# Presentation: 500759

## Benefit Assessment in Economic Evaluation of Transmission Expansion

**Benefit Assessment in Economic Evaluation of Transmission Expansion**

***SSG-WI Workshop ***
***Economic Evaluation of Transmission Expansion***
**Mingxia Zhang, Ph.D.**
**CAISO Market Analysis**
**September 14-15, 2004**
**Portland, Oregon**

## Presentation Outline 

-  **Concepts of economics surpluses/benefits **
** ****Identifying and calculating economic benefits of transmission expansion for various market participants**
** ****Evaluating economic transmission expansion project: benefit tests**
** ****Overview of example case study**

## Assessment method presented here is part of TEAM (Transmission Economics Assessment Methodology) developed for CAISO.
For more detailed description, please see the CAISO TEAM Report at http://www1.caiso.com/docs/2003/03/18/2003031815303519270.html
 Method can be extended to other systems.

**For more detailed description, please see the CAISO TEAM Report at ***http://www1.caiso.com/docs/2003/03/18/2003031815303519270.html*
** ****Method can be extended to other systems.**

**CAISO TEAM**

## Major Challenges to Valuing Transmission Upgrades in Wholesale Market Regime

**How do strategic suppliers bid both before and after the transmission upgrade?**
**What are the appropriate measures of transmission expansion benefits to all market participants?**
**Whose benefit should be included in the evaluation of economic-driven transmission project for both private investment and regulated investment?**
**How should the CAISO evaluate an economic-driven transmission upgrade project?**

## Benefit Measures in Vertical Integrated Regime vs. Wholesale Market Regime

_**VI Regime**_**: Production Cost Saving**
_**WM Regime**_**: **
**	****- Production Cost Saving**
**	****- Societal Benefit**
**	****- Consumer Benefit**
**	****- Producer Benefit**
**	****- Transmission Owner Benefit (or FTR/CRR Holder Benefit)**
**	****- Monopoly Rent Benefit**
**	****- Competitive Rent Benefit**
**	****- Ratepayer Benefit**
**	****- Participant Benefit**
**	****- Etc.**

## Economic Surpluses in Wholesale Market Regime

- _ __**Consumer Surplus**_ (CS) is the difference between consumers’ willingness to pay and their payment (Cost-to-Load).
***CS ************ (VOLL – Price)*Load***
*  *
- • _**Producer Surplus**_ (PS) is the difference between the total payment producers received (Producer Revenue) and the total variable cost of production (Production Variable Cost).
***PS = PR – PC***
- • _**Total Surplus**_ (TS) is the sum of CS and PS if there is no congestion.
***TS = CS + PS***

***Assumption:  no congestion,***
***no losses, no market power ***

## Economic Surpluses - Example

-  **Suppose all generators bid their marginal costs.**
** ****There is no congestion in the system.**
** ****Total system load and generation is 100 MW.**
** ****Price across the system is $40/MWh.**
** ****VOLL is $100/MWh.**
** ****Total production variable cost (fuel and variable O&M) is $2000.**
** ****Thus**
**   *****CS = ($100 - $40) * 100 = $6000***
***   ******PS = $40*100 - $2000 =  $2000***
***   ******TS = $6000 + $2000 = $8000***

***Assumption: no congestion,***
***no losses, no market power***

## Economic Surpluses  --- continued 

*** *****What if the system is congested somewhere?**
** ****There exists locational price differences.**
** ****Transmission owners or FTR/CRR holders get paid congestion revenue.**
** **_**Congestion Revenue**_** (CR) is the difference between what consumers pay (Cost-to-Load) and what generators receive (Producer Revenue).**
***	******CR = CTL – PR***

## Economic Surpluses  --- continued

**Congestion Revenue sometimes is called Congestion Management Charge or Congestion Usage Charge.**
**Whatever the name it is called, this is the part of the monies that goes back to transmission owners or FTR/CRR holders of congested lines so that ISO can remain cash neutral.**

## A 2-Zone Example

**Zone 1: Importing Zone (due to resource inadequacy or more expensive generation)**
**Zone 2: Exporting Zone (due to abundant generation or cheap generation)**
**T: Power transfer limit between two zones**
**Line can be congested.**

***1 = Importing Zone ***

***2 = Exporting Zone ***

***•  ****CR = Total Cost to Load – Total Producer Revenue*
*	**= (CTL**1** + CTL**2**) – (PR**1** + PR**2**)*
- • Equivalently, CR can also be calculated as *Line Flow * (P**1** – P**2**) *
- • Total Surplus is  *TS = CS + PS + CR.*

***Power transferred = Line Limit T***

***Case assumptions: congestion, no losses, no market power***

***1 = Importing Zone ***

***2 = Exporting Zone ***

***• ***Suppose L1 = 50 MW, L2 = 50 MW, P1 = $50/MWh, P2 = $35/MWh,
- 	PC1  = $1300, PC2 = $800, Q1 = 40 MW, Q2 = 60 MW, and T = 10 MW
- • ***CS = CS******1****** + CS******2****** = ($100 - $50)*50 + ($100 - $35)*50 = $5,750***
***• ******PS = PS******1****** + PS******2****** = ($50*40 - $1300) + ($35*60 - $800) = $2,000***
***• ******CR = ($50 - $35)*10 = $150***
***• ******TS = CS + PS + CR = $7,900***

***10 MW is transferred ***

***Case assumptions: congestion, no losses, no market power***

***40 MW***

***60 MW***

## If we plan to expand the line limit to T+T, how are we going to measure the economic expansion benefit?

***New Line Limit = ******T + ************T***

***Zone 1***

***Zone 2***

**Line can still be congested after expansion.**
**Generators in Zone 1 produce less output than without expansion.**
**Generators in Zone 2 produce more output than without expansion.**
**Price in Zone 1 may go down.**
**Price in Zone 2 may go up.**

## How do we calculate the benefit of a transmission upgrade?

**Compute all surpluses without and with expansion for all market participants in all regions.**
**Subtract surplus without expansion from surplus with expansion.**
**Obtain the net impact of transmission expansion on various market participants in various regions.**

## Suppose the line is expanded by 20 MW and is no more congested.
System price goes down to $40/MWh, system production cost goes down to $2,000.
Total consumer surplus with expansion is 
	CS’  = ($100 - $40)*50 + ($100 - $40)*50 = 6,000 
Total producer surplus with expansion is
	 PS’  = ($40*35 + $40*65) - $2,000 = $2000 
Since the line becomes no more congested with expansion, congestion revenue is $0 with expansion.  CR’ = ($40 - $40)*15 = $0
Total surplus with expansion is  TS’  = $6000 + $2000 + $0 = $8000

**System price goes down to $40/MWh, system production cost goes down to $2,000.**
**Total consumer surplus with expansion is **
***	******CS’****** ****** = ($100 - $40)*50 + ($100 - $40)*50 = 6,000 ***
**Total producer surplus with expansion is**
**	**** *****PS’****** ****** = ($40*35 + $40*65) - $2,000 = $2000 ***
**Since the line becomes no more congested with expansion, congestion revenue is $0 with expansion.  *****CR’ = ($40 - $40)*15 = $0***
**Total surplus with expansion is  *****TS’****** ****** = $6000 + $2000 + $0 = $8000***

***$50***
******
***$40***

***$40***
******
***$35***

***Power transferred increased from 10 MW to 15 MW***

***1 = Importing Zone***

***2 = Exporting zone***

***Case assumptions: With expansion, no losses, no market power***

***VOLL***

***50***
***MW***

***50***
***MW***

***VOLL***

***35 MW***

***65 MW***

## In this example, consumers as a whole benefit from expansion.  
	CS  = $6,000 - $5,750 = $250
Producers as a whole do not benefit from expansion.  
	PS  = $2,000 - $2,000 = $0
Since the line becomes no more congested with expansion, TOs (or CRR Holders) are a net loss.  CR = $0 - $150 = -$150
Total expansion benefit is  TS  = $250 + $0 - $150 = $100

*	**********CS****** ****** = $6,000 - $5,750 = $250***
- Producers as a whole do not benefit from expansion.
*	**********PS****** ****** = $2,000 - $2,000 = $0***
- Since the line becomes no more congested with expansion, TOs (or CRR Holders) are a net loss.  *********CR = $0 - $150 = -$150***
- Total expansion benefit is  *********TS****** ****** = $250 + $0 - $150 = $100***

***$50***
******
***$40***

***$40***
******
***$35***

***Power transferred increased from 10 MW to 15 MW***

***1 = Importing Zone***

***2 = Exporting zone***

***Case assumptions: With expansion, no losses, no market power***

***VOLL***

***50***
***MW***

***50***
***MW***

***VOLL***

***35 MW***

***65 MW***

## Where does transmission expansion benefit come from?  
From more efficient generation utilization (dispatch).  
In this example, more cheaper generation in Zone 2 is able to serve load in Zone 1 due to transmission expansion.
Total production variable cost is reduced as the result of expansion.
Fundamentally, total transmission expansion benefit equals to total reduction of production variable cost (if load is not price sensitive).
In this example, PC = $2000 - $2100= -$100
			TS = $250 + $0 - $150= $100

- From more efficient generation utilization (dispatch).
- In this example, more cheaper generation in Zone 2 is able to serve load in Zone 1 due to transmission expansion.
- Total production variable cost is reduced as the result of expansion.
- Fundamentally, total transmission expansion benefit equals to total reduction of production variable cost (if load is not price sensitive).
- In this example, *********PC = $2000 - $2100= -$100***
**	****	****	***********TS = $250 + $0 - $150= $100***

***$50***
******
***$40***

***$40****** ***
******
***$35***

***Power transferred increased from 10 MW to 15 MW***

***1 = Importing Zone***

***2 = Exporting zone***

***VOLL***

***50MW***

***50MW***

***VOLL***

***35 MW***

***65 MW***

## Market participants in different zones are impacted differently by expansion.
Suppose with expansion, PC1’ = $1250, PC2’ = $750, Q1’ = 35 MW, Q2’ = 65 MW.
Zone 1: Consumers benefit from expansion.  CS1 = ($50 - $40)*50 = $500
		Producers do not benefit from expansion. 
		PS1 = ($40*35 - $1250) – ($50*40 - $1300) = $150 - $700 = -$550 
Zone 2: Consumers do not benefit from expansion.  CS2 = ($35 - $40)*50 = -$250 
		Producers benefit from expansion.  
		PS2 = ($40*65 - $750) – ($35*60 - $800) = $1850 - $1300 = $550
It’s important to evaluate who benefit and who lose from transmission expansion.

- Suppose with expansion, PC1’ = $1250, PC2’ = $750, Q1’ = 35 MW, Q2’ = 65 MW.
- Zone 1: Consumers benefit from expansion.  *********CS******1****** = ($50 - $40)*50 = $500***
- 		Producers do not benefit from expansion.
- 		*********PS******1****** = ($40*35 - $1250) – ($50*40 - $1300) = $150 - $700 = -$550 ***
- Zone 2: Consumers do not benefit from expansion.  *********CS******2****** = ($35 - $40)*50 = -$250***
- 		Producers benefit from expansion.
- 		*********PS******2****** = ($40*65 - $750) – ($35*60 - $800) = $1850 - $1300 = $550***
- It’s important to evaluate who benefit and who lose from transmission expansion.

***$50***
******
***$40***

***$40****** ***
******
***$35***

***Power transferred increased from 10 MW to 15 MW***

***1 = Importing Zone***

***2 = Exporting zone***

***VOLL***

***50MW***

***50MW***

***VOLL***

***35 MW***

***65 MW***

## How should we evaluate an economic transmission expansion project?

**We need to evaluate whether the project benefits the society as a whole.**
**We also need to evaluate whether the project benefits its funding parties or users.**
**We focus on projects funded by regulated investment.**
**If it is regulated investment, we need to identify who are the funding parties and users of the project.**
**Then we can determine whose benefits to be included in project evaluation and apply evaluation criteria.**

## Private vs. Regulated  Investment in Wholesale Market Regime

_**Private Investment**_**: does not seek cost recovery from electricity customer rate base.  Cost is recovered through receiving FTR/CRR on the increased transmission capacity.**
_**Regulated Investment**_**: any ratepayer funded transmission project including private project with regulated cost recovery arrangement.**
**The distinction between private and regulated investment is important because it determines whose benefit to be included in project evaluation.**
**Our focus is on regulated investment.  A project is recommended if it benefits its ratepayers in aggregate.**
**If a private project is cost-effective to its investors, does not harm the ratepayers, and  does not jeopardize the stability and reliability of the grid, we should also recommend it.**

## Societal Test: Does a project benefit the society as a whole?

**A project can pass the societal test if the present value of total societal benefit from the upgrade exceeds the present value of total project cost.**
**Total societal benefit is the sum of consumers’ benefit , producers’ benefit, and transmission owners’ (or FTR/CRR holders’) benefit across all regions.**
**Total societal benefit from transmission expansion is equivalent to total system variable production cost savings due to expansion (when demand is irresponsive).**

## Ratepayer Test:  Does a project benefit its ratepayers?

**A project can pass the ratepayer test if the present value of total ratepayer benefit from the upgrade exceeds the present value of total project cost.**
**Calculation of total ratepayer benefit has to include all relevant ratepayers. **
**In the CAISO case, ratepayers include all load serving entities, PTOs, and utility-retained generation in CAISO Control Area.**

## Participant Test:  Does a project benefit its users (market participants)?

**A project can pass the participant test if the present value of total participant benefit from the upgrade exceeds the present value of total project cost.**
**Calculation of total participant benefit has to include all relevant market participants. **
**In the CAISO case, participants include all load serving entities, PTOs, utility-retained generation, and IPPs in CAISO Control Area.**

## Impact of Generation Long-Term Contracts on Benefits

**Long-term generation contracts do not affect total societal benefit from transmission expansion, because total production cost saving remains the same regardless of contract covering.**
**Generation contract covering may have significant impact on benefit distribution among various market participants.**
**Generation in the importing zone and load in the exporting zone can use long-term contract to hedge against potential price decrease or increase due to transmission expansion.**

## Suppose Load in Zone 1 has long-term contract with generation in Zone 1 for 10 MW at $45/MWh.
Thus consumers benefit in Zone 1 can be calculated as follows:
	CS1 = ($100 - $50)*40  + ($100 - $45)*10 = $2550 
	CS1’ = ($100 - $40)*40  + ($100 - $45)*10 = $2950 
	CS1 = $2950 - $2550 = $400, comparing to $500 without long-term contract covering.
 Producer benefit in Zone 1 can be calculated as follows:
	PS1 = $50*30 + $45*10 - $1300 = $650 
	PS1’ = $40*25 + $45*10 - $1250 = $200
	PS1 = $200 - $650  = -$450, comparing to -$550 without long-term contract covering.

- Thus consumers benefit in Zone 1 can be calculated as follows:
*	****CS******1****** = ($100 - $50)*40  + ($100 - $45)*10 = $2550 ***
***	******CS******1******’****** = ($100 - $40)*40  + ($100 - $45)*10 = $2950 ***
***	************CS******1****** = $2950 - $2550 = $400***, ***comparing to $500 without long-term contract covering****.*
-  Producer benefit in Zone 1 can be calculated as follows:
***	******PS******1****** = $50*30 + $45*10 - $1300 = $650 ***
***	******PS******1******’****** = $40*25 + $45*10 - $1250 = $200***
*	**********PS******1****** = $200 - $650  = -$450***, ***comparing to -$550 without long-term contract covering.***

***$50***
******
***$40***

***$40****** ***
******
***$35***

***Power transferred increased from 10 MW to 15 MW***

***1 = Importing Zone***

***2 = Exporting zone***

***VOLL***

***50MW***

***50MW***

***VOLL***

***35 MW***

***65 MW***

## Impact of Transmission Congestion Contracts on Benefits

**Transmission congestion contract is a financial instrument that provides a hedge against congestion price differences between zone or nodes.**
**Transmission congestion contracts do not affect total societal benefit from transmission expansion, because total production cost saving remains the same regardless of contract covering.**
**Transmission congestion contracts may have significant impact on benefit distribution among various market participants.**

## Suppose Load in Zone 1 has bought 10 MW of CRR with Sink in Zone 1 and Source in Zone 2.
Load in Zone 1 has become CRR holders in this case.
Then Load in Zone 1 is entitled to congestion revenue.
Thus consumers benefit from transmission expansion in Zone 1 is 
	CS1 +  CR = ($50 - $40)*50 + ($0*15 - $15*10) = $500 - $150 = $350.

- Load in Zone 1 has become CRR holders in this case.
- Then Load in Zone 1 is entitled to congestion revenue.
- Thus consumers benefit from transmission expansion in Zone 1 is
*	**********CS******1****** + ************ CR = ($50 - $40)*50 + ($0*15 - $15*10) = $500 - $150 = $350***.

***$50***
******
***$40***

***$40****** ***
******
***$35***

***Power transferred increased from 10 MW to 15 MW***

***1 = Importing Zone***

***2 = Exporting zone***

***VOLL***

***50MW***

***50MW***

***VOLL***

***35 MW***

***65 MW***

## Economic Surpluses Under Market Power

- _ __**Monopoly Rent**_ (MRent) is the excess profit generators capture by bidding above their marginal cost curve.
*MRent **** (P**m** – P**c**)*Load*
- • _**Competitive Rent**_ (CRent) is what producers should receive for providing output when the market is competitive.
*CRent = P**c***L – PC*

***VOLL***

***Competitive Price  = P******c***

***Output Q = Load L***

***Demand***

***Marginal Cost Curve***

***Case assumptions: market power, ***
***no congestion, & no losses***

***Bid Curve***

***Market Price = P******m***

***CRent***

***MRent***

***CS***

***1 = Importing Zone ***

***2 = Exporting Zone ***

***P******1******c***

***P******2******c***

***Power transferred = Line Limit T***

***Case assumptions: market power,  congestion, & no expansion***

***P******1******m***

***P******2******m***

***L******1***

***L******2***

***CRent******1***

***MRent******1***

***CS******1***

***VOLL***

***VOLL***

***CRent******2***

***MRent******2***

***CS******2***

***1 = Importing Zone ***

***2 = Exporting Zone ***

***P******1******c*********

***P******2******c*********

***Power transferred = Line Limit T + ************T***

***Case assumptions: market power,  congestion, & expansion***

***P******1******m*********

***P******2******m************ ***

***L******1***

***L******2***

***VOLL***

***VOLL***

## Impact of Transmission Expansion on Monopoly Rent

**Transmission expansion expands number of suppliers than can compete to supply energy at any location.**
**Transmission expansion reduces strategic suppliers’ ability to bid high.**
**Transmission expansion reduces monopoly rent for strategic suppliers comparing to without expansion.**
**Reduction of monopoly rent is good to the society and to ratepayers.**

## Modified Benefit Test

**Modified Societal Test excludes all producers’ monopoly rent in surplus and benefit calculation.**
**Modified Participant/Ratepayer Test excludes relevant producers’ monopoly rent in surplus and benefit calculation.**

## CAISO Proposed Transmission Evaluation Criteria (still under discussion)

| Case | Pass Societal Test? | Pass Modified Societal Test? | Pass ISO Modified Participant/ Ratepayers’ Test?  | CAISO Recommendation |
| --- | --- | --- | --- | --- |
| 1 | Yes | Yes | Yes | Yes |
| 2 | Yes | Yes | No | Ask neighbors to participate in funding |
| 3 | Yes | No | Yes | Yes |
| 4 | Yes | No | No | No |
| 5 | No | Yes | Yes | Yes |
| 6 | No | Yes | No | No |
| 7 | No | No | Yes | Yes |
| 8 | No | No | No | No |

## Overview of Illustrative Path 26 Study

**Path 26 consists of three 500 kV lines between Midway and Vincent.**
**Current ranting is 3400 MW (N-S) and 3000 MW (S-N)**
**Possible upgrade to 4400 MW (N-S) and 4000 MW (S-N) by 2008.**

## Path 26

**Path 26**

## Identifying Benefits in An Example Case StudyFor a typical Scenario in 2013 – Path 26 Upgrade

| Perspective | Description | Consumer Benefit ($M) | Producer Benefit ($M) | Transmission Owner Benefit
($M) | Total Benefit
($M) | Production Cost Saving
($M) |
| --- | --- | --- | --- | --- | --- | --- |
| Societal | WECC Total | 34.38 | (25.76) | (6.59) | 2.02 | 2.02 |
| Modified Societal | WECC Total | 34.38 | (16.92) | (6.59) | 10.87 |  |
| Modified CAISO | CAISO Ratepayer Subtotal | 11.05 | (3.98) | (0.87) | 6.2 |  |
|  | CAISO Participant Subtotal | 11.05 | 4.59 | (0.87) | 14.77 |  |

## Acronyms

- CS: Consumer Surplus
- TS: Total Surplus
- VOLL: Value of Lost Load
- CRR: Congestion Revenue Rights
- TO: Transmission Owner
- CS: Consumer Benefit
- MRent: Producer Monopoly Rent
- CRent: Producer Competitive Rent
- CR: Transmission Owner (or CRR holder) Benefit
- MRent: Producer Monopoly Benefit
- CRent: Producer Competitive Benefit

** **CTL: Cost to Load
-  PS: Producer Surplus
-  CR: Congestion Revenue
-  PR: Producer Revenue
-  PC: Production Cost
-  SB: Societal Benefit
-  PS: Producer Benefit