TODAY’S STUDY: How New Transmission Benefits Everybody
How Does Electric Transmission Benefit You? Identifying and Measuring the Life-Cycle Benefits of Infrastructure Investment
Julia Frayer, et. al., January 8, 2018 (London Economics International)
WIRES commissioned London Economics International LLC (“LEI”) to prepare a study demonstrating the benefits of transmission investment. The benefits of transmission are frequently seen as uncertain by many policymakers and regulators; system planners have also found it a challenge to comprehensively measure benefits and identify beneficiaries. This study shows that a variety of benefits can be quantified robustly through forward-looking, simulationbased analysis. Moreover, these benefits are substantial, widespread, and long-lasting – putting dollars in the pockets of households, businesses, and governments.
The modeling approach LEI uses to estimate the benefits of transmission utilizes two hypothetical transmission investment projects. LEI presents the projected benefits of each transmission project by category and by beneficiary, showing as well where and over what timeframe these various benefits arise during the lifetime of a typical transmission investment. Although the hypothetical projects analyzed in this study are created to highlight the benefits of two specific types of interregional transmission investments in two diverse market settings, the methodology for estimating benefits and the overall magnitude of the benefits are indicative of all transmission investments – reliability projects, economically-motivated projects, and policy-driven initiatives. Therefore, the analytical approach illustrated in this study applies not just to inter-regional transmission projects but also to various other types of well-conceived transmission investments.
Large transmission investments are often challenging for system planners and policymakers to assess. The benefits of such projects can be widespread, but the regional nature of system planning often overlooks the full spectrum of wide-ranging benefits that emerge during different stages of a transmission project’s life cycle. For this paper, LEI conducts a comprehensive analysis of benefits by evaluating two hypothetical, yet realistic, inter-regional transmission projects in different parts of the US. LEI analyzes these projects with well-accepted forward-looking modeling techniques to show the ways in which the benefits of transmission emerge and evolve.
The purpose of this study is to demonstrate that transmission benefits can be quantified, and would provide system planners and decision-makers with important baseline information to properly plan for the grid of the future. LEI’s approach for estimating the benefits of transmission is based on projections of future electricity market conditions, with and without the hypothetical transmission projects. Although the two hypothetical transmission projects are variations on inter-regional projects, the approach could easily be employed to understand the benefits of any well-conceived transmission project during its entire useful life.
The benefit calculus in this paper is based on empirical analysis and utilizes a suite of simulationbased modeling tools. LEI’s modeling covers the construction phase of the project and the first 15 years of the operations under a “base case” or “most likely” forecast for the future electricity market conditions. LEI also examines alternative supply conditions to measure longer-term reliability benefits.
The modeling in this study demonstrates that the uncertainties faced by transmission planners and policymakers with respect to economic impacts of these long-lived assets should not deter them from undertaking a benefit analysis. Only with a comprehensive economic examination of benefits will decision makers be able to optimize the value of transmission projects to consumers and the wholesale power market.
Two hypothetical projects
The hypothetical projects LEI analyzes in this study reflect two common commercial drivers for transmission investments: (i) increasing market efficiency through additional trade of electricity, and (ii) accommodating delivery of lower cost and cleaner energy resources (that may be in remote locations) to consumers. The first hypothetical project, located in the Eastern Interconnect, increases the transmission capacity between two regional markets operated by PJM Interconnection LLC (“PJM”) and Midwest Independent Transmission System Operator, Inc. (“MISO”). This “Eastern Interconnect project” aims at enhancing market efficiency through trade. The other hypothetical project involves a new transmission line extending from the Rocky Mountain area to southern California (the “Western Interconnect project”). This hypothetical project demonstrates the value of transmission investment in bringing energy and associated products and services (such as capacity and reduced carbon emissions) from new resources located at some distance from electricity consumers.
While the primary business drivers, configuration and market conditions of these two hypothetical transmission projects are different, LEI’s findings suggest that the magnitude and variety of benefits is broadly similar for different types of transmission projects, once adjusting for the scale of the transmission project and the volume of energy deliveries. As such, this study can serve as an indicator of benefits for many types of transmission projects. Furthermore, LEI’s approach and conclusions are generalizable to other projects – interregional or intra-regional – and call out the multiple benefits that have often been overlooked as system planners focus more on reliability considerations or only narrow categories of economic benefits, like efficiency improvements to system operations (also known as “production cost savings” or, as referenced in this study, “savings from efficient production of energy”).
Findings regarding benefits of transmission
This study estimates the benefits of transmission chronologically: starting from the initial days of transmission project development and construction, through the first fifteen years of commercial operations1 (see Figure 1). The two hypothetical projects, like their real-world counterparts, are projected to provide electricity consumers, electricity generators, electric power markets and the economy generally with a range of benefits over their useful lives. To demonstrate the variety of benefits and diversity of beneficiaries, LEI has presented all the benefit streams individually in dollar terms. Furthermore, given the focus of this study on benefits, LEI has not netted these benefits against the costs of the project, although that would be a standard procedure in the realworld for purposes of a complete evaluation of a project.
Benefits in the Short Term
In the short term, properly-conceived transmission investments, like other large infrastructure projects, create benefits by boosting the local economy (commonly measured by Gross Domestic Product (“GDP”)2) and creating new jobs through local spending on construction-related services. The new jobs are not limited to the construction sector because of the “ripple effect” of investment. The short-term benefits are shown in Figure 2 below. The magnitude of these benefits is largely driven by the capital costs of a project and the amount of local spending associated with the construction of the project in the short term. The Eastern Interconnect project is estimated to cost $200 million on an indicative basis, while the Western Interconnect project is estimated to be a $3 billion project. Therefore, we observe a proportionately higher level of project benefits from the Western Interconnect project in the short term.
Benefits in the Medium Term
In the medium term, the modeled transmission investments create the following benefits, with results summarized in Figure 3 and further detailed in Section 4.2:
• These transmission investments lower the costs of electricity to consumers by allowing more cost-effective energy and capacity resources to reach consumers.
• These transmission investments also economically benefit some generators, allowing them to earn higher revenues by making possible sales to new markets consumers through the new transmission capacity.
• Transmission investments can paradoxically both lower the market price paid by consumers for electricity and increase some generators’ revenues. This can be explained by the overall efficiency improvement in the energy market brought about by transmission investment and the expansion of the market that system operators can use to optimize dispatch of resources.
• The lower electricity costs for consumers also catalyze another category of benefits - regional economic growth. Lower electricity costs make the local economy more attractive to industrial and commercial businesses and spur investment that then leads to an expansion of operations of these businesses. Meanwhile, lower electricity bills increase residents’ household income and increase demand for various consumer goods and services.
• Thanks to the increased level of trading accommodated by the new transmission line, cleaner and lower-cost energy is used by consumers, which reduces carbon dioxide emissions3 in the receiving or importing region(s).
• Achievements like reduced carbon emissions are highly valued by some residents and households. To some individuals, these achievements signal a “quality of life” improvement, creating a more favorable living environment and attracting new residents to relocate to the region. Expansion of the labor market (as people move to the region) gives rise to another wave of expansion in the local economy.
The benefits listed in Figure 3 arise across a large geographic area. For example, as residents and local businesses in the directly affected region (where electricity costs decline) purchase additional products and services, the economies in other states that provide such additional products and services also benefit from the increased demand. In addition, as market conditions evolve, LEI’s modeling shows that transmission can accommodate changes in various external market conditions and help system operators more cost-effectively adapt to new circumstances. This does not mean that benefits of transmission are diminished as a consequence of evolving market conditions, but rather that the beneficiaries or the timing of benefits may change (see Section 4.2.1 for additional details).
Benefits in the Longer Term
In the longer term, well-planned transmission brings significant reliability value. For example, transmission investment can serve to dampen or neutralize the cost impacts of unexpected events in the market, much like an “insurance” policy. The insurance value of new transmission over its long term described in Figure 4 (and fully described in 4.3) is estimated by modeling the energy system with and without the new investment. The benefits of avoiding higher energy costs can be very large for consumers, as energy market costs rise quickly in the face of supply constraints. In addition, the economic consequences of avoiding supply interruptions are significant, even if such events are rare. Unexpected events can occur at any time and such events – especially if they lead to supply interruptions – can be immensely expensive. Well-placed transmission investment can reduce the frequency of supply interruptions (blackouts) and temper rising energy market costs from supply constraints. Such reliability benefits exist over the lifetime of a transmission project. LEI’s modeling results (see Figure 4) indicate that both hypothetical transmission projects can reduce the cost impacts of supply constraints and economic losses of blackouts under specific circumstances, thereby creating significant value to energy consumers and the local economy in the long run.
Observations and recommendations
The empirical analysis in this study demonstrates that well-conceived transmission can provide benefits that are quantifiable, substantial, widespread and long-lasting. To ensure effective decision-making and investment appraisal, system planners, policymakers, and decision-makers should consider the full spectrum of benefits provided by transmission. LEI recommends that such considerations need to be made in concert with the design and development of the project (rather than as a ‘postscript’ in the description of the project, or in response to a request of a policymaker or regulator). Quantified benefits then can be compared to the costs4 of the project to assess the investment thesis. The goal should be to build the infrastructure and deploy capital to secure an optimal range of benefits for consumers and the economy.
LEI suggests integrating economic valuation methodologies, similar to those demonstrated in this study, within current transmission planning processes. The system planning process should not only be looking at the technical needs and engineering characteristics of new transmission (e.g., costs), but should also consider the numerous economic benefits that are derived from making the investment. When the full range of benefits is considered in transmission planning, projects can be optimized to provide the highest level of value to customers.
The benefits of transmission investments take many forms and affect many stakeholders in different ways, over varying timeframes. Uncertainties around economic trends, technology improvements, and public policy add challenges in predicting a future world. Scenario analysis, and other probabilistic modeling techniques, can allow estimates of impacts from new investment in the face such uncertainties. Decision-makers should refrain from assuming that there are no economic benefits from transmission investment simply because of uncertainties about future conditions. Rather, rigorous analysis of the full range of short-term, medium-term and long-term benefits should provide decision-makers more confidence in selecting the most valuable transmission investments for the future.