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How to Assess the Benefits of Transmission Investment

As our electric infrastructure becomes increasingly complex and our economic challenges progressively demanding, accurately assessing the benefits of transmission investment is becoming critically important.

In the past, most transmission projects were developed by vertically integrated utilities that built new lines to connect new generation to serve growing demand within their service territories. Then, benefits were relatively easy to recognize and costs easy to allocate.

Now, the grid is a complex network of power lines, substations and control centers operated by multiple entities that often span state, regional and international boundaries that serve a broad range of residential, commercial and industrial customers.

Assessing the benefits of transmission investment is an essential part of determining operational characteristics, reliability objectives and capital costs, but it also is important when considering public policy objectives, regulatory and market conditions and economic and environmental impact, all of which can be critical when establishing project priorities and cost allocations.

Although integrated utilities continue to build transmission to serve the needs of their customers, decisions about which projects to pursue, what technologies to leverage and how to recover costs for those investments still require more thorough cost-benefit assessments. This can be particularly challenging when the target continues to move and demand growth and generation capacity changes cannot always be accurately modeled or predicted. These challenges are further exacerbated by ongoing changes in cost allocation and cost recovery schemes that continue to evolve on a case-by-case basis. Many projects are motivated by a few key objectives, such as the integration of renewables, improved reliability under N-1 conditions or other primary objectives, and secondary or tertiary benefits also are generally realized but not necessarily factored in during assessments.

For instance, the use of a high-capacity, high-efficiency conductor such as CTC Global's ACCC to increase the capacity of a section of the grid to accommodate an N-1 condition also will reduce its electrical resistance substantially during normal operating conditions. This reduction in line losses will free up generation capacity, which then can be deployed to a paying customer or, conversely, conserved to reduce fuel consumption and associated emissions. Transmission planners might not always recognize or consider second- or third-tier benefits, but these benefits have a profound impact on the overall performance of the grid, are quantifiable and should and will be considered.

As the focus of transmission planning has expanded during the past dozen or so years to better address reliability concerns, market efficiency and public policy drivers, new Federal Energy Regulatory Commission (FERC) requirements for cost allocations have driven the need to develop better ways to assess transmission benefits. The cost-benefit analysis requirement has attracted the attention of policymakers and others who must pay for the transmission investments. As a result, transmission companies and regional transmission operators (RTOs) have developed improved methodologies for evaluating the benefits of transmission projects.

Many of the current methodologies use formulaic methods to consider market and reliability attributes, but they often rely on simplified production cost analyses to measure economic benefits. Unfortunately, simplified production cost analyses cannot measure many potential and significant benefits associated with transmission projects that can prevent many of the difficult-to-quantify yet desirable projects from securing approval.

As a number of transmission planners and RTOs recognize the need to broaden their perspectives on the benefits of transmission investment, efforts are being undertaken to identify and communicate these benefits using a more comprehensive business case approach. Because no industry standard for this exists, the Working Group for Investment in Reliable and Economic Electric Systems (WIRES) commissioned The Brattle Group to research the subject and offer guidance. The Brattle Group subsequently published a report, "The Benefits of Electric Transmission: Identifying and Analyzing the Value of Investments." This and other informative reports are available on the WIRES website, www.wiresgroup.com.

The report identifies a broad range of potential transmission-related benefits, performance metrics and approaches through which any specific project or group of projects can be more effectively evaluated. Benefit categories included traditional production cost savings, which are commonly used to consider the economic benefits of transmission investments based on estimated reductions in fuel or other generation production costs, the impact on wholesale market pricing (often referred to as locational marginal prices (LMPs)) and transmission congestion reductions based on grid constraints, load flow approximations and other assumptions. Using this approach, RTOs such as PJM often cite reductions in congestion costs as the primary economic driver for transmission investment. The economic relief of reduced congestion costs is reflected in production cost savings, given access to lower cost generation, and reduced market supply or demand leverage.

Although assessing production cost savings has become a widely accepted method for evaluating proposed transmission projects and groups of projects as they are readily estimated, the results are based on simplified assumptions and short-term dispatch cost savings that can underestimate the actual project value. In addition, production cost savings only represent a portion of the overall value of the transmission investment benefits.

Aside from production cost savings, The Brattle Group report describes other benefits, particularly those associated with improved reliability, reduced generation capital costs, reduced market leverage and several others, which often have been omitted in many transmission benefit-cost analyses. These omitted benefits have been considered intangible because they generally are not considered. Although some of these additional benefits can be difficult to estimate, omitting them implies they have no value, which is not the case. A more accurate approach to estimations would be to consider a broader range of likely benefits in any given scenario. This would yield more accurate cost-benefit analyses, provide greater insight and a better basis for project comparison, which would reduce the likelihood that beneficial projects would be overlooked.

Other benefits might include long-term capital and operational cost savings, line loss reductions, generation capacity cost savings, improved grid reliability and the potential avoidance of disruptive and costly outages. Additional benefits also could include the improved use of existing corridors to reduce environmental impact, reductions of greenhouse gas emissions through improved transmission efficiency and by opening access to cleaner generation. Other substantial benefits could include economic development opportunities that could provide residential, commercial and industrial customers with access to more efficient, affordable and reliable power, which is a key component of our ability to maintain competitive businesses, employment opportunities and quality of life.

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