($/MWh).21 the deep system costs are high. Figure 5.2 illustrates this NBT = the average hourly net benefit from using a with a specific example. remote transmission line to support QR of renewable production ($/h). CDS = the cost of any deep-system upgrade needed to support QR ($/h). figure 5.2: Comparing Three Transmission Plans With these definitions, the average savings from the line Cost of renewable power and transmission in $/MWh is given by CB= $150 CT1= $20 NBT = (V − CQT) QT − CDS (measured in $/h) (6) CR1= $125 CT2= $10 Note that this is net benefit, that is, renewable energy value minus transmission cost. As discussed in the CR2= $130 previous chapter, QB should be evaluated at the BBS— CT3= $4 the least-cost site for generating the same type of renewable energy as QR while just breaking even. (Note that because generators do not pay the full cost of the Possible plans: Generators B, R1, and R2 each produce Q MW. required transmission upgrades, a break-even site can Transmission: T1 goes to R1, 1. {R1, T1, T3} have higher transmission costs that are not reflected in 2. {R2, T2, T3} T2 goes to R2, lower generator profits, so two BBSs do not necessarily 3. { BBS } T3 is a deep-system upgrade. have the same total cost of generation and transmission.) 21 As mentioned previously, V is much more uniform than the cost of renewable energy across different technologies, but it does vary because technologies differ as to when they produce their energy (time of day, and season). See Joskow (2010) for a comparison of the value of solar and wind energy. Also, the carbon content of a normal system power affects V. In this example, the cost of capacity, C, can be taken to Step 1a. First, the power produced by line T1 is be US$37.50/MWh, meaning that, if it produced at full computed according to equation 1a. This is the output all the time, the cost of its power would be only extra power that results from placing the renewable US$37.50/MWh. However, at the BBS, the capacity generation at a high-quality remote location R1 instead factor is assumed to be only 0.25, so the cost of power of at the BBS. If Q, the renewable output generated by at BBS is C /fR, or US$150/MWh. At location R1, the any of the plans, is 150 MW, QT1 = 25 MW because capacity factor is 0.30, so the cost of production is the same-cost renewable generator place at BBS would reduced by the factor (0.25/0.30) to US$125/MWh. At generate only 125 MW. However, the example leaves Q location R2, the capacity factor is 0.2885, so the cost of unspecified, so QT1 is just found to be Q /6. production is US$130/MWh. Step 1b. Next, equation 2 is used to find the cost of Figure 5.1 shows three possible transmission plans that the power computed in Step 1a. This is proportional to accommodate an annual average renewable output of the cost of the remote line T1, and is smaller if, QT1, the Q MW. The first plan builds transmission line T1, the power produced by the line is greater. longest line, which reaches the best renewable resource. The second builds line T2 instead, which results in Step 2. Obtains the value of renewable energy from generation costing slightly more, US$130/MWh. the policymaker in charge of renewable subsidies. (It 74 However, line T2 is cheaper and costs only US$10/MWh is independent of the source, but technically it does to transmit power back to the main system grid, instead vary with the time profile (diurnal and seasonal) of of US$20/MWh, the all-in, levelized cost of using line the renewable energy (Joskow 2010).) This value will T1. With either Plan 1 or Plan 2, it will be necessary be higher than the average price of nonrenewable to make a deep-system upgrade by improving line wholesale power. In this example, the value used is T3. Although this upgrade will serve several functions, US$135/MWh. a cost of US$4/MWh is attributed to handling the renewable energy produced at R1 or R2. Finally, the Step 3. Calculates net benefit—value minus cost. First, third plan is to build generation at the BBS where, the cost of the transmission-produced renewable energy, coincidentally, no new transmission—neither a remote measured in US$/MWh, is subtracted from its value, line nor a deep-system upgrade—will be needed. also in US$/MWh. This is multiplied by the amount of transmission-produced energy (in MW) to find a net cost Table 5.1 shows the computation of net benefit from in US$/h. Any deep-system upgrade cost measured in Plan 1. The first two steps compute the cost and value US$/h is then subtracted to find the compete net benefit. of the power produced by the remote line. The final step, 3, subtracts the cost from value to find the net The second transmission plan can be evaluated in benefit of the plan. exactly the same manner with the following results: Table 5.1: Transmission to remote location 1 (QR1 = Q) 1. Compute the average quantity and cost of power produced by transmission to R1 Power produced by T1 QT1 Q − (CR1 /CB)Q (1a) Q × (1 − 125/150) (Q/6) MW Cost of QT1 CQT1 CT1 × QR / QT1 (2) 20 ×150/(150 −125) US$120/MWh 2. find the value of renewable generation from the renewable policy maker Value of QT1 V V 135 US$135/MWh 3. Compute levelized hourly savings from remote lines Net benefit from QT1 NBT1 (V − CQT1)·QT1 – CT3 (6) (Q/6)(135−120) − 4 −uS$1.50×Q/h Source: The authors. Power is average power, and net benefit from QT1 is average net benefit. Cost of the system upgrade is levelized cost. Q = the target or predicted number of MWh of renewable power produced under each plan. Equation numbers are shown in parentheses in column 3. Table 5.2: Plan 2: Transmission to remote location 2 1. Compute the average quantity and cost of power produced by transmission to r2 Power produced by T2 QT2 Q − (CR2/CL)Q (1a) Q × (1 − 130/150) (Q/7.5) MW Cost of QT2 CQT2 CT2 × QR / QT2 (2) 10 ×150/(150 − 130) US$75/MWh 2. find the value of renewable generation from the renewable policy maker Value of QT1 V V 135 US$135/MWh 3. Compute levelized hourly savings from remote lines Net benefit from QT2 NBT2 (V − CQT2)·QT2 − CT3 (6) (Q/7.5)(135−75) − 4 uS$4.00×Q/h Source: The authors. Table 5.2 shows that Plan 2 is much better than the quantity of renewable energy targeted, it will make Plan 1. It saves US$4.00 for every megawatt-hour of sense to produce some at the BBS because the quality renewable energy produced instead of costing US$1.50 of the renewable resource there is reasonably high and 75 per megawatt-hour as does Plan 1. This is because no transmission is needed. This might correspond to, transmission to the remote location costs only half as for example, a solar array in a sunny urban area. This much as in Plan 1, and it provides generators with example can be evaluated simply by combining results almost as good a renewable resource. This illustrates from the previous example. There are four possible the inefficient outcomes that can occur if renewable plans, and they are evaluated in Table 5.3. generation providers decide where to locate if transmission costs to them are completely eliminated. The cheapest plan, Plan 2, relies on the two cheapest Under such a system, the investor would pick location options from the previous example and omits the R1 because their generators would be somewhat more remote line T1, which is most expensive. Because local productive and they would earn more excess profits. renewable generation is needed, the subsidized price for renewable energy needs to be set at US$150/MWh, The final plan is trivial to evaluate because it builds no which is the cost of renewable energy at the BBS (see transmission at all. So the net cost of Plan 3 is zero, Figure 5.1). Consequently, the generators locating at which is worse than Plan 2, although better than Plan 1. R2 will be paid US$150/MWh, even though they earn If these three plans are the only ones that appear sensible US$20/MWh more than the BBS generators, which to evaluate, the planning process is done, and Plan 2 is means US$20/MWh more than they need to break the result. even. The benefits of the expensive transmission to the remote location all accrue to the remote generators, 5.3.2.1. Additional Example who would be earning excess profits. In fact, the remote generators capture not just the full cost of the Note that even though the efficient transmission plan transmission—US$10/MWh—but also another US$10/ reduces costs, it will not, on its own, necessarily save MWh in additional locational rents. consumers any money at all.22 Transmission pricing is needed to achieve this objective. To illustrate this, Now it might seem that the solution to this situation we construct a new example based on the previous is to lower the price paid for renewable energy to the example. The only change is that the target production remote generators at R2. In normal markets, however, of renewable energy, Q, is assumed to be 200 MW, and some suppliers are usually cheaper than others, and we assume that each of the two remote sites has room they earn excess profit. There is generally no good way for only 100 MW of low-cost production. The essence around this. In particular, it would be impractical and of this example is simply the assumption that, given almost unrealistic for a regulator to attempt to evaluate 22 If all renewable transmission is built on remote lines and charged the expansion cost of these lines (as discussed in the next section), building remote transmission can save consumers money. Table 5.3: Three-Plan example, Q = 200 MW QR1 and QR2 are limited to 100 MW each Planned renewable production Cost Plan At BBS At r1 At r2 At BBS At r1 At r2 net benefit 1 100 100 0 US$0 US$150/h n.a. − US$150/h 2 100 0 100 US$0 n.a. − US$400/h + US$400/h 3 0 100 100 n.a. US$150/h − US$400/h + US$250/h 4 200 0 0 US$0 n.a. n.a. − US$0/h Source: The authors. Note: For the cheapest plan, some power is produced at the BBS. n.a. Not applicable. 76 each project and set each subsidy rate to make the accommodate renewable investors while accounting for project break even. Moreover, this would take away subsequent uncertainty can be found in Van der Weijde all incentive for investors to build efficient projects and and Hobbs (2011). Other practical approaches to would replace that incentive with a powerful one to account for other uncertainties have been discussed in increase cost, given the provider’s advantages provided Chapter 3. by the assymetry of information. Although the example is stylized, especially When it comes to transmission costs, the example shows concerning uncertainty, its objective is to demonstrate a way to recover some of the excess profits earned by for transmission planners how to take account of generators. In particular, the generators can be made renewable costs and benefits that are defined somewhat to pay for some of the cost of the remote lines they use. ambiguously by policy makers. This provides a key This can be done without distorting incentives. In fact, foundation for planning for renewables. There is less such a charge will provide a much-needed incentive to value in using sophisticated planning techniques when use transmission wisely. The next chapter describes how the basic policy inputs have not been well defined. this can be achieved. It requires pricing the use of the Because not all policies may mesh well with planning transmission line approximately as a competitive market criteria and techniques, this initial step is particularly would price it. When reading this next section, it is important. important to keep in mind that most remote generators will still receive part of the line cost and some additional 5.3.4. Achieving Quantity Goals and Price Targets locational rent as excess profits. They will be winners in the remote location game, even if consumers manage The above example assumed a policy objective of Q to recover part of the cost of the lines that allow remote MW of renewable power production. To achieve such generators to earn their locational rents. a goal, the transmission planner needs to consider all plausible transmission plans that would support this 5.3.3. Note on Planning for Uncertainty level of production and then find the one that maximizes net benefits. Such a process was illustrated with The example above presents a nearly deterministic example 1. approach. It does, however, assume that the cost of transmission used in the calculations is an expected However, it simplifies by assuming that the list of cost, and in this way accounts for some uncertainty. It transmission plans producing a particular Q could would also use an expected investment in renewable be easily obtained. More likely, whether the target is generation. However, it makes no attempt to account quantity or price, it will be necessary to formulate a list for uncertainty in future developments that occur after of transmission plans that appear plausible and then the planning horizon. A methodology for planning to evaluate them. Only after evaluation will it become clear how much power they are likely produce and desire was curbed. For example, generation and load at what cost. Valuing alternative plants has proved to might want to use 120 MW of capacity when the line’s be beneficial both in the case of Texas and Midwest reliability limit is only 100 MW. In this case, 20 MW of ISO presented in Chapter 3. The results of the first potential use will be disallowed and only 100 MW will be evaluations may help guide the formulation of other transmitted. The problem here is not reliability. Rather, the plausible plans to evaluate. This process cannot be problem is that, if transmitted, the extra 20 MW would completely systematized, but the important aspect is have had some value, and that value would be lost. that the process of finding the net benefit will allow the efficiency of the plans to be judged with some accuracy. If such a situation (20 MW of denied service) occurs Then, after a number of plans have been evaluated, for one hour per year, and the value lost is US$100/ an efficient plan that achieves either roughly the right MWh not transmitted, the annual loss of value is quantity or the right price can be selected. US$2,000. If the levelized cost of expanding that line to 120 MW of capacity is US$200,000 per year, it 5.4. A Note on Variable Output, Congestion, would not be worthwhile to eliminate the one hour Reliability, and Cost per year of congestion. Therefore, transmission for renewable energy does not necessarily need to be built For variable power generation, such as wind and to trasnsport all wind power output, specially peaks solar power, special consideration could be exploited during short periods. This will depend on the value of 77 when it comes to determining investment needs, given such extra power and the cost of extra transmission. congestion and reliability considerations. The variable Examples of this consideration are emerging in planning output of power generation technologies may allow for studies for renewable energy. One example is the special treatment; this includes allowing for spilling wind Western System Coordination Council of the United or solar power when the extra cost of transmission is not states (Enernex 2011), which takes into account the worth the additional generation. strategic cost-saving possibilities of spilling wind and not always expanding transmission to absorb 100 percent A congested line is not an unreliable line. It is simply of expected wind production. a line that is being fully utilized. When this happens, the system operator does need to pay attention, so that New reliability formulation that take into account the the line’s flow limit is not exceeded. However, this limit variability of new generation resources are emergin in is set well below the point at which the line would be technical research. These new reliability measures take damaged, so even if the limit is somewhat exceeded, into account more accuratedly the statistical properties all that happens is that the system becomes somewhat of renewable output and they way such properties more vulnerable to other “contingencies�—unexpected interact with system reliability. By doing so, as described problems. by Moreno, Pudjianto, and Strbac (2010), larger renewable power transfers could be achieved at lower The point is that there is no reason not to have the cost, since transmission can be saved if compensated line fully utilized—congested. System operators can with more generation reserves. Although these cost- handle such situations without difficulty. Most of the saving opportunities are highly dependent on each time, though, when a line is fully utilized, it is because sytem, and their practical implementation requires there was a desire to use even more capacity, but that careful study, they are worth mentioning. 6. eConoMiC PrinCiPleS of 6.1.1. Charging Generation vs. Charging Load TrAnSMiSSion PriCing The most basic point about transmission tariffs is that Transmission must be paid for; there are two systemwide, it essentially makes no difference whether approaches—pricing and cost allocation. Pricing is charges are applied to generators or consumers. Either used to improve the efficiency of generation dispatch way, consumers will bear the cost of transmission and investment, but it usually collects too little to cover in the long term. When generators are charged per costs, so the remaining costs must be allocated. The megawatt-hour, they see this as an increase in their first pricing rule requires that any transmission facility marginal cost of production, and marginal costs are used by only one generation investor should be paid passed on as price increases when all producers for by that investor. The second pricing rule requires experience the same cost increase. This is true under shared transmission to be priced so that expansion costs perfect competition. If all generators have some will be fully covered when the line is fully utilized. An monopoly power, theory suggests that they will pass important fringe benefit of transmission pricing is that on a marked-up marginal cost. In this case, charging it can recapture part of the excess profits (locational generators will result in an increase in generation rents) that could be provided by transmission and return profits and in consumers paying more than 100 them to the consumers who must pay for any uncovered percent of the transmission costs. transmission costs. 79 However, if some generators are singled out and Renewable transmission pricing will likely fall well short charged more, the variable cost increase is not uniform. of covering the cost of lines to remote locations, and Such a charge can be useful if some generators receive it will not cover the cost of deep-system upgrades for special treatment in the form of extra transmission built renewables, so the uncovered costs will need to be specifically to benefit a small minority of generators. allocated. Since the benefits of renewable energy are In this case, those generators can be charged extra, global or national, cost allocation should be as broad and they will not be able to pass on the costs to load. as practical. This will prove useful to define transmission pricing for renewable generation so that the basic trade-off 6.1. Observations on Traditional Principles of discussed in previous chapters is enforced through Transmission Cost Allocation and Pricing pricing signals. Transmission costs are allocated by a different method 6.1.2. Charging on a per-Megawatt or per- in every jurisdiction. There is no standardization, and Megawatt-Hour Basis there is no clear agreement on the best approach to follow, neither from the economic theory nor the Transmission cost can be allocated to load in two practical experience. All methods used in practice fundamentally different ways—as an energy charge to allocate cost tend to be supported by ad hoc or as a demand charge. A demand charge is usually “principles� that, although they may seem reasonable, based on the customer’s power use at the time of the their economic foundations are hard to justify. These system’s peak power use. This is called a coincident- principles include cost causality, efficiency, and peak demand charge. Such a charge makes more transparency. Most systems use more than one cost- sense than a charge based on the customer’s individual allocation method or combinations of several methods, peak usage because a “good� customer will use the as explained in Chapter 2. Fortunately, the various most power at night when the cost of power is low, and methods can be grouped into a few categories when it such usage should not be discouraged. What should be comes to network costs, namely postage stamp-based discouraged is using power when it is in short supply. methods and usage- or flow-based methods. When it That tends to be when system demand is highest. In a comes to connection costs, Chapter 2 also explained system with efficient real-time pricing, there is no need how the boundary between network and connection for demand charges. In most systems, however, demand costs is not always clear, but for the most part, charges will decrease the peak capacity needed to connection assets always include those that are used maintain reliability, which will reduce costs. The same exclusively by the interconnecting generator. amount of energy will be produced with less capacity. For customers subject to fairly accurate, real-time As mentioned in the previous chapter, peak generation pricing, demand charges are not appropriate, and does not necessarily drive transmission investments for energy charges (per megawatt-hour) should be used connecting renewables. Simpler megawatt-hour postage instead. Also, customers without real-time meters cannot stamp methods are being embraced in recent efforts be charged for coincident peak demand because it to allocate transmission costs triggered by renewable is not measurable. These customers will also need generation, as in the case of MVP in Midwest ISO or to be charged per megawatt-hour. In fact, a uniform Texas. per-megawatt-hour charge is a good approach to transmission pricing because it causes no distortions There is an additional argument to support this trend. in the price of power and hence no inefficiencies. Benefits of using renewable energy do not come from When renewable generation faces its share of a its generation, but rather from the fossil fuel it displaces. uniform network charge, the same can be said about In the case of climate change, the benefits are global, charging on a per-megawatt-hour basis. Practical and in the case of energy-source diversity, the benefits implementations of charges to renewable generation are national, but widely distributed. It must be noted are largely moving in this direction, as presented in that this does not exclude the need to charge renewable Chapters 2 and 3. generation for some transmission cost to ensure efficient outcomes, both in terms of the cost and generation and 80 6.1.3. Flow-Based Methods vs. Postage Stamp transmission, as will be explained later. Methods in the Context of Renewable Energy 6.2. Transmission Tariffs Mimicking As described in Chapter 2, flow-based approaches Competitive Pricing to charging network assets are sometimes perceived as unfair for renewable energy when generators There are two reasons to charge for the use of are allocated part of the network costs. Estimating transmission—economic incentives and cost recovery. how a particular power injection or transaction from Although some of the policies overlap, and both are point A to point B “uses� the infrastructure is typically often considered at once, the two viewpoints are based on an engineering approach, but such a cost different. Economics is about efficiency while cost allocation is usually not well grounded in economics. recovery is just about who must pay the cost. Economics There are tens of alternatives for determining how a uses “prices,� while cost recovery uses “cost allocation.� transaction affects the “use� or “flows� in the system. Each alternative could lead to different results. In For an example of the difference, consider a new bridge addition, each method could also lead to different that has been built larger than needed because the results, depending on the assumptions, convergence town expects to grow.23 (A bridge, like a transmission settings, and parameters used in the load-flow models line, can suffer from congestion and can need that these alternatives require. For these reasons, such congestion pricing.) Presently there is more than enough methods tend to lack credibility regarding their ability room for everyone in the town to cross the bridge twice to determine cost-causality. The main benefit of such a day, which is what everyone wants to do—although systems is simply that they can ensure cost recovery, some people would pay more to cross than would which is, necessarily, the main goal in any cost- others. Some would pay no more than 50 cents to cross allocation method. twice and some would pay US$10. Suppose the loan to build the bridge is costing the town US$1,000 per day, This does not mean that cost allocation should not and there are 1,000 people in the town. Who should be efficient. When it comes to renewable energy, pay, and how much should they pay? megawatt-hour charges are an efficient method of recovering costs that cannot be allocated on the bassis The standard cost-recovery answer is to charge users of of cost causality. Charges that unequivocally reflect the bridge about US$2 per day, if at that price only 500 causality are really prices because they are designed people per day would be willing to pay to cross at that for the purpose of providing cost-minimizing incentives. price. This will just collect the needed US$1,000 per Such prices policies will be discussed next. day. The standard economic answer is to let everyone 23 While people can choose which bridge they cross and power cannot chose its path, this example has only one bridge, and this difference causes no problem. cross for free, because that is efficient—it does not renewable generation investors, even if they pay the full waste spare bridge capacity. There is no reason to stop cost of the remote power line. Making investors pay the those who would pay less than US$2 per day since they full cost of the line will not be suggested. won’t get in anyone’s way. The first approach is a cost allocation of US$2 per day per bridge user. The second Pricing the use of the transmission line appropriately will approach is a congestion price of US$0 per day. partly pay its cost, thereby refunding some of the excess profits to consumers. Such pricing will also increase the So how would the economist repay the loan? efficiency of renewable generation investment by inducing Economics recommends the use of a nonstandard cost efficient solutions as explained in the previous section. allocation. Charge everyone in the town US$1 per day, (This means lower combined generation and transmission whether they use the bridge or not. And of course, they costs.) Because this approach does not require regulators will use the bridge, since it costs them nothing to do so. to attempt to assess and claw back excess profits for Now this may seem a bit unfair to the person that would each individual project (which for new renewable energy only pay US$0.50 to cross and now must pay US$1.00. could be hundreds or thousands of projects), it will not That’s a loss of US$0.50, but if there is a high price for distort or reduce the all-important incentive for producers crossing (US$2), that person will also lose US$0.50 in to minimize their production costs. value because of not getting to cross the bridge. So no one is worse off with this policy and everyone but those 6.2.2. Increasing the Efficiency of Renewable 81 with the very lowest bridge-crossing value are better off, Generation Investment and even those people break even. Also, if the town has other public projects, the efficiency gains may be spread In advanced power markets, congestion pricing is said around more evenly. to send “locational signals� to generation. If fact, this does not work well for reasons that will be explained So economics suggests that the first step should be to below. However, a simple approximation to congestion set a price that causes goods and services to be used pricing can actually do better. What is the point of these efficiently, and then, if that does not collect the required “locational signals� for renewable generation? Put revenue, collect the rest while doing as little harm to simply, the point is to avoid encouraging investors to efficiency as possible. This section takes the first step, build poor-quality generation where it will waste much and describes the efficient, economic price. The next of the cost of building the transmission. section takes the second step and allocates the costs that are not covered by the price. To understand how pricing reduces the misuse of valuable transmission, refer to Example 2 in the 6.2.1. Fairness to Electricity Consumers previous chapter. In that example, the subsidized price of renewable energy was US$150/MWh. The remote As seen in the example in the previous chapter, line that was part of the best plan was justified by transmission can reduce production costs by more than the fact that it made possible cheap, US$130/MWh, the cost of the line. In a market, however, producers renewable generation—US$20/MWh cheaper than with lower production costs are rewarded with the entire generation at the BBS. That savings in generation cost cost reduction. This happens even in a market with a did not come free. It required a line that cost US$10/ subsidized selling price (such as a FIT). The reward for MWh of energy transmitted. That makes sense, but it lower cost is a powerful incentive for producers to cut makes sense only if high-efficiency generation gets built costs and produce as efficiently as possible, and we at this remote location. If a US$145/MWh generator should not interfere with this most-important incentive. gets built, it will be quite profitable for the investor— who will make US$5/MWh of excess profit, but it will be It does not seem fair, however, to ask electricity a waste of transmission resources. It is worth taking a consumers to pay for all of the transmission line and closer look at this argument. then transfer an amount equal to the the entire cost of the line to the renewable generators in the form of Figure 6.1 shows the same US$10/MWh remote excess profits (locational rents). This seems especially transmission line as in Example 2. The subsidized price unfair, since most lines will provide more savings than of renewable energy is US$150/MWh. Now suppose the cost of the line, and that extra savings will accrue to that the US$10/MWh line can handle three of the six renewable energy projects shown at the remote In this case, including the cost of transmission, the end of the line. If the best three are selected, they will projects will actually be generating power at a cost average US$130 just as the transmission provided of US$159, US$151, and US$140/MWh. This is an had anticipated. The energy “produced� by the inefficient outcome because this example assumes that transmission line was based on this low cost of energy the BBS can generate power for US$150/MWh without and that was based on the availability of an excellent the need to build any transmission. The only reason this renewable resource and renewable energy projects transmission was built was to gain low-cost power at that made good use of this resource. Besides the costs averaging US$140/MWh, including transmission. high-quality projects, low-quality projects are always So the cost of the line has not provided any benefit. available as well. They may be low quality because a Two-thirds of the projects it made possible are more wind turbine is sited downhill instead of on the ridge, costly than projects requiring no transmission at all. or a solar project is poorly constructed, or some other More importantly, this outcome leaves out two cheaper project is located too far from the end of the US$10/ projects. Additional transmission investment will be MWh remote line and so requires an expensive required to integrate these projects that were left out. connection. 6.2.2.1. Transmission Charges or an Auction Since the line only has room for three of these projects, 82 it is important to pick the three high-quality projects. The problem just described is the natural consequence However, if the transmission line is priced at US$0/ of fully subsidizing the cost the transmission cost. There MWh—if this valuable resource is provided for free—all are two options for solving this problem with both six of these projects, each with a different developer, charging for the remote transmission. One approach will want to connect to the remote line. Since the is to set a charge for the use of the line that is based subsidized price is US$150, the three poor projects on the cost of replacing what is used up. The other will make US$1/MWh, US$5/MWh, and US$9/ approach is to auction off the use of the line (see MWh, respectively, in excess profits. If the transmission example in Table 6.1). Conceptually, the auction is provider asks “which projects are cheaper than simpler, but in practice the charge is likely to be the US$140/MWh,� all six projects will claim that they are. easier approach. In the above example, a second-price Consequently, the transmission provider will need to auction would work as follows. inspect them and try to determine their costs. This is difficult; the transmission provider is not equipped to In a second-price auction, the winners all pay the price perform this task and should not be. So it will probably of the highest losing bid. This motivates every bidder just decide on a first-come, first-served basis. This, to bid competitively. If any bidder enters a low bid and however, does not guarantee that the best project will use the scarce capacity. It could happen that the US$149, US$141, and US$130 projects will request Table 6.1: Auctioning Access to the line in connection first. figure 6.1, with a fiT Price of uS$150 Project’s cost Price of energy per Bid per paid per figure 6.1: Why Charge for Some Transmission? MWh MWh Bid MWh (uS$) (uS$) accepted (uS$) $149 $145 149 1 No n.a. Remote $141 145 5 No n.a. transmission $135 141 9 No n.a. $10/MWh $130 135 15 Yes 9 $125 Main grid 130 20 Yes 9 Production costs per MWh 125 25 Yes 9 Source: The authors. n.a. Not applicable. Source: The authors. wins, lowering the bid will not lower the price paid at might be more helpful to induce efficient dispatch of all, but reducing a bid can cause a bidder to lose when fossil generation. In the United Kingdom, revisions of the bidder would have wanted to win. So low-balling the the transmission charging method have opted to keep auction can only make a bidder worse off. Because all a locational component in network charges applied to bidders bid competitively, the bids are higher than in a renewable generators. The location signal, similar to the first-price auction, and generally the auctioneer collects proposed approach, is based on long-term incremental at least as much revenue. In any case, the resulting (expansion) costs. price, $9/MWh, is almost enough to cover the cost of the transmission line. There are other detailed design 6.2.3. Why Expansion-Pricing is Approximately issues that need be taken into account, but an auction is Long-Term Congestion Pricing one way to avoid the previous inefficient outcome. We have just seen that charging the expansion price The second approach is to charge generators the cost for the use of remote transmission is fair to consumers of the line capacity that they use up. This would mean (who would otherwise pay for even more excess profit) charging for a share of the upgrade cost. For example, and improves the efficiency of remote generation suppose the next likely upgrade would be a 100 investments, but how does this fit with most common MW upgrade. It may be best to define the size of the transmission pricing theory? upgrade not by capacity but by the amount of average 83 usage of the line when fully utilized—just before it is Transmission pricing theory is mainly an application upgraded again. If this average usage is 100 MW, and of standard, competitive, marginal-cost theory to the the line costs US$500/h (the levelized cost per hour), production and distribution of electricity. It would be the charge for the line, even at the beginning when not risky to diverge significantly from such a well-established fully utilized, would be US$5/MWh. This logic leads to analysis. Fortunately, the suggested pricing approach is the following pricing rule. just a convenient approximation to standard congestion pricing (marginal cost pricing). And, since congestion 6.2.2.2. Transmission Pricing Rule pricing is too complex for most current power systems, this simplification captures the most important part Let X be the levelized, hourly cost (US$/h) of the next of the congestion-pricing signal for renewable expected expansion. Let Q be the size of the expansion generation—the long-term, locational signal.24 in megawatts of useable capacity. Charge US$(X/Q)/ MWh for use of the line. What tells us that the expansion price is an approximation for the long-term average of congestion If the line is expanded just after time T1, and then must prices, which are known to be extremely volatile? The be expanded again just after T2, the usable capacity connect between the two comes from a fundamental of the expansion is the average power flow at time T2 result of congestion pricing theory. minus the average power flow at T1. Congestion-pricing result. Consider an optimally sized Compared with real congestion pricing, this is vastly transmission line with a sunk cost of US$F/h and a simpler. There is just one price (perhaps escalated by “variable� cost of US$V/h. For each megawatt of inflation) during the whole period between expansions, capacity, congestion pricing will pay for the variable instead of a new price every 10 minutes. Of course, part of the line’s construction cost. such a long-term price cannot help with the dispatch or solve short-term congestion problems, but the main To understand the connection between variable problem being faced is how to encourge the efficient construction cost and expansion cost, consider the development of renewable generation. In addition, following example. If the construction cost of a line short-term congestion pricing does not solve the is approximated as C = F + V × Q, where Q is the problem, since renewable generators tend to have line’s capacity, V is the variable part of the construction near-zero marginal costs. Short-term congestion signals cost. The levelized cost of the line is C, so if the F = 24 When generators using the line have similar marginal costs, the dispatch function of congestion pricing becomes much less important. US$100/h, and V = US$9/h, and Q = 100 MW, then based on expansion costs, so it will certainly send strong C = 100 + 900 = US$1,000/h. On average, this locational signals and will recover a significant part comes to US$10/MWh, which is the cost of the optimal of the line’s cost for consumers, even if it is overbuilt line in Figure 6.1 and Examples 1 and 2. from a congestion pricing point of view. Basically, as long as the line saves generators more in production The congestion-pricing result tells us that, in the long costs than the line costs, the recommended pricing term, congestion prices will pay an average US$900/h, should work well. While planning is always subject to or US$9/MWh. So, given the present formula for C, mistakes, pricing should be the way to confirm that the if the line is optimally sized, congestion pricing would lines are useful and to avoid overbuilding or inefficient charge generators an average US$9/MWh. This generation and transmission outcomes. is the long-term average congestion-cost, and our proposal is to charge the expansion cost. Suppose The second advantage of expansion pricing is that the next expansion would be a 100 MW expansion. it is a low risk for investors. The cost of transmission According to the cost formula, cost would rise from services will be known with certainty from the time the F + V × 100, to F + V × 200. In other words, cost investors go on line until the time of the next expansion, would rise by V × (the expansion in megawatts), or in and it will be reasonably predictable even after that. In this case US$9/MWh × 100 MW = US$900/h. On contrast, congestion pricing starts out being extremely 84 a per-megawatt-hour basis, however, the expansion inexpensive or free, and then increases later as the cost is US$9/MWh, which is the variable part of the line becomes more congested. If congestion pricing line’s construction cost. So for an optimally sized line works perfectly, the increase in transmission costs in the that has a linear cost formula, the long-term average later years is so great that it makes up for all the low- congestion cost is the same as the expansion cost, cost early years. However, this increase in congestion, and our simple pricing rule exactly matches long-term and hence in the congestion price, will be driven by average congestion pricing. future investments that increase the use of the line. And such investments are very hard to predict. So an early 6.2.4. Why Expansion-Pricing is Better than investor does not know how soon congestion cost will Congestion Pricing increase or how long they will stay high before the line is expanded and the congestion costs again fall back Transmission lines cannot always be optimally sized, toward zero. because of the lumpiness of the size options. So the congestion-pricing result does not always hold. If a 6.2.5. Charging Full Price for Private Lines line is too large for the initial load that it needs to manage, congestion will be infrequent, and the average Expansion-cost pricing does not charge for the one- congestion price will be low. So it will not pay for the time cost of building lines. In the simple cost formula, variable part of construction costs. This is a frequent F + V × Q, it does not charge for F. However, there is outcome of actual congestion pricing implementation an exception to this rule. Generation investors should (see Chapter 2). Sometimes lines are larger than what be free to site their generator wherever they want, but the congestion-pricing result considers optimal because they should generally pay for the line to reach the that definition of optimal may not properly account for grid.26 Transmission is not qualitatively different from reliability rules.25 So the congestion pricing signal will other capital investments, such as generators, wind again be too low to send a strong locational signal, and turbines, or the towers they are mounted on. So the too risky for an investment to be developed based on only reason generation should be treated differently is the revenues generated from such a stream of income. that it is usually shared by several investors. When it is not shared, however—when it is private—it should The expansion-pricing rule recommended here will not be treated as any other private investment, and the be affected by the capacity of the line because it is investors should pay the full cost. 25 For example, a line might be expanded for reliability reasons when it becomes congested 2 percent of the time, even though congestion charges were still far too low to pay for the expansion. 26 Of course, this does not mean that the grid should not be extended to good renewable resources. It only means that if an investors wants to locate some distance from the grid, this is perfectly acceptable. In the case of renewable generation, where subsidies the last section. Very little of the deep-system cost, to generation are introduced for a policy reason, however, is likely to be attributable in this way because why not subsidize their transmission as well? The physical power flows from generators generally cannot reason is simply that this method of subsidization be tracked once they leave a radial line and enter the would be inefficient compared with paying more for “deep system,� the meshed part of the grid. renewable energy. It is a matter of subsidizing inputs versus subsidizing the output. The purpose of having As noted, if the expansion cost of transmission can private investors build renewable generation is to take be reliably assigned to specific groups of renewable advantage of their detailed knowledge of input costs generators (or to any other generators), those and their powerful incentive to minimize these costs, to generators should be charged for these costs. When balance the basic trade-off. However, they will minimize this is not possible, though, costs must be recovered by input costs (and hence produce efficiently) only if they charging in some other way. must pay the true cost of inputs. If any input cost is subsidized, their powerful cost-minimizing incentive The benefits of renewable energy are the lack of will operate on the distorted (reduced) cost they face, emissions and the lack of fossil-fuel imports. These and they will minimize these distorted costs instead of benefits are generally national or global, so it would not minimizing the true costs. be rational to charge only users of renewable energy or only renewable generators. More importantly, what we 85 An example will help illustrate the cost analogy between want to avoid is inefficient solutions to the trade-off. private lines and other private capital investments. Suppose that a wind turbine investor can increase the The transmission cost allocation mechanisms that wind speed that its turbine is exposed to by moving it track power flows are not relevant when the problem farther from the provided transmission. With a private is to track power that has not been generated by line costing US$1/MWh, it can gain 1 percent in wind fossil fuel. Similarly, license plate charges for deep- speed, and with US$2/MWh, it can gain 2 percent, system reinforcement that vary from one region to and so on. Suppose that by increasing the height of another in order to capture the differentials in the its turbine’s tower, it can also gain wind speed, and cost of transmission make no sense. The benefits from the cost per increase in wind speed will be exactly the renewable energy flow from the fuel that is not burned. same. Why should we subsidize moving the wind turbine horizontally to gain stronger wind, but not subsidize So the cost of transmission that is not covered by moving it vertically to gain stronger wind? The costs economically efficient transmission prices should be and effects are identical. Clearly there is no reason distributed as widely as possible. This is analogous to to subsidize one and not the other, yet no one would charging everyone in the town for the bridge—it is a suggest subsidizing the towers. This view is correct and way of charging that does little harm. This can be done it holds for wires, as well as towers. by charging all generation in a per-megawatt-hour charge. Such a charge will be passed through to load, 6.3. Broadly Allocating Uncovered since it increases the variable production cost of every Transmission Costs megawatt-hour uniformly. So if a per-megawatt-hour charge is to be used, it can be charged to generation As explained above, transmission pricing is not or to load customers, and the choice should be a intended to cover the cost of transmission, but rather matter of convenience or ease of implementation. As to induce the development of efficient generation (for shown in Chapter 2, more pricing systems are moving example, generation whose combined cost, including toward charging most of the uncovered network costs to transmission, deviates from the less from the efficient consumers. benchmark). The expansion costs of shared remote lines to generation can be efficiently priced, as described in By contrast, it may be better to charge large customers Chapter 3. Also, any expansion costs of deep-system a demand charge. This is a charge based on the upgrades that can be clearly attributed to a specific customer’s demand during the system’s period of group of renewable generators should receive the peak use. This would not be necessary or desirable if same treatment. The same economic analysis applies an accurate system of real-time pricing is already in to these as to the remote transmission analyzed in place. If such system is not in place, a demand charge can serve to significantly reduce the need for on-peak • Choose the plan with the greatest net benefit. generation. This will save costs and improve reliability • Charge investors for the full cost of any transmission in a system that frequently sheds load during times that they alone use. of peak load. A combination of demand charge and • For shared radial lines to remote renewable energy charge might spread the burden most evenly generators, charge each generator the average while making use of demand charges. The exact mix expansion (upgrade) cost per-megawatt-hour times that is best is difficult to determine because this is a its megawatt usage of the line. second-best solution compared with real-time pricing. • Collect the remaining transmission costs (likely over Renewable transmission charges will not be large, since half the cost) by using some combination of energy they are spread so widely. If transmission is proactively and demand charges that spread the burden as developed—if the planner has made all the effort to broadly as possible. reduce costs—the regulator will likely support allocating uncovered costs broadly. If a proactive planning process The crucial aspects of this framework are as is not in place and costs are broadly allocated to follows. First, it takes account of the benefit of consumers, there will be no incentive for the efficient locating renewable generation where there are development of transmission. high-quality renewable resources. Second, it takes into account transmission costs. Third, by charging 86 6.4. Summary of a Framework for Proactive for future expansion costs, it prevents the misuse Provision of Renewable Transmission of transmission while capturing excess profits from inefficient generators. The objective of this pricing Although many complexities have been mentioned and principle is more directed toward making renewable taken into account, the suggested framework for the generation more efficient by allocating some long- proactive provision of renewable transmission is simple. term transmission costs to them. Once this has been The framework relies on the principles collected in achieved, regulations should allow for recovering the Box 6.1. required revenue from consumers. While implementation could take different forms, the use A final, broad advantage is that this framework makes of principles can be summarized in the following steps: transparent the costs and benefits of renewable generation. While every cost-benefit analysis suffers • Choose a list of transmission plans that are from data problems, if its assumptions are not revealed, candidates for maximizing net savings. less can be said about the efficiency of the solutions. • For each plan, evaluate the following: The suggested framework is very general, but could • The energy produced by the planned transmission be implemented in different ways. Since contexts vary (equation 1). greatly, the report does not aim to provide a general • The cost of that energy (equation 2). solution, but rather a framework that is useful for • The value of that energy (using the policy maker’s analyzing policy alternatives. renewable energy value, V. • The cost of deep-system upgrades. • Net benefit = sum of values minus all costs. Box 6.1: Summary Principles on Transmission Expansion and Pricing for Renewable Energy Principle 1. Extra transmission is often worth the cost. Principle 2. Allow the transmission provider to plan transmission proactively. Principle 3. Maximize the net benefit of renewable transmission. Principle 4. Transmission tariffs for generation should use efficient pricing. Principle 5. Broadly allocate uncovered transmission costs. APPenDix A: inveSTMenT ASSeSSMenT By already achieved in terms of developing transmission JuriSDiCTion for renewable energy. The Regional Generation Outlet Study (RGOS) by Midwest ISO (2010) and the CREZ United States Transmission Optimization Study (ERCOT 2008a) estimate the size of the investment needs and describes The United States has been emphasizing the nation’s the available options to meet the growing demand in need for greater renewable energy and also actively these areas. trying to diversify its energy portfolio. The U.S. Energy Information Administration (EIA) estimates that U.S. Midwest ISO electricity demand will grow by 39 percent from 2005 to 2030, reaching 5.8 billion MWh by 2030. To meet The transmission expansion and its investment needs for 20 percent of that demand, U.S. wind power capacity Midwest ISO region are driven by state RPS (Renewable would have to amount to more than 300 GW from Portfolio Standards). This Midwest ISO service territory the current levels of 10 MW. This growth represents an covers parts of 13 U.S. states and the Canadian increase of more than 290 GW by 2030 (U.S. DOE province of Manitoba (Figure A.2). RPS from states 2010b). In addition, NERC, through its annual 10-year within the Midwest ISO region vary from 3.5 percent up reliability outlook (NERC 2009), established that the two to 30 percent for the period between 2015 and 2025, primary drivers of transmission requirements are needs and the targets refer mainly to wind power. The result of 87 triggered by reliability requirements and by the needs the RGOS shows that the transmission investment needs of renewable generation (Figure A.1). Requirements to meet the demand driven by the RPS and GIQ range are especially located in areas such as the Midwestern between US$12.7 billion and US$15.1 billion. Such United States, California, and Texas, all purusing estimates depend on which overlay solution is selected important renewable energy programs. among the three different strategies—the so-called Native Voltage, 765 kV, and Native Voltage DC— It is convenient to look at the investment requirements under the premise of a distributed set of wind zones in specific regions of the United States where there are with varying capacity factors and distances from the important and innovative developments in developing load. Figure A.2 depicts the selected set of renewable renewable energy: the Midwest states region. The first is energy zones for the assumptions of the RGOS with important for its regional and multi-jurisdictional nature, transmission overlay of Native Voltage option. and the Texas region is relevant because of the results The Native Voltage strategy focuses on a transmission development without introducing a new voltage class within areas. This solution has the advantage of the figure A.1: Connecting Wind farm to existing lowest net total cost of US$49/MWh, and the estimated Transmission network total cost for construction is US$13.9 billion. The Hydro integration 765 kV overlay strategy assumes the development of Fossil-fired 3% integration Nuclear integration transmission with a new voltage class into much of 3% 3% the RGOS area with its estimated construction costs Economics/ of US$15.1 billion. This overlay’s Adjusted Production congestion Other Cost (APC) savings are greater than the Native Voltage 5% 18% overlay and Native Voltage DC overlay. The Native Voltage with DC strategy involves the development of Variable/ transmission facilities with a new voltage class with renewable integration DC. This option offers the lowest construction costs 35% of US$12.7 billion, the lowest levelized annual costs Reliability of US$1.3 billion, and the lowest annual costs of 18% US$15/MW among the three strategies proposed. This solution could be considered as an option for bulk energy delivery from renewable energy areas across long distances, since the costs of adding DC to the Source: NERC 2009. system are rather high compared to the AC alternatives figure A.2: native voltage Transmission overlay 88 Source: Midwest ISO 2008; 2010. at shorter-distance needs, and the entries to tap the The RPS provides states with a mechanism to increase lines are much more expensive and less integrated renewable energy generation using a cost-effective, than providing AC paths across the system. Table A.1 market-based approach, by requiring electric utilities summarizes the competitiveness and advantage of each strategy option, in terms of construction costs for transmission, levelized annual costs, annual costs, Table A.1: Summary of estimated Costs for adjusted production cost, and net total costs. Transmission facilities It is notable that the Midwest ISO is expanding its native native Costs voltage 765 kv voltage DC transmission at a significant scale. For example, the investment needs from the recent planning studies Construction costs for 13,865 15,099 12,662 done by Midwest ISO for the proposed transmission transmission (2010 US$ million) expansions are estimated at about US$5 billion for 2011. This is a very high level of transmission investment, Levelized annual costs 1,419 1,537 1,304 (2010 US$ million) equivalent to about five times the average annual new transmission investment in the Midwest ISO area. Annual costs 16 17 15 (US$/MW) Texas—Competitive Renewable Energy Zones Adjusted production 41 43 42 cost Savings Texas currently not only leads the nation, but also (US$/MWh) ranks fifth overall in the world with 9,528 MW of Net total cost 49 52 54 installed wind power capacity. Success with renewable (US$/MWh) generation in Texas is partially attributed to the RPS. Source: Compiled from Midwest ISO 2008. and other retail electricity service providers to supply MW of wind (61 percent), 5,900 MW of nuclear a specified minimum amount of customer load with (8 percent), 14,000 MW of natural gas (19 percent), electricity from eligible renewable energy sources. In the 5,000 MW of coal (7 percent), and 3,300 MW of solar, case of Texas, this necessitates that each provider obtain biomass, and other (5 percent) (see figure A.3). a renewable energy capacity based on their percentage of market share of energy sales multiplied by the The Public Utility Commission of Texas (PUC) designated renewable capacity goal. The transmission expansion is five zones as CREZs, as shown in Figure A.4, and the a prerequisite to achieving these targets. CREZ Transmission Optimization Study (CREZ TOS; ERCOT 2008a) looks into four different scenarios, with According to the ERCOT 2009 annual report (ERCOT five sets of assumptions on wind capacity and new 2010a), transmission investment in Texas would rise rights-of-way, in order to develop transmission plans to significantly in 2012 and 2013, mainly because of the provide transfer capacity for wind generation. increase of investments in new 345 kV rights-of-way in the region. More importantly, this expansion is primarily Scenario 1 has two different subplans. Plan A is driven by the scale-up of renewable energy generation, designed for a CREZ wind generation capacity of 5,150 especially wind power. For example, Texas has invested MW, without possible reinforcement needed for the total US$5.78 billion for the new transmission since 1999, wind generation capacity of 12,053 MW. The total cost and currently US$8.2 billion are being spent under of this plan is estimated at US$2.95 billion, involving 89 the five-year plan, including US$5 billion solely to 2,309 km of 345 kV right-of-way and 327 km of new accommodate 18,000 MW of wind power capacity. 138 kV right-of-way. Plan B is also developed under the As of June 2009, 72,500 MW of new generation assumption of a CREZ wind capacity of 5,150 MW, but interconnection requests are under review, with 44,300 considering reinforcement for the total wind capacity. figure A.3: Transmission investments, 2007–15 (i), and Cumulative installed Capacity (MW), 2007–14 (ii) $3,600 $3,400 12,000 $3,200 $3,000 $2,800 10,000 $2,600 $2,400 8,000 $2,200 Millions $2,000 $1,800 6,000 $1,600 $1,400 $1,200 4,000 $1,000 $600 2,000 $400 $200 $0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015+ 345 kV 138 kV 69 kV Source: (i) ERCOT2010a and (ii) ERCOT 2010b. Note: (i) Numbers are based on projects being completed in the designated year and may not reflect actual investment in that year. Costs may be spread over several years; (ii) figures from 2011 to 2014 include cumulative planned capacity with a signed interconnection agreement. figure A.4: Competitive renewable energy Zones (CreZs) PLEASE PROVIDE THE 90 HIGH RES IMAGE Source: ERCOT 2008a. The estimated total cost of this plan is US$3.78 billion, CREZ Transmission Optimization Study, Scenario 2 was involving 2,879 km of new 345 kV right-of-way and selected for the implementation. 68 km of new 138 kV right-of-way. Scenario 2 with total CREZ capacity of 11,553 MW has a total cost of United Kingdom US$4.93 billion. This plan involves 3,759 km of new 345 kV right-of-way and 68 km of new 138 kV right-of- To support and facilitate the growth of renewable way. For Scenario 3, the total wind capacity of 18,456 energy, the United Kingdom has incorporated several MW with CREZ wind capacity of 17,956 MW was policies and reform mechanism within their regulatory assumed, and the total cost of this plan is estimated at framework, which has served as the primary driver for US$6.38 billion, involving 4,239 km new 345 kV right- the increased contribution of renewable energy. In 1989, of-way, 68 km of new 138 kV right-of-way, and 580 the United Kingdom introduced the electricity reform km of new high-voltage direct current (HVDC) right-of- and privatization process to bid out non-fossil fuel- way. As for Scenario 4, the cost with 17,516 MW of generation technologies. This procurement mechanism CREZ wind generation capacity assumed is estimated remained active until 2002 when it was replaced by at US$5.75 billion, involving 3,359 km of new 345 kV RO mechanisms. RO mechanisms set the first-ever right-of-way, 68 km of new 138 kV right-of-way, and target of 10 percent of renewable generation by 2010 580 km of new HVDC right-of-way. Table A.2 describes in the United Kingdom. A few years later, the Climate the core assumptions of each scenario analyzed in Change Act of 2008 increased the target to 20 percent the CREZ study. In the end, after the review of this renewable generation by 2020. The latest targets are Table A.2: estimated investment needs from the CreZ Study Scenario 1-A Scenario 1-B Scenario 2a Scenario 3 Scenario 4 CREZ wind capacity (MW) 5,150 5,150 11,553 17,956 17,516 Total wind capacity (MW)b 12,053 12,053 18,456 24,859 24,419 Estimated investment 2.95 3.78 4.93 6.38 5.75 needs (US$ billion) New rights-of-way (km) 345 kV 2,309 2,879 3756 4,239 3,359 138 kV 327 68 68 68 68 HVDC n.a. n.a. n.a. 580 580 Source: Compiled from ERCOT 2008a. n.a. Not applicable. a Selected option by CREZ TOS. b Total wind capacity = CREZ wind capacity + base case wind 6,903 MW. 91 part of a framework to curb GHG emissions to 80 regulator assesses each plan through various audits percent by 2050 as compared to the 1990 emissions. and technical studies conducted by third parties. Once transmission companies respond to the assessment, the For the past 20 years, the RO mechanisms have been the regulator issues the final decision on the allowed capital main driver behind the growth of renewable energy with and operation expenditures for the transmission utilities biomass and wind power being the main contributors to for a regulatory period of five years. The operational this growth. As of 2008, total production of electricity and capital expenditures are converted into annual from renewable sources accounted for 6 percent of revenues that the companies are allowed to generate by the total generation. It is expected that this value could applying transmission charges to network users. reach the level of 31 percent, overtaking the target of 20 percent by 2020, provided that existing power plants are The rapid increase in renewable energy as a result of closed in line with existing retirement dates (DECC 2009). the RO mechanisms in 2002 has triggered considerable Figure A.5 displays the increase in renewable energy in investment requirements in transmission and distribution. the United Kingdom from 1996 to 2008. The greater investment requirements specific to the United Kingdom are the result of interconnecting wind With increasing renewable energy generation, the power generated in the north (Scotland) and transmitted needs for the transmission network to accommodate to the main consumption centers in the south. In the increased capacity are also being addressed in 2004, the regulator approved a £500 million interim the United Kingdom. The U.K. transmission system is capital expenditure specifically to accommodate the owned and maintained by three regional monopoly significant investment transmission needs triggered by transmission companies: (a) National Grid Electricity renewable energy (OFGEM 2004) through a special Transmission (NGET) in England; (b) Scottish Power capital expenditure approval. In 2006, when the Transmission Limited (SPT) in southern Scotland; and allowed revenues for transmission companies for the (c) Scottish Hydro-Electric Transmission Limited (SHETL) period 2006–12 were under assessment, it became in northern Scotland. NGET also serves as the system evident that investment in transmission needed to be operator for the U.K. system. The transmission sector is scaled up. The approved capital expenditures for the regulated and overseen by OFGEM. three transmission companies for the 2006-12 period more than doubled from £1,676 million to £3,786 Under the existing regulatory framework, every five million compared to the previous period. For the SPT, years the transmission companies submit their capital where most of the wind power potential is located, and operational expenditure plans to the regulator. The their approved capital expenditures tripled. Table A.3 figure A.5: renewable electricity generation in the united kingdom 18,000 16,000 Renewable electricity generation (GWh) 14,000 12,000 10,000 8,000 6000 4,000 92 2,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total biomass Onshore Wind Offshore wind Small scale hydro Solar photovoltaics Source: U.K. Department of Energy and Climate Change 2009. details the levels of transmission investments and capital Table A.3: Approved Capital expenditures for expenditures in the United Kingdom during the periods the Three u.k. Transmission Companies 2002–07 and 2007–12. Approved capital European Union expenditures (£ million) ngeT SPT SheTl Total In order to continue the development and deployment Regulatory period 1,453 152 71 1,676 of renewable energy technologies, the European Union 2002–07 adopted the 2009 Renewable Energy Directive, which included a 20 percent renewable energy target by New regulatory 2,997 608 181 3,786 period 2007–12 2020 for the European Union (Figure A.6). In 2020, according to the Renewable Energy Directive’s 27 Percentage 106 300 155 126 change National Renewable Energy Action Plans, 34 percent of the European Union’s total electricity consumption Source: OFGEM 2006. should come from renewable energy sources, including Note: Values in 2005/2004 prices. 495 TWh from wind energy representing levels equivalent to 14 percent of consumption (EWEA 2011). In 2009, despite the economic crisis, renewable energy because their electricity cannot be integrated into the technologies accounted for 61 percent of new electricity grid because of bottlenecks in the transmission network. generating capacity connected to the grid. This strong For this reason, renewable electricity surpluses are not growth of renewable electricity sources, especially wind always transferred to another region with demand. The energy and solar PV (see Figure A.7), has started to grids must be urgently extended and upgraded to foster challenge the electricity system in countries such as market integration and maintain the existing levels of Germany and Spain. More often, wind turbines in some the system’s security, but especially to transport and regions are switched off during periods with high winds, balance electricity generated from renewable sources, figure A.6: renewable energy Share Targets of the european Countries 60% 50% 40% 30% 20% 10% 0% Belgium Bulgaria Czech Republic Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden United Kingdom EU-27 93 2005 2010 Source: European Commission 2011. which is expected to more than double during the period mounted solar and wind parks in Southern Europe or 2007–20. A significant share of generation capacities biomass installations in Central and Eastern Europe, will be concentrated in locations farther away from the while decentralized generation will also gain ground major centers of consumption or storage. Up to 12 throughout the continent(European Commission 2010). percent of renewable generation in 2020 is expected to come from offshore installations, notably in the northern The European Commission (2010) estimates that about seas. Significant shares will also come from ground- €1 trillion must be invested in energy system between figure A.7: new installed Capacity per year, 1995–2010 (MW) 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 RES 10,000 5,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Wind PV Large hydro Other RES Nuclear Coal Natural gas Fuel oil Other non-RES Source: EWEA 2011. figure A.8: grid Model Mapping used by energynautics grid Study, Status 2010 94 Source: Energynautics 2010. 2010 and 2020 in order to meet its energy policy projects by allowing private participation in the objectives and climate goals. Out of this investment, generation sector since 1992, specific targets for approximately €200 billion are needed for energy renewable energy generation in the electric power transmission networks alone. Looking into electricity sector were introduced in 2010 by the National Energy transmission investment specifically, according to Strategy (Secretaría de Energía 2010). The strategy, the European grid study (Energynautics 2010; see approved by congress in February 2010, pursues Figure A.8), depending on various scenarios, the three main objectives: (a) improving energy security investment needs in transmission for renewable energy by increasing oil production and oil products reserve would range from €50 billion to €70 billion for margins; (b) increasing economic efficiency and 2030 with 2,537 TWh generation (65 percent) from productivity by reducing losses in improving efficiency of renewable energy sources out of total generation of the oil refining sector, reducing losses in the electricity 3,886 TWh, and from €124 billion to €149 billion for sector, and further improving the electricity access the 2050 grid with 4,517 TWh (99 percent) generation rate to 98.5 percent; and (c) improving environmental from RES out of total generation of 4,543 TWh. sustainability by increasing renewable energy participation in the generation sector and improving Mexico end-user energy consumption. While the Government of Mexico has been increasingly For the last objective, the strategy set a target for the supporting the development of renewable energy participation of renewable generation technologies, including large hydropower. The target includes achieving figure. That is, these projects supply large industrial a 35 percent share of renewable energy in terms of consumers at privately negotiated energy prices. When generation by 2024. The share of renewable generation consumers are located in a remote location, private technologies in 2008 (CFE 2010) was 23.7 percent, generation producers are required to pay a transmission from which 21.7 percent was hydroelectricity, 1.8 percent charge to the CFE, the vertically integrated utility geothermal power, and 0.2 percent wind power. that owns and operates the entire transmission and distribution networks in the country. Such increasing One of the richest wind resource areas in Mexico is interest in developing wind-based self-supply generation located in the southeastern state of Oaxaca. The area projects in the region triggered the need for important has long-been named La Ventosa, whose translation to expansion to existing transmission network. The main English is “The Windy.� The wind power potential has reason for the need to increase transmission capacity been estimated between 5,000 MW and 6,000 MW, and was that consumption centers were not located in the the wind resource in the area is of high quality and can vanity of the wind resource area, and the existing high- lead to capacity factors of up to 40 percent (Figure A.9). voltage network was not equipped to evacuate the generation from the new additions. Currently only 84.65 MW of wind power capacity are operational in the area, but projects in operation Figure A.10 depicts the existing transmission system in will increase to 2,745 MW by 2014 in the area. The the central and southeastern parts of the country. The 95 majority of these projects (1,967 MW) will be owned reinforcement required to evacuate 1,967 MW of wind and operated by the private sector under the self-supply self-supply projects consists mainly of a new 400 kV figure A.9: Wind Speeds in la ventosa region located in the Southeastern State of oaxaca Source: F. J. Barnes, “An Open Season Scheme to develop Transmission Interconnection Investments for large wind farms in Mexico,� Washington DC, 2009. figure A.10: existing Transmission network and new Transmission needs in la ventosa region 96 Source: F. J. Barnes, “An Open Season Scheme to develop Transmission Interconnection Investments for large wind farms in Mexico,� Washington DC, 2009. double circuit line connecting La Ventosa region with emissions. Last, the law introduced an important the main trunk lines of the national interconnected incentive consisting of eliminating any transmission or system, reinforcement of the main trunk line with an distribution charge for small renewable energy producers additional 400 kV circuit, a substation where most whose capacity is below 10 MW. The law includes the wind power production will be collected, and a static same incentive for projects whose capacity is at or below var compensator to improve reactive power control. 20 MW, but the exemption applies for the transmission The total cost of these investment needs is estimated at and distribution charges applicable to the first 10 MW. US$260 million. The total installed generation capacity in Panama in Panama 2009 was 1,771 MW, of which 881 MW came from large and SH plants, and the rest from fossil fuel-fired While the Government of Panama has not established generation (data from CEPAL 2010). The first wind specific targets for penetration levels of renewable power plant in Panama, the 120 MW Toabre project, energy technologies, the government has increased is expected to enter into operation in late 2011. The its support to such technologies through the approval transmission system in Panama is developed and of different incentives. Law 45, approved by congress operated by Empresa de Transmisión Eléctrica S.A. in 2004, set forth a set of incentives for small power (ETESA), a state-owned transmission-only company. generation projects with renewable energy technologies, including hydro, geothermal, wind, solar, and other Panama has especially rich hydro and minihydro renewable energy technologies. The law established renewable energy resources. While other sources, such three main types of incentives for small renewable as wind, are expected to increase their participation, energy producers whose capacity is equal to or below small minihydro generators are the technology 10 MW. First, direct contracting is allowed for energy sources representing an increasing challenge for the supply from small renewable energy producers and transmission company. the regulated distribution utilities or the transmission company. Second, the law introduced fiscal incentives, After Law 45 had been approved, a large number of such as exemption of import taxes and direct fiscal minihydropower projects in the basins of the rivers incentives based on an evaluation of avoided CO2 Chiriquí, Chiquiri Viejo, and Piedra have requested interconnection to ETESA’s lower-voltage transmission transformer to collect the projects in the central area network. The basins have a number of minihydro of the figure. This substation will connect to the 230 projects that are in advanced stages of preparation. kV system at a point between the Mata de Nance and In aggregate, there are 21 projects whose capacities El Progreso substations. Altogether, the cost of these vary from a few megawatts up to 20 MW, representing transmission expansions adds up to US$12.29 million, a total of 172.2 MW. Figure A.11 depicts the relative which is about 10 percent of the total investment needs locations of such projects to existing and proposed of the company for the period 2008–12 (authors’ transmission infrastructures. calculations with data from ETESA 2009, p. 299). In order to interconnect these projects, the transmission Egypt company’s expansion plan considers the expansion of caldera substation—green (S) in the upper right In February 2008, the Supreme Council of Energy of corner in Figure A.11—and the addition of a new Egypt, headed by the prime minister, approved a plan to substation—yellow (S) in the center. The objective of generate 20 percent of the total energy generated from these substations is to serve as collectors of a number of renewable sources by 2020. For such ambitions targets, minihydro projects in these areas. the Government of Egypt is considered a champion of renewable energy in the region. Egypt’s current The expansion at caldera substation involves adding energy portfolio mix consists mainly of hydro, wind, and 97 a new 34.5 kV bay with a 50 MVA 115/34.5 kV thermal generation as shown in Table A.4. transformer. The substation will collect, at 34.5 kV, the output of the SH projects in the region. The new To achieve this goal, the Egyptian Electricity Holding substation Boqueron 3 will host a 230/34.5 kV Company (EEHC) and New and Renewable Energy figure A.11: Mini-hydro Sites and existing and Proposed Substations. Panama Chiriquí region Source: ETESA 2009. Minihydro Sites: yellow arrows; existing substations: green; proposed substations yellow; substations: S. Similar to wind, commissioning tests for the first 140 Table A.4: installed Capacity in egypt as of 2009 MW integrated solar combined-cycle power plant is currently under way. Additionally, two 100 MW solar Source MW % thermal power plants and four photovoltaic plants with Hydro 2,800 11.8 total capacity of 20 MW are under preparation by Wind 430 1.8 NREA. Thermal 20,529 86.4 These wind and solar projects, which are part of the Total 23,759 100 FY07–12 five-year investment plan, have obtained Source: Sustainable Development Department Middle financing commitments and are at various stages of East and North Africa Region, World Bank. construction. As of June 2010, NREA has installed 530 MW of wind energy capacity with about 1,000 MW in the pipeline. Authority (NREA) are executing a number of renewable In addition to executing a number of projects, generation projects, especially focusing on wind and the regulars are also using a policy and regulator solar energy. As shown in figure A.5, in the first five-year mechanism to meet their targets. To further facilitate 98 phase (FY07–12), NREA plans to add 600 MW in wind the growth of renewable energy and reduce investment power and 140 MW in hybrid solar thermal technology risk—especially for wind energy developers, the EETC generation. In addition, an investment strategy for the and distribution companies are required to sign a following five years (FY12–17) is also being strategically power purchase agreement with all licensed renewable pursued, which includes adding 3,600 MW in wind plants connected to their network to purchase all power and 150 MW in concentrated solar power energy generated from the first 20-year period. technology. Additionally, regulators in Egypt are also incentivizing the renewable energy project developers through the To satisfy the significant investment requirement for following: wind power generation, Egypt is pursuing a wind commercialization program that will focus on engaging • Exemption of imported renewable equipment from the private sector in phases. The first stage is through custom duties compared to 5 percent customs duties competitive bidding where the EETC is inviting private for conventional equipment. developers to design, finance, own, and operate • Government allocation of more than 7,600 square private wind power projects and sell all electricity kilometers of land for renewable projects. generated to the national grid. A 250 MW installed • All permits for land allocation and utilization have capacity wind project at the Gulf of Suez is planned to already been obtained by NREA. be commissioned by December 2013 through such a • Qualified developers can sign a use of land competitive bidding process, and the remaining 1,000 agreement with NREA, with zero leasing fees. MW will be commissioned by the end of the year. The • For the competitive bidding, the EETC will purchase remaining wind power generation will be implemented all energy generated for 20–25 years, and the through both competitive bidding and FITs. government will provide guarantee for payments. • All historic wind data are available for all developers (more than 10 years). Table A.5: Wind and Solar expansion Plan (MW) Furthermore, the new electricity law—in the process of ratification—will provide the legal framework for the Sources fy07–12 fy12–17 creation of an electricity market in Egypt. This includes the Wind 600 3,600 establishment of the TSO through ownership unbundling from the holding company and guaranteeing third party Solar 140 150 access to both the transmission and distribution networks. Total 740 3,750 The necessary regulations, including the tariff process, Source: Sustainable Development Department Middle incentive regulation, market surveillance, and assurance East and North Africa Region, World Bank. of implementation of unbundling criteria, as well as quality of service regulations, are under development The Wind Atlas of Egypt identifies several geographic by the Egyptian Electric Utility and Consumer Protection regions with wind resource potential, including along Regulatory Agency (EgyptEra). the Gulf of Suez, large regions of the Western and Eastern Deserts (in particular west and east of the By contrast, a number of barriers must be overcome Nile Valley) and parts of Sinai Peninsula. The wind for Egypt to successfully grow and meet its renewable resources are particularly high along the Gulf of targets. These barriers include the following: Suez and comparable to those of the most favorable regions in northwestern Europe. In view of this • High wind speed is concentrated in specific areas favorable resource base, the Gulf of Suez has been very far away from loads, which requires huge chosen for scaling up wind power development in investments in transmission systems to be built Egypt. specifically for wind farms. • Lack of regulations to encourage renewables (such One of the projects supported by the World Bank and as codes, access tariffs, supplementary agreements, currently under way is the 250 MW, build-own-operate and connection agreements). (BOO) transmission project that will connect the future • Incentives for purchasing renewable energy. wind parks at Gulf of Suez and Gabel El-Zait to the national transmission network (Figure A.12). By addressing the barriers above and strategically 99 pursuing renewable energy projects, involving the As displayed on the map, the desired location for private sector, and initiating policies geared toward developing wind farms is away from the demand, attracting investors to renewable projects, Egypt can as well as the existing transmission infrastructure. continue to outpace neighboring Middle East and North Connecting this site to the existing network would African countries, while pragmatically approaching its require miles of transmission line, multiple substations, 20 percent by 2020 target. and various other relevant components. figure A.12: Boo Transmission Project in egypt CAIRO. W. CAIRO . N. SUEZ 500 HELIOPOLIS CAIRO 500 CAIRORABAA SAQR MOATAMEDIA 12 SUEZ 2 O.MOUSA ZAYED Giza STAD MARSA MATRUH 6th of October BASAT. CAIRO.E. SUEZ STL Suez GIZA ATAQA HADABA 13 LASLKY KATAMIA SUEZ CEM 6 OCTOBER ECON . 2 Helwan SUEZ EZZ STL CAIRO.S. W.HOUF SUEZ GULF TEBBIN HELWAN MAGHNSUM SUKHNA RAS SIDR TEBBIN TEBBIN 500 ECON . 1 SOUTH Gu El Fayoum SOUTHERN DEMO lf FAYOM WEST KURIMAT SINAI of EL FAYOUM Su Beni Suef GIZA SOUTH ZAFARANA ez B. SUEF EAST Abu Zenima BENI SUEF 500kV double-circuit overhead AL MINYA MAGHAGHA transmission line (OHTL) ELWAHAT MAGHAGHA 6TH OF OCTOBER ELBAHAREYA WEST Ras Gharib MINIA CEM El Tur Project extension of SAMALLOUT 500kV/220kV Al Minya GIS substation MINIA Planned 500kV substation ELZIET MINIA WEST AL BAHR MALLAWI MALLAWI WEST AL AHMAR Source: World Bank. figure A.13: Transmission infrastructure for renewable Project in egypt 1,750MW by 2015/16 A4 220kV, double-circuit, Gulf of Suez 50km, OHTL (Ras Ghareb) A1 500/220kV S/S 780MW by 500kV, 2013/14 double-circuit A2 500MW by (280km) 2012/13 Samalut S/S TF Ext. 1x375MVA 1x375MVA A3 Gabal Elzait Source: World Bank. 100 As displayed in the diagram below (Figure A.13), the the generation mix: biomass from sugarcane bagasse transmission line would first connect the wind farm from cogeneration, and hydro plants smaller than 30 MW the Gulf of Suez (Ras Ghareb) using a 500 kV double (SH). Hundreds of bagasse cogeneration and SH plants, circuit line over a distance of 280 km to Samalut (A1). totalling 5,200 MW, are already in operation, and an Second, a 500 kV/220 kV GIS substation at the Gulf of additional 2,700 MW are under construction. These Suez would be constructed and connected to the wind plants entered the market through participating in farm (A2). Third, extension of Samalut 500 kV/220 centralized energy auctions for contracts with Brazilian kV conventional substation would be constructed and distribution companies to supply their loads, in direct connected (A3). Last, a double-circuit, 220 kV line from competition with all other generation sources (such as the Gulf of Suez (Ras Gharib) to Gabel El-Zait would be gas, coal, and large hydropower). More recently, wind constructed to bring the second wind farm on board. power has emerged as the fourth “asset� of the country’s “renewable portfolio,� with 800 MW already in operation The total cost of this project is estimated to be and under construction, plus a successful 1,800 MW US$795.9 million, of which transmission costs contracting auction conducted in December 2009. are estimated at US$299.7 million. However, this investment in transmission will also accommodate One of the most promising sites for renewables in Brazil the future wind farm efforts in the Gulf of Suez and is the Center-West region, which includes parts of the Gabal El-Zait, not just the 250 MW project currently states of Mato Grosso do Sul and Goiás. As shown in under way. In total, the transmission built through this the following figures, there are hundreds of candidate investment will accommodate 1,750 MW and 540 MW bagasse cogeneration and SH projects spread over capacity planned in the Gulf of Suez and Gabal El-Zait, 200,000 km (Figure A.14). respectively. The challenge to integrating these small renewable Brazil projects comes from two factors: first, their dispersed location and, second, their distance to existing Brazil has one of the world’s cleanest energy matrixes, distribution or transmission networks. with 85.3 percent of overall energy production coming from hydro and other renewable sources (the worldwide The investment needs to integrate about 80 biomass average is 16 percent), and with 75 percent of the (sugar bagasse) cogeneration and SH plants, resulting country’s 105,000 MW installed generation capacity in 4,100 MW, were at about US$400 million. The costs coming from hydropower plants. correspond to 2,500 km of networks, out of which 1,550 km are 230 kV lines, 960 km are 138 kV lines, In the last five years, two other renewable resources and some are 230 kV circuit reinforcements in the main have become competitive and increased their share in transmission network. figure A.14: Some of the renewable Table A.6: Potential renewable generation Candidate Projects in Mato grosso do Sul Capacity per grid (MW) luzon visayas Mindanao Wind 11,381 2,527 455 Small 1,291 58 978 hydropower Biomass 44 168 24 Geothermal 380 700 120 Total 13,096 3,453 1,577 Source: The authors and del Mundo and others (2003). renewable energy in the Philippines. Advancing that the development of transmission networks to connect the renewable energy potential would represent an 101 important challenge, the act made some specific provisions. Sections 11 and 18 state the following: Sec. 11. Transmission and Distribution System Development. TRANSCO or its successors-in-interest or its buyer/concessionaire and all DUs shall include Source: World Bank 2010. the required connection facilities for RE based power facilities in the Transmission and Distribution Development Plans: Provided that such facilities are approved by the DOE[…]. The Philippines Sec 18. Payment of Transmission Charges. A registered renewable energy developer producing The Philippines recently enacted important regulations power and electricity from an intermittent RE that will bolster the participation of renewable energy resource may opt to pay the transmission and into its islanded power system. The Philippines is well wheeling charge of TRANSCO or its successors- known to have tremendous potential for wind, hydro, in-interest on a per-kilowatt-hour basis at a cost and other renewable energy sources (Table A.6). equivalent to the average per-kilowatt-hour rate of all other electricity transmitted through the grid. In order to decrease the country’s dependence on fossil fuels, increase energy security by using In addition, Section 8 of the Rules and Regulations local energy resources, and reduce emissions, Implementing Republic Act No. 9513 (Republic of the the government approved the Act Promoting the Philippines—Department of Energy 2009) establishes Development, Utilization and Commercialization similar provisions and adds considerations on the cost of Renewable Energy Resources (Congress of the recovery of the connection facilities for renewable Philippines 2008). The act, known as the Renewable energy: Energy Act (Congress of the Philippines 2008) provides an institutional framework and general guidance to The ERC shall, in consultation with the NREB, foster the development and utilization of renewable TRANSCO, its concessionaire or its successors-in- energy in the Philippines. interest, provide the mechanisms for the recovery of the costs of these connection facilities. The Renewable Energy Act (Congress of the Philippines 2008) provides an institutional framework and general All these provisions are being designed in detail at guidance to foster the development and utilization of the same time the main support scheme, FITs, for renewable energy are being designed. The installed The first panel in Figure A.15 depicts the existing generation capacity of the three main islands in transmission network, while the second panel depicts the Philippines is presented in Table A.7. As can the location of potential renewable energy projects in be seen, hydro and geothermal power are the two the area. The locations are depicted in gray, and the main sources of renewable energy currently under colored circles are the location of existing substations operation. A first wind plant is already under operation in the transmission network at different voltage levels. in the Luzon Island, where wind power potential is the The locations are obtained directly from developers’ highest. applications to develop the sites. This application process is called a Service Contract in the context of The World Bank conducted an assessment of the Philippine regulations. transmission investment needs to connect most of the projects that requested a services contract in the Luzon The potential projects include biomass, wind, and area. While Luzon is only one of the three main islands hydropower for a total of 589.4 MW. A transmission in the country, the transmission needs identified in that planning exercise was carried out, which concluded island serve as an important reference on the investment that transmission investment needs can be worth as needs for renewable energy, given the importance of much as US$192 or US$170 million, depending on the island in terms of size and its renewable energy the planning strategy followed to interconnect the 102 potential, especially wind power. project. The first amount corresponds to a scenario where each project is connected individually to figure A.15: Philippine Bulk Transmission System and Map Showing All renewable Candidate Projects and All Transmission System Substations in luzon Source: World Bank 2010. Table A.7: Total Capital expenditure Approved for the Transmission Company, 2005–10 2005 2006 2007 2008 2009 2010 Transmission 96.49 168.56 207.67 130.42 67.22 59.94 Non-network 14.28 15.40 15.45 15.21 11.42 11.63 Subtransmission+connection 3.42 4.13 10.22 10.95 1.87 2.08 Total 114.19 188.09 233.34 156.59 80.51 73.64 Source: The authors’ calculations with data from ERC 2006. Note: IMF exchange rates have been applied to convert PHP to USD. the transmission network, and the second amount These investment needs can be contrasted with corresponds to the investment needs if planning is the total capital expenditures approved for the performed proactively for sets or clusters of projects transmission company for the most recent regulatory located in different areas. period 2005–10. 103 APPenDix B: revieW of ConneCTion cost policy, where costs associated with network upgrades CoST AlloCATion AnD neTWork and system extensions inland for offshore wind parks are infrASTruCTure PriCing shared by all transmission companies (SOU 2008). All MeThoDologieS TSO costs for network upgrades are socialized and can be recovered through higher network consumer tariffs. B.1 Cost Allocation Denmark Spain Denmark, similar to Germany, uses a different strategy Traditionally in Spain, all network connection costs for for onshore renewables and offshore wind parks. For all new generation were borne by the project developer. As onshore renewable projects, Denmark has incorporated costs have increased substantially—especially with the a shallow cost allocation policy. Project developers in inception of offshore wind farms—the cost allocation Denmark are responsible for all enabler facilities and structures in Spain have been adjusted. Currently, system extension costs to the nearest 10 kV point of Spain has adopted a shallow cost allocation policy electric system. The distribution system operator (DSO) for its connection cost allocation structure, where all and TSO are responsible for all network upgrade transmission network upgrades (reinforcement) costs (reinforcement) costs, including all additional costs if are borne by the TSO and socialized—that is, they are they choose to connect the renewable project elsewhere 105 financed through transmission tariffs paid by consumers. other than the closest existing grid connection. For wind Project developers can speed up the process by paying plants that are larger than 100 MW, the DSO generally the reinforcement costs upfront to the TSO and getting provides a connection at a voltage above 100 kV, for reimbursed later through consumer tariffs (SOU 2008). which all interconnection and network upgrade costs By contrast, the costs associated with the connection are socialized (National Grid 2006). assets in Spain are typically borne by the project developer based on the agreement with the TSO. There For offshore wind farms, a super-shallow cost allocation are instances in which a semi-shallow cost allocation policy is incorporated. However, unlike Germany, policy has been applied and the costs have been shared the Demark offshore wind farm cost allocation policy between the project developer and the TSO, although transfers the cost of offshore substations to the TSO. this is generally not the case and overall cost allocation Such policy further reduces the cost burden on policy remains shallow. In instances where multiple generators, and it has contributed to high wind energy generations are connected in the same area, the costs penetration in Denmark (National Grid 2006). for these reinforcements are shared between the different project developers according to the connected capacity. United Kingdom Germany The United Kingdom, which consists of Ireland, Scotland, England, and Wales, has incorporated Germany, similar to Spain, has incorporated a shallow a super-shallow cost allocation policy. All network cost allocation policy for cost allocation structures upgrades, system extension, and some enabler associated with connecting renewable generation to facility costs are borne by the TSO. This is one of the the existing transmission network. Project developers in shallowest policies in the European Union where the Germany are responsible for all enabler facilities and connection asset boundary is set very close to the system extension, while the TSO is responsible for all generation, benefiting the renewable project developers network upgrade (reinforcement) costs. The TSO is also from the low connection costs (Scott 2007). Connection responsible for all additional costs if it chooses to connect costs in the United Kingdom are charged by imposing the renewable project elsewhere other than the closest a connection charge component in the overall existing grid connection. However, such is not the case transmission charge methodology. when it comes to offshore wind parks that can warrant significant investment in system extension to connect with Texas the existing network. Any wind park erected three nautical miles seaward in Germany is considered offshore. In the last 10 years, the wind industry in the United German regulators have incorporated a super-shallow States has grown extensively, especially in Texas (Diffen 2009). Texas regulators have incorporated a semi- allocation policy. The TSO’s investment is ultimately shallow cost allocation policy to accommodate such reimbursed directly by government funds. growth and decrease the upfront investment costs for the renewable project developer. In Texas, “the Brazil individual electric utilities are responsible for building the transmission that is needed to interconnect a new Brazil offers one of the cleanest energy mixes with generation facility.� However, the developer must pay 85.3 percent of overall energy being generated a security deposit to protect the utility from developers from renewable sources, such as hydro, biomass, backing out. The security deposit is returned to the sugarcane bagasse, and wind in 2009 (Farias 2010). developers once the generating plant is completed Although large-scale hydropower generation projects and ready to interconnect on time (Diffen 2009). In are currently under way, smaller bagasse renewable addition to the semi-shallow cost allocation, Texas has generation has gained tremendous momentum because created CREZs, a process that “is intended to accelerate of its shorter ramp-up time, smaller investment, and the building of transmission lines to allow renewable lesser risk. However, from a transmission perspective, generation to get its power to markets that need it� these projects pose a severe risk. Brazil has taken (Diffen 2009). This approach, further elaborated later, measures to optimize network expansion and reduce identifies a group of generation to a common network transmission costs (operational and losses) with the 106 that can reduce overall transmission costs and the cost help of a combinatorial optimization algorithm. This of connections. has led to the advent of an integration network with shared connection links through collector stations at Mexico different voltages. Such networks eliminate the need for each generator to develop and pay for individual The vertically integrated utility in Mexico has no grid connection. Instead, generators bear the cost of obligation to expand transmission networks, including enabling facilities and system extension up to the shared connections and reinforcements for generation projects network. The costs associated with the shared network that will not be supplying public service demand. For all are allocated to each generator based on usage. This self-supply projects, Mexico has incorporated a deep point is further discussed in the following section. policy for its cost allocation structure, whereby private project developers are responsible for all enabling The Philippines facilities, system extension, and network upgrades costs. However, with the recent increase in wind energy The Philippines is well known for its tremendous generation in remote regions to supply private industrial potential for renewable energy resources. To facilitate clients requiring significant investment in transmission and advance the growth of renewable energy, increase network expansion and upgrades, the CRE has instituted energy security, and decrease fossil fuel dependence, a process called Open Season. This process, similar to the government has approved the Renewable Energy CREZs in Texas, allows the utility to identify transmission Resources Act (Congress of the Philippines 2008). This investment needs to serve all wind power projects in act provides an institutional framework and general the region. Even though all costs are borne by the guidance to foster the development and utilization of renewable energy producers, this process can greatly renewable energy in the Philippines. The act makes reduce the investment needs. specific reference to the issue of transmission and provides general guidance to change current regulation Panama and incorporate a semi-shallow cost allocation policy for renewable developers. The transmission company To encourage the growth of small renewable energy (TRANSCO) is responsible for planning and connecting producers, Panama has incorporated a super-shallow renewable energy projects throughout the nation, as policy for developers of renewable projects with well as financing and building the interconnection. The capacities of 10 MW or under. Renewable generators investment costs for system extensions are recouped are responsible for enabling facilities, while the TSO later through monthly installments from the generator bears the cost of network extension and upgrades. For or other cost recovery mechanisms. Feed-in tariffs, developers of renewable projects above 10 MW, similar however, design for specific sites that incorporate some to Texas, Panama has opted for a semi-shallow cost incentives for transmission interconnection costs for renewable developers that are under consideration. a low capacity factor, UoS charges calculated on Based on the approval of RA 9513, regulators in the the basis of amount of usage (MWh) are more Philippines are contemplating changes in the existing advantageous. shallow policy. • Peak-based demand or generation: This method also spreads the costs to all users irrespective of location. Egypt However, the costs are based on their maximum amount of load (demand peak) or generation The transmission network in Egypt is publicly owned (system capacity peak). The second formula in and operated by the Egyptian Electricity Transmission Table B.1 illustrates the concepts of postage stamp Company (EETC), which serves nine distribution pricing based on megawatt ratios. With regard to companies and in turn provides electricity to 23.7 renewable energy, calculating on the basis of peak million customers. The Egyptian government has set an generation is less favorable because of the low ambitious target of 20 percent renewable energy in its capacity factor. For a wind or solar power plant, energy portfolio by 2020, and government agencies where capacity factors range between 20 and 35 are currently working on policies and measures to percent of the name plate capacity, the generator encourage the growth of renewable energy, especially to would pay for capacity that is rarely used. Because accommodate wind energy for which the desirable high of their variability, these technologies would be wind speed areas are concentrated away from the load adversely affected by a peak or name plate capacity 107 and which require significant transmission investments. postage stamp method Current interconnection cost allocation practice can be considered shallow, since generators are responsible Usage Based Methods: This method refers to when for enabling facilities, as well as system extension the infractructure pricing is based on a measure of up to shared networks. Shared networks are being the burden it is placed on the network by the user. developed by the EETC, which should in turn recoup the costs from transmission tariffs. Regulators in Egypt, Table B.1: Basic formulas for various uoS similar to regulators in the Philippines, understand the Charge Methodologies transmission challenges posed by renewable generation and are currently in the process of implementing formula for postage stamp method final regulations on transmission pricing and final Energy-based (MWh): Rt = TC • (Pt(e)÷Ps(e)) interconnection rules for wind power. Peak-based (MW): Rt = TC • (Pt(p)÷Ps(p)) B.2 Review of Network Infrastructure Pricing formulas for usage basis Methodologies Formula for flow basis: Postage Stamp Method: This is the simpliest pricing Rt = ∑C allk k ( • fk ( t ) ÷ fk ) methodology where a flat rate is charged based on the Formula for distance-based MW-mile: amount of energy transmitted or injected into the network. The rate can be derived in the following two ways: Rt = ∑C allk k ( • Gu( t ) ÷ Gu ) where • Energy-based consumption generation: Allocating Gu = Dk • fk costs for consumers and generators based on the annual megawatt-hours of consumption List of variables: and generation, regardless of the peak usage • Rt transmission price for transaction T (PJM Interconnection 2010). Transmission UoS • TC total transmission charges charges for a user can be calculated simply by • Pt(p) peak power of transaction dividing megawatt-hours injected or extracted • Ps(p) total system peak power generation • Pt(e) energy of transaction by the particular user by total annual megawatt- • Ps(e) total system energy generation hours transmitted in the network and multiplying • Dk distance (length of line) that fraction with the total transmission costs (see • Ck cost of circuit k • fk(t) k-circuit flow caused by transaction Table B.1). For renewable energy technology • fk k-circuit capacity whose power production is intermittent leading to Usage-based charges are commonly determined in the renewable energy generation has been in the north following two ways: away from the demand in the south. To accommodate north-south power flow, significant reinforcement of the • Flow-based: Two power flow analyses are used to grid is required (Scott 2007). determine the change in flows in the network with and without the generator or demand in question. Denmark The changes in flow are considered the “extent of use� of such particular generator or demand of Regulators in Denmark have adopted a postage stamp the network. Network costs for a particular user transmission UoS methodology based on the amount are prorated based on the extent of use and can of usage (MWh) and not peak generation (MW). In this be expressed by the equation shown in Table B.1 case, demand customers (load) are responsible for 98 (Pérez-Arriaga n.d). percent of the costs, and the remaining 2 percent is • Distance-based MW-mile: While there are several borne by the generators, creating a favorable situation variations of usage-based methodologies, one for the generators. Unlike network connection cost that is of special impact for renewable energy is allocation, there is no special treatment for offshore when the “extent of use� metric includes a distance wind farms when it comes to UoS charges; however, component. For instance, in a longitudinal power renewable energy projects are largely exempt from UoS 108 network, it is clear that a transaction over a long (Scott 2007). distance will require additional infrastructure needs and cause more pressure on the system. United Kingdom For this reason, the applicable charges reflect the added cost of distance. A MW-mile transmission Regulators in the United Kingdom have adopted a pricing method can incorporate the length of each hybrid policy that includes locational and residual transmission element into the flow-based ratio as UoS charges. The locational charges are based on described in Table B.1. generation zones and reflect the long-term marginal cost of transmission services within those zones Network Pricing Practices in various (Wilks and Bradbury 2010). Similar to Germany, Jurisdictions renewable generation in the United Kingdom is strong in the north, while the demand is in the south. Since Spain generators are responsible for 27 percent of the locational UoS charges, being located in the north Spain, as well as 13 other European countries, does creates an unfavorable situation for many renewable not allocate any transmission UoS charges to the developers. However, locational charges also serve generators. Consumers are responsible for bearing 100 as a signal to renewable developers to develop future percent of transmission usage charges based on the projects in the south closer to demand (Scott 2007). postage stamp methodology (CEPA 2011). This creates Since locational charges typically do not fully recover a favorable situation for the renewable developers, all UoS costs, residual charges based on flow-based since they are responsible for bearing only shallow usage charges are also levied on the customer (load connection costs. and generation) and calculated on the basis of the “extent of use� using power flow models (National Germany Grid 2011). Germany, similar to Spain, does not levy any UoS Texas charges on generators. All charges are passed on to the demand consumers (load) based on a methodology that The transmission UoS charges are fully allocated to falls into the postage stamp method. The costs levied the demand consumers (load). Currently, charges on on load vary based on voltage level and utilization demand are levied based on zonal usage reflecting the time, but do not include any locational signal (Wilks short-term energy prices within the five pricing zones and Bradbury 2010). This has been one of the drivers (Wilks and Bradbury 2010). In addition to the zonal behind the success of Germany’s renewable energy charges, which only recoups a fraction of transmission penetration. However, most of the development of costs, UoS charges are determined using a postage stamp methodology (Public Utility Commission of Texas, on the flows in the network at each point (ASEP). The or PUC). Similar to Germany, Spain, and 11 other EU generators bear 70 percent of the cost, while the load member states, generators in Texas are responsible only bears the remaining 30 percent. Load flow studies are for shallow connection costs. utilized to compute the impacts. For small renewable projects under 10 MW, Panama does not allocate any Mexico transmission network usage cost to generators. Instead, all operational and maintenance costs are absorbed by Historically, Mexico had incorporated a flow-based the TSOs. usage transmission pricing methodology for self-supply bilateral transactions. Generator’s charges would be The Philippines based on determining the extent of network usage by a particular transaction using load flow modeling. The Philippines uses a postage stamp methodology This methodology led to transaction charges that had applied in equal amounts to consumption and been perceived as inadequate for renewable energy generations on megawatt-hour-based methodology. producers, given that they are unable to change their Anticipating the potential need to change transmission location. To accommodate and encourage renewable pricing rules for renewable energy, the recently energy, the Energy Regulatory Commission approved approved Renewable Energy Act mandate (Congress a new methodology that introduces a new flat-rate of the Philippines 2008) provides guidance to the 109 tariff per megawatt-hour. The rate (see Table B.2) is regulators on price transmission services for variable applied for up to two voltage levels that the transaction renewable energy in a per-megawatt-hour basis and covers. These rates are lower compared to average recognizes that cost recovery of interconnection play a transmission prices paid by European transmission major role in the economic viability of remotely located networks users. However, the difference in the case of generation projects. Mexico is that deep network connection cost allocation policy is applied to wind power developers. It needs Brazil to be noted that wind power development has taken place under a self-supply scheme, and the transmission Regulation applicable to the transmission sector in Brazil system is owned and operated by the vertically allocates the transmission UoS costs to both generation integrated utility. and demand based on flow-based usage methodology. In the case of small-scale renewable generation, the Panama network is not part of the national interconnected transmission system or the distribution concessionaries The methodology in Panama has a locational (by assets. Cost allocation for small-scale renewable zones) differentiation of tariffs, where in each zone the developers utilizing the integrated network with shared tariffs are determined based on the flow-based usage connections is based on distance-based MW-mile methodology. The methodology determines the extent usage methodology. Low-flow simulations are used to of use for each customer (generator and load) based determine the extent of use of the shared network and on the impact the power injection or extraction has chargers are appropriately allocated. Egypt Table B.2: flat-rate uoS, Mexico In Egypt, the energy tariffs are bundled for consumers, voltage level Transmission charge and there are no separate charges for transmission UoS. However, regulators are currently working on High voltage US$2.4296/MWh Above or equal to 69 kV new regulations to include transmission usage pricing. Table 2.6 summarizes the main characteristics of the Medium voltage US$2.4296/MWh interconnection cost allocation policies and the network Above 1 kV, but below 69 kV pricing policies utilized in the countries. It is evident that Low voltage US$4.8592/MWh shallower interconnection cost policies combined with At or below 1 kV no, or little, network costs allocation to generation are Source: CRE 2010. present in countries that have been highly successful in integrating large amounts of renewable energy. transmission planning has a great role to play to reduce While such success cannot clearly be attributed directly transmission cost and to support one or the other to the transmission policy, it is evident that these pricing methodology. countries have made an effort to reduce such barriers. The following chapter of the report will analyze how 110 APPenDix C: ToPiCS on TrAnSMiSSion PlAnning: reliABiliTy CriTeriA AnD neW ToolS Table C.1 contains a description of various models (building-blocks) that assist the transmission planning function. Table C.1: various Models That Assist with Transmission Planning Type of model Some available models long-term, optimization-based transmission models. These models have the OptGen ability to systematically generate transmission expansion options for medium- and long- Ventyx term timeframes (3–20 years). The models are based on optimization methods, and WinDS traditional objective functions are to find the lowest-cost network for a given target year, including its optimal evolution from the first year in the planning scenario. Some of the models usually perform combined generation and transmission planning. Network models are usually simplified and, for this reason, additional load-flow or dynamic 111 models will be required to analyze the reliability of the network in the short term. Traditional inputs are load forecast, generation options, and transmission options with their technical and cost characteristics, as well as a description of the existing system. These types of models can be very useful to identify shared networks for renewable energy projects in a given geographical area. Production simulation models. The main difference between production simulation • SDDP models and planning models, above, is that the former does not determine investment • Ventyx PROMOD decision, only the optimal operation and dispatch of the network over a long term. • EWIS Market Model The advantage of production simulation in the context of transmission planning and • Powerworld renewable energy is twofold. They can be used to estimate the economic benefits of • GTMax proposed transmission additions. Transmission additions need to be included in the • EGEAS models based on planners’ experience or analysis or a clear identification of need (for example, reaching a renewable potential area or increasing transmission capacity in a given corridor). Simulating the operation of the system with and without the proposed interconnection will determine the economic impact of the network in terms of operational costs. Production simulation models have the capability to simulate the operation of the system with a time step of tens of minutes or hourly resolution. This resolution is very important for capturing the most important variability of wind and solar power, which occurs in the timeframe of minutes to hours. This simulation resolution is very helpful for capturing the variability of wind and solar resources. Production simulation models will be able to help decide if transmission is worth it for highly variable sources. For instance, the models can be used to determine when it is better to “spill� wind power than to build extra transmission. Traditionally production simulation models do not include detailed models of the network; rather, they focus only on real power. Losses can be considered in the model. Verifying that other system aspects, such as voltages and reactive power flows, are in technical compliance will require the use of additional models, such as load-flow models. (continued on next page) Table C.1: various Models That Assist with Transmission Planning (continued) Type of model Some available models load-flow models. Load-flow models determine the state of the network during steady- • Siemens PTI – PSSE and state conditions. Load flow models include a detailed (nonlinear) representation of the MUST network to determine how real and reactive power will flow in the network for a given • GE – PSLF generation and load condition. That is, they represent only a snapshot in time. Load-flow • Powertech PSAT models are used to determine whether elements in the network are operating at their • V&R Energy POM-OPM rated capacities, including load and voltages. These models are used to identify reactive • Powerworld power compensations needs that could be required and that cannot be identified by the models above. In addition, power flow models can be used to perform N-1 reliability analysis and identify whether the network is able to deliver load without reaching a level that may lead to unstable conditions. Load-flow models will provide an indication of whether more detailed dynamic simulation) models are required to further analyze conditions of overloads in the system. Load-flow models alone can be used to propose transmission expansions if the model is assembled for different expected conditions in future years. The model will be able to analyze the technical soundness of the proposal, but it will not be able to provide information on its costs and benefits. Short-circuit models. Short-circuit models are used to determine currents in the network • Siemens PTI – PSSE under short-circuit conditions. A proposed transmission expansion addition must be • GE – PSLF 112 analyzed under short-circuit conditions to determine whether the short-circuit capacity of elements is within limits. These studies are especially used to determine currents in breakers and determine needed upgrades. Specialized reliability evaluation models. The models are used to determine • GE-MARS reliability indicators of the generation and transmission system. Such reliability indicators • Integral are expressed in expected frequency of interruptions, loss of load probabilities, and • Netomac so forth. Reliability evaluation models use enumeration, probabilistic, and Monte • Digsilent Carlo analysis, or other varied techniques to determine system reliability, given certain probabilities of equipment failure and unexpected events. Checking N-1 contingencies for a given set of probable events (line, generation outages) would constitute the simplest form of reliability evaluation, which can be performed by load-flow studies. Specialized reliability models go a step further by making automatic generating scenarios, considering statistical equipment failure rates to perform more comprehensive reliability evaluations. Dynamic simulation models. These models are used to reproduce the dynamic time • Siemens PTI – PSSE behavior of the power systems. These models are necessary to check that the system will • GE – PSLF remain stable for a number of possible contingencies. There are different angles to the • Powertech TSAT, VSAT, stability of the power system, which include (a) angular or inertial stability, (b) voltage SSAT stability, and (c) frequency stability. The configuration and equipment in the transmission • Digsilent system has a great deal of influence in the stability of the system. Some expected failures may require that flow in lines be limited to a certain amount, which could in turn require more transmission. Reactive power control and stability are crucial for ensuring that losses are reduced and that voltages can remain within safe operational limits. Dynamic simulation models will identify potential additional investment needs to achieve stable condition, which could include reactive power compensation needs or needs, synchronous compensation, or improved voltage control. All stability studies are performed for a given condition of the network in the short term and require large amounts of data related to the characteristics of generation, load, and other equipment in the network. Dynamic studies require reliable data for meaningful results. The timeframe of these varied studies is from a few milliseconds to a few minutes. Source: The authors. The building blocks of the transmission planning function through the Planning Agency in Colombia are shown in Figure C.1. figure C.1: Transmission Planning in Colombia: Methodology Building Blocks Scenarios (generation dispatch & demand) identification Analysis of Transmission congestion cost failure rates AC power flow Stability Reliability analysis analysis analysis Transmission enhancement Power system committed or projects identification planned enhancements Hydrotermal dispatch operating costs for projects Investment costs 113 Analysis of additional benefits Economical evaluation of projects cost – Benefit analysis Source: XM Colombia 2009. The building blocks of the technical transmission A tier below, the Planning Subcommittee (PSC), planning function in Mid-West ISO. which reports to the PAC, draws upon the collective knowledge of its transmission owner, transmission Midwest ISO’s planning process is fully compliant customer, and other industry participants to advise, with the Planning Principles established by the Federal guide, and provide recommendations to Midwest ISO Energy Regulatory Commission’s (FERC’s) Order No. planning staff in executing its planning responsibilities. 890. In Order No. 890, the principles must be satisfied This committee is responsible for stakeholder technical for a transmission provider’s planning process to be reviews of planning processes. A tier below the PSC considered compliant with the rules: coordination, are Sub-Regional Planning Meetings (SPM), instituted openness, transparency, information exchange, by FERC Order 890. They provide a forum for all comparability, dispute resolution, regional participation, stakeholders, including regulatory staff, to participate economic planning studies, and cost allocation for new in an open and transparent planning process. While projects. study assumptions and policies are dictated through the PAC and PSC, stakeholders at the SPMs get an The planning process. Planning principles that are opportunity to see study results directly and provide set forth by the Midwest ISO Board of Directors are active feedback on identified issues and other related translated through the Planning Advisory Committee issues, and collaborate with Midwest ISO planning staff (PAC). PAC is formed to provide advice and direction to to propose the transmission expansions necessary to the Midwest ISO Planning Staff and Board of Directors meet reliability and economic standards. Stakeholder Advisory Committee on policy matters related to the participation at these forums is critical in successfully process, integrity, and fairness of the Midwest ISO- translating planning analysis results into transmission wide transmission expansion and implementation of expansions consistent with Midwest ISO planning cost allocation principles for transmission expansion. principles. Participation of state and federal regulatory staff additionally helps in successful implementation of tackled at various planning forums at Midwest ISO. such plans. This is especially true in states where state Where needed, Midwest ISO staff also prepare and regulatory approvals are needed for siting transmission present testimony at state or federal courts, regulatory lines. Upfront involvement of staff in the planning authorities, or other agencies. process helps ensure that by the time a transmission plan is in a state docket for siting permits, they are Table C.2 presents some widely used reliability criteria. aware of all stakeholder issues, since they have been figure C.2: high-level Planning Process flow Diagram Midwest ISO transmission planning process Previous planning cycle Current planning cycle Next planning cycle Initial Models for Model Initial models for Model building current planning cycle Building next planning cycle Load forecast 114 Stakeholder input Transmission owners, market participants, NewGen and LSEs, IPPs, state regulators transcaction info for PLEASE CHECK THE FIGURE AS THE DATA model bldg Transmission TO plans Access Planning Trans. Service Gen. Intercom. New and other upgrades for (TSR/GIR) stakeholder Planning (TSR) planning (GIR) model bldg HAS TO BE MANUALLY ENTERED. input Other studies – SSR, Focus studies, Upg. from TSR/GIR Multiple processed during T-T requests, Load processes intercon requests, current Planning Cycle Starting LTTR/FTR, models CSA CSPs Project Economic/Long-term DB Baseline planning New reliability upgrades and economic Reliability/Short-term MTEP planning planning report Table C.2: Some Widely used reliability Criteria State Contingency Criteria Steady-state no contingency, normal conditions No system element with overloads All system load being served All voltages above 230 kV at +/–5 % All voltages below 230 kV at +/–10% Steady-state Single contingency, n-1: The loss of one No system element with overloads system element (transmission line, transformer, System loss load less than 10%, except when generator) from previously screened contingency is a radial line-feeding load contingencies All voltages above 230 kV at +/–7 % All voltages below 230 kV at +/–10% Steady-state Double contingency, n-1: The loss of No system element with overloads two system elements (transmission line, System loss load less than 10% transformer, generator) from previously screened All voltages above 230 kV at +/–7 % contingencies All voltages below 230 kV at +/–10% Steady-state Short circuit: Three- and single-phase to No circuit breaker reaches its current limit ground faults at major generators or substations Dynamic Short circuit: Three- and single-phase faults at All system generators retain angle stability, with 115 major generators, lines, and substation bus bars, minor load-shedding freed in normal time by circuit breakers Dynamic Single or double contingency: Loss of major System frequency back to normal, allowing for generator or transmission line under-load frequency shedding Source: Various sources, prepared by the authors. The following box presents the mathematical model of shared network planning as implemented by the PSR model in Box 3.2. Box C.1: PRS-Netplan Model for Designing Shared Networks for Multiple Projects in Renewable Zones The problem is to identify the least-cost network expansion for a set of generators (WG) seeking interconnection to the network. The first step is to compute the optimal network for year t = tF, after which all generators must be connected by solving the following optimization problem: Minimize {CAPEXΘj,t=tF + NPV[OPEXΘj, t=tF+1, OPEXΘj, t=tF+2, … OPEXΘj, t=tF+ν]t=tF} Subject to: power flow balance in each node (first Kirchhoff law); power flow limits in each circuit; discrete choices of conductor sizes for each circuit; Where: WG = {G1, G2, … GN} is the set of renewable generators seeking connection; N is the number of generators; Gi is the i-th generator seeking connection; Θj is the j-th subset of of WG; AGi = {(x,y)i, δi, Pi, ζi} attributes of generator Gi: (x,y) i are the geographic coordinates (latitude, longitude); δI is year of commissioning; Pi the installed power of Gi [MW]; ζi is 116 the estimated capacity factor. ΓΘj, t is the set of reinforcements to the transport grid needed for connecting any subset Θj of WG to the transmission network in year t [US$]; CAPEXΘ, t=t = CAPEXΘj, t{ΓΘj, t≤t} are the capital expenditures (investments) in the connection facilities (facilities linking the generator to the bulk transmission system) of any subset Θ j of WG in year t = t [US$], which are a function of ΓΘ, t≤t (which indicates ΓΘj, t occurred in every year t ≤ t); OPEXΘj, t = mL, t·LΘj, t + mE, t×ENS,Θj, t are the operational expenditures of the connection facilities (facilities linking the generator to the bulk transmission system) of any subset Θj of WG in year t [US$]; LQ, t=t = LΘj, t=t{ΓΘj, t≤t, A{Gi ∈ Θj}} are the energy losses at the connection facilities (facilities linking the generator to the bulk transmission system) of any subset Θj of WG in year t [MWh], which are a function of ΓΘj, t≤t and A{Gi Î Θj}; ENS, Θj, t=t = ENS, Θj, t=t{ΓΘj, t≤t, A{Gi Î Θj}} is the energy not supplied because of the unavailability of the connection facilities (facilities linking the generator to the bulk transmission system) of any subset Θj of WG in year t [MWh], which are a function of ΓΘj, t≤t and A{Gi Î Θj}; mL, t ; mE, t⋅ is the cost of energy used to value, respectively, LΘj, t and ENS, Θj, t in year t [US$/MWh]; NPV{ · }t=t notation for the function net present value at year t; tI year after which at least one generator of WG must be connected to the network; tF year after which all generators of WG must be connected to the network; ν service life of a given reinforcement or set of reinforcements to the transport grid. Load flow equations are described by a linear model to facilitate solution by means of mixed integer quadratic programming. Losses are a modeled quadratic loss factor. Given the set of reinforcements ΓΘ,t=tF defined in the model above, optimally allocate the reinforcements over time, in order to minimize the net present value of the sum of capital expenditures and operational expenditures that occurred in the time horizon tI ≤ t ≤ (tF+ν).This is accomplished by an additional module in NetPlan. BiBliogrAPhy IEEE PES 2009 Meeting, Calgary, July 28. www. merrillenergy.com/TrPl.pdf • CSP Today. 2009. Global Concentrated Solar Power Industry Report 2010–2011. CSP Today and Altran • Cambridge Economic Policy Associates Ltd. 2011. Technologies. London: FC Business Intelligence. 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