TODAY’S STUDY: NEW OPPORTUNITIES IN TRANSMISSION
Market Resource Alternatives: An Examination of New Technologies in the Electric Transmission Planning Process
Julia Frayer and Eva Wang, October 2014 (London Economics International)
WIRES commissioned London Economics International LLC (“LEI”) to provide a report on market resource alternatives (“MRAs”). The purpose of this Report is to provide external parties with a clear understanding of MRAs, and compare their features - advantages and shortcomings - relative to transmission. In addition, based on analysis of how MRAs have been examined by planners and regulators, LEI also proposes a set of analytical tools and techniques that can be used to effectively evaluate MRAs alongside transmission investment. The Report consists of four chapters: the first chapter addresses the question “what are MRAs and why do we need to analyze them?”; the second chapter discusses how MRAs are considered in federal and regional policy; the third chapter shows how MRAs are used in organized markets in the U.S. through a case study analysis; and the fourth chapter provides a proposed ”toolkit” of analytical tools and techniques that would allow for the effective evaluation of MRAs within the transmission planning environment.
WIRES commissioned London Economics International LLC (“LEI”) to provide a Report on market resource alternatives (“MRAs”). Specifically, WIRES asked LEI to determine whether and when MRAs can augment and/or replace transmission, and how MRAs and transmission can be evaluated on equal footing in the system planning context. The purpose of this Report is twofold. First, we seek to provide readers with a clear understanding of MRAs and their features - advantages and shortcomings - relative to transmission. Second, drawing on analysis of how MRAs have been examined by planners and regulators to date, we propose a set of analytical tools and modeling techniques (which we refer to as the “toolkit”) that can be used to effectively evaluate MRAs alongside transmission investment.
An understanding of MRAs and how they can be compared to and evaluated alongside transmission investment is critical given the increasing attention being paid to MRAs and as a result of advancements in technology, policy evolution, and the basic need for transmission investment to maintain, modernize, and expand the grid. System planners are required to consider reliability, market outcomes, and transmission congestion as well as public policy as they work to develop a robust power grid. MRAs are increasingly being put forth as possible solutions in lieu of transmission infrastructure. However, based on the characteristics of MRAs today, MRAs are rarely a complete substitute to transmission, and individual MRAs typically provide only a partial suite of the services that transmission provides. Nevertheless, MRAs (either individually or in combination) can provide specific benefits and can serve as complements to transmission, and vice versa. Furthermore, MRAs have the potential to delay the timing for needed transmission investment. An understanding of what services MRAs can and cannot provide, and the benefits and challenges associated with MRAs is therefore critical for system planners, who must ultimately be able to evaluate viable MRAs and transmission projects side-by-side and select a solution that best addresses the needs of the electric power system and customers.
Through our research and case studies, LEI developed key observations about MRAs and transmission investment.
• Transmission provides a variety of services and offers a broad range of potential benefits. Understanding the types of services and benefits transmission can provide is necessary as MRAs will be evaluated in terms of the services and benefits they can provide when compared to transmission.
• An MRA generally is able to provide only a partial suite of services that transmission provides. MRAs may provide some of the services that transmission can provide, but they cannot perfectly replace transmission. Furthermore, the services each MRA can provide vary.
• Comprehensively measuring the benefits and costs to customers is necessary in order to distinguish among the feasible solutions and the various services that MRAs and transmission can provide; relying on least cost analysis is not sufficient. In the analysis of MRA policies regionally, federal guidelines, and specific case studies involving MRAs, we have found that such a comprehensive analysis is rarely performed.
• It is important to consider both the magnitude and breadth of benefits of MRAs compared to transmission. One must consider the ability of a solution - be that MRAs or transmission - to provide benefits and services to various customer classes and over what geographic and time dimension. Different MRAs provide benefits of varying magnitude and breadth. Transmission, on the other hand, is typically built to provide benefits to the larger regional system over a long period of time.
• Operational uncertainty is an important consideration for MRAs. We have found that there are often high levels of operational uncertainty associated with MRAs, especially in the longer term. Given the technical and operational characteristics of transmission system planners historically have not had to give significant weight to operational uncertainty in their analyses.
• A comprehensive analysis must include consideration of negative and positive externalities associated with potential costs and benefits. Externalities can be positive; there are examples of strong complementarity between transmission and some MRAs, where transmission opens up further opportunities for MRAs, and vice versa.
Externalities can be negative; some MRA installations require additional investment to maintain system reliability.
Recommended Tools and Techniques
We recognize that system planners have their own analytical approaches and planning processes that have been developed over the decades to provide an extremely reliable and affordable electric system. We are not attempting to specify an approach. We recognize that transmission planners and ISOs/RTOs may have specific processes in place that are unique to their situation. Rather than a “one-size fits all” analytical approach, we are recommending a “toolkit” for system planners with various suggested modeling tools and analytical techniques that can be deployed to analyze transmission and MRAs.
The analysis deployed by system planners should be inclusive, and consider all feasible solutions – transmission and MRAs. The analysis should be sufficiently detailed and comprehensive so as to distinguish between the feasible solutions’ traits and defining characteristics and benefits. We suggest several guidelines that will provide for an effective analysis of MRAs and transmission:
• MRAs should be judged on the same criteria for reliability and economic benefits as proposed transmission;
• Technical feasibility should be a requirement for any solution, not an option; the ability of MRAs to consistently meet the technical (reliability) needs of the system are sometimes overlooked for the sake of policy;
• MRAs and transmission are not equals in the services and benefits they provide, therefore, the evaluation framework must be able to assess a broad set of benefits and costs to fairly compare MRAs and transmission;
• A robust cost-benefit analysis should measure and quantify the uncertainties and risks associated with MRAs and transmission;
• Economic cost-benefit analysis should consider the dynamic evolution of the system; such an analysis may show potential for complementarity between transmission and certain MRAs, which could justify the need for more investment.
A successful analytical framework, consistent with these guidelines, should
1. Identify all the benefits and costs and gather them under the umbrella of a cost-benefit analysis,
2. Use the right set of tools to measure both those benefits and costs and the risks and uncertainties involved, and
3. Conduct analyses that specifically address the identified challenges for evaluating both MRAs and transmission in an efficient manner.
If one evaluates MRAs and transmission technically to the same specified “needs” criteria, across the same categories of benefits and over the appropriate geographical and time dimensions, the most robust and efficient investments can be chosen.
MRAs can be broadly defined as a group of solutions to identified electric system needs that do not involve traditional transmission infrastructure. MRAs are often referred to as non-transmission alternatives (“NTAs”), a misleading convention that incorrectly implies that MRAs are always a substitute for transmission. MRAs can in fact be complements to transmission infrastructure and should be thought of as one element in a portfolio of infrastructure elements that together are necessary for the efficient and reliable provision of electricity to customers.
Indeed, the electric system would not be able to operate and provide services to customers if there were only investment in either transmission or MRAs in isolation. MRAs come in a variety of forms and can include supply-side resources (for example, conventional generation and distributed generation or advanced generation-like technologies such as batteries and storage) and demand-side resources (such as demand response and conservation/energy efficiency programs), or a combination of resources that are not conventionally associated with transmission. Discussions of MRAs occurring in wholesale power markets and at state regulatory commissions generally focus on six categories of MRAs: energy efficiency; demand response; utility-scale generation; distributed generation; energy storage; and smart grid technology.
Services provided by transmission and MRAs
In order to put the capabilities and benefits of each MRA in context, it is first important to understand the types of services that transmission provides. Transmission provides for the transportation of electric power from producers (generators) to customers (load), often times over long distances. Transmission can also help to ensure resource adequacy because it allows generators located in an isolated area to serve customers in another area of the power grid (in this way, transmission effectively provides capacity). In addition to facilitating the delivery of energy and capacity, transmission can provide other benefits. For example, transmission system reinforcements can reduce system losses and improve overall system efficiency.
Transmission can also provide support to the electric power grid through the provision of certain ancillary services, which are used to keep the grid operating smoothly. Transmission can provide insurance against uncertain future market events and the costs of such unforeseen events on customers. For example, if in the future a generator were to unexpectedly go off line, transmission lines could allow other generators on the system to serve customers.
Transmission can also reduce production costs of energy through expansion of a market (and increased competition from other existing resources) as well as provision of market access to new resources. As a consequence of expanding access to market for existing and new resources, transmission can also help to reduce the emissions footprint of the market as a whole and curb harmful pollutants such as carbon dioxide and other greenhouse gases.
It is important to consider to what extent MRAs can produce these same services, over what time dimension they can be counted on to provide these services, and for what geographical area. In many cases, MRAs may have shorter economic lives (or less certain longevity in terms of the market benefits that they create) than transmission, and provide benefits to a smaller or more localized geographical segment of customers.
In Figure 2 below, we have prepared a visual comparison of the services that various current MRA technologies can provide relative to transmission. This comparison is meant to reflect the relative abilities of generic MRAs and generic transmission investment to provide broad classes of services. In reality, the specific services will vary with the characteristics of the individual project (i.e., proposed solution) and the underlying “need.” Furthermore, the comparative charts of transmission and MRAs in the following sections reflect the overall experience of LEI and WIRES members with the technologies as they exist today. We recognize that technology (both MRAs and transmission) is evolving rapidly and that MRAs and transmission will likely be able provide a more extensive list of services in the future. Finally, we recognize that this type of comparative chart can simplify the relationship between transmission and MRAs. As mentioned earlier, transmission and MRAs are interconnected – a system comprised of one or the other would not be functional. In this sense, transmission can only provide energy and capacity if there is a generator connected to the grid able to generate the energy and capacity.
Likewise, generation can only provide energy and other services if there is a transmission system that connects the generator to customers. Nevertheless, the comparison of relative abilities under current technology provides a high level consideration of relative strengths and weaknesses of different MRAs, from which benefits can be evaluated. Such a comparison of services is also a useful cross-check for the toolkit, which needs to contain tools and techniques that can capture such differences in services provided, technical characteristics, and ultimately economic costs and benefits.
We observe that individual MRAs are generally not capable of providing all of the same services that transmission provides for the same tenure and geographical dimension. Furthermore, there is considerable variety among MRAs in their ability to provide services.
With the exception of utility-scale generation in limited circumstances, no single MRA is a workable substitute for transmission. However, in certain instances, depending on the identified needs of the system, other MRAs (either individually or in combination) can be beneficial and can serve as complements to transmission, and vice versa.
Given the characteristics of transmission, it tends to provide a broad array of benefits that accrue to a wide variety of parties over a large geographical dimension. That is, the benefits accrue at a micro or local level (for example, to the investor or a particular community), but transmission also directly benefits a broader set of customers in the electricity sector and indirectly creates benefits for society as a whole, for example through achievement of public policy and macroeconomic benefits (see Figure 11).
When considering if and how MRAs are able to provide the equivalent benefits of transmission, it is important to understand any challenges or limitations to the ability of MRAs to deliver these benefits (or for system planners and operators to take advantage of these benefits). Not only is it important to understand which of these benefits MRAs can provide, but also to consider the magnitude and breadth of the benefits.
Transmission delivers its services and provides benefits throughout its long lifecycle. And once built, a transmission asset is a fixed element of the power system and therefore its existence is not dependent on market dynamics. In contrast, some MRAs such as generation (either utility-scale or distributed) or demand response may decide to exit the market and close operations if market conditions are not attractive. The permanent nature of transmission - once in service - means that system planners have reasonable certainty that transmission would provide services and benefits would accrue over the transmission asset’s life. Experience has shown that there is a higher degree of uncertainty associated with MRAs, both in terms of the services and the benefits they can provide.
Finally, when considering the benefits of transmission or MRAs, it is important to consider the optionality associated with the investment. These can be either positive or negative: for example, if a solution can provide an option to delay other investments or an option for future expansion, that would have a positive value to customers and system planners alike. On the other hand, if a solution requires additional incremental investment to come online (perhaps in the form of additional infrastructure), that cost should also be considered.
Practical Experience with MRAs
Practical experience with MRAs is relatively limited. FERC’s Order 1000, issued in 2011, requires consideration of MRAs in the regional transmission planning process. However, it does not establish any requirements as to which MRAs should be considered or what the appropriate metrics for evaluating MRAs against transmission solutions would be. We found that MRAs appear to generally be considered in the transmission planning process in Independent System Operators and Regional Transmission Organizations (“ISO/RTOs”) although the timing of an analysis varies on a RTO-to-RTO basis. Generally, evaluation of MRAs completed to date appears to be targeted and localized, rather than comprehensive. This is not surprising as economic analysis of transmission is also a relatively nascent but evolving component of the system planning process.
We selected four case studies that cover a variety of MRA technologies and investment needs, apply varying levels of analytical techniques for consideration of MRAs and transmission solutions, and highlight different aspects of the interplay between MRAs and transmission investment. Specifically, we considered the following case studies in our review of MRAs: Boothbay Smart Grid Reliability Pilot project in Maine, I-5 Corridor Reinforcement Transmission Project by Bonneville Power Administration (“BPA”), PATH and MAPP transmission projects in PJM, and Tehachapi Renewable Transmission Project in California.