The economic value of transmission lines and the implications for planning models

Many connections between economic efficiency, regulation, the environment and energy markets are evident in the planning for transmission upgrades in an electricity network. Transmission owners have to make decisions about investing in new assets while facing uncertainty in the generation plans, regulatory and environmental constraints, and current system endowments. In this paper, we demonstrate an analytical method for determining the economic value of individual transmission lines in a meshed network by calculating the total welfare effects for the system. While many regulators believe that traditional congestion rents provide the correct incentives for investing in transmission upgrades, we show that the uncertainty in system conditions breaks down this paradigm. The analysis uses an existing Security Constrained Optimal Power Flow (SCOPF) model and a test network to demonstrate how the method can be used to determine the welfare effects of changing the capacity of selected transmission lines. The results show that a substantial portion of the economic benefits for an individual line may come from maintaining system reliability when equipment failures occur. Furthermore, these benefits can change dramatically when inherently intermittent sources of renewable generation are added to a network, and the changes in benefits are not captured effectively by changes in the expected congestion rents.