The analytical challenges in evaluating the impacts of transmission line investments have vexed practitioners and electricity market regulators. The purpose of this study is to provide a guideline for improving the accuracy and predictability of the impacts of electricity rehabilitation projects. The subject is too broad to address completely here. The proposed guideline is suitable for evaluations of such project implemented in a broken electricity network. In such case, the demand for electricity is deterred, the supply of the electricity is unreliable, and the system is far away from its least-cost optimum production/consumption level. The guideline does not rebut the catalog of existing evaluation models or approaches. The guideline utilizes them for a reasonable ex-ante assessment to identify “good” projects that satisfy the economic and public objectives of the economy. An integrated cost-benefit analysis (CBA) framework is recommended to appraise such projects along with allocating the impacts to stakeholders in a manner that is commensurate with the net benefits they receive. Such an integrated analysis is much more than a set of procedures for estimating the expected net present values or rates of return of the project.

1. Economics of Electricity Transmission
Rehabilitation Line Investments
Sener SALCI
Department of Economics, Queen’s University, Canada
sener.salci@gmail.com / ssalci@econ.queensu.ca
May 2017

2. • Reference Material
http://econpapers.repec.org/paper/pramprapa/78929.htm
2

3. Outline of Talk
1. Introduction
2. Costs and Benefits of Transmission Capacity Investments
3. Evaluation of Transmission Capacity Investments Using CBA
Framework
4. Application of CBA in Transmission Capacity Investments
5. Some Extensions in the Evaluation of Transmission Capacity
Investments
6. Examples of CBA in the Evaluation of Transmission Capacity
Investments
3

4. Electricity Market Structure in LAC
Source: Roques, 2015
4
Electricity Market in LAC

5. Some Facts
• Electricity transmission infrastructure transport power in electricity markets (i.e. meeting producers
in X region with consumers living in Y region)
• The system operator carries out transmission control.
• Transmission investments are endogenous to market conditions ( i.e. coordination of investments in
transmission and generation of electricity)
• Traditionally, transmission line was responsible for transport of electricity securely and efficiently
at minimum operating cost while meeting demand (functions of transmission infrastructure)
• With the unbundling in the electricity sector, generation and supply of electricity is separated
aiming to introduce competition in the industry and to regulate the transmission and distribution
systems. With the introduction unbundling , transmission must ensure fair access to energy for all
participants, mitigate the market power, make a possible a competitive electricity market and
enable optimum expansion of electric system, and integrate the increase of decentralized
production (functions of transmission infrastructure)
• Timing and Scaling: Avoid or delay the need for future reliability projects by economically
justifying the transmission projects.
5

6. Transmission Capacity Business
• Long-lived capital intensive assets
• Average costs decrease with capacity (i.e. economies of scale)
• Long-lead times for construction and investments are irreversible
• Natural Monopoly (for good)
o where transmission is unbundled, monopoly subject to regulations,
including pricing of transmission to cover fixed costs and earn “fair”
from investments (see Hernandez et al, nd)
• Transmission is sometimes a substitute for electricity generation
6

7. Transmission Capacity Investments
Case I. Is it economically viable to expand transmission capacity?
Evaluate transmission capacity expansion as part of long-run generation capacity investment (i.e.
integrated generation and transmission investment)
Examples of such projects include:
• to accommodate growing demand
• to connect additional power generation source into network (e.g. issue of integrating wind
power into the system)
Case II. Is it economically viable to rehabilitate transmission capacity?
Evaluate as “stand-alone project”
Examples of such projects include:
• to replace , repair ageing network infrastructure
• to replace “old” to avoid energy losses
Case III. Is it economically viable to upgrade transmission capacity?
Evaluate as “some combination of the above situations”
Examples of such projects include:
• to improve the reliability of supply to existing consumers from upgrading the overall
transmission
• to provide inter-connection between two demand grids
7

8. Models of Market for Transmission
Investments
1. Traditional: Integrated generation and transmission
planning
o Public Investment,
o Transmission line “traditionally” responsible for security and reliability of the system while
ensuring that the demand is satisfied
2. Competitive: generation and transmission are separated to ensure
fair competition and achieve economic efficiency (unbundling)
Regulated transmission capacity
o Transmission company (monopoly) proposes and builds a new investment if
regulator approves the proposed investment
o Transmission company collects revenues from users to pay for the investment
Merchant expansion
8

9. Traditional transmission expansion planning
procedure
9
Source: Wu et al., 2006, p. 957

10. Transmission expansion planning procedure in the
deregulated environment
10
Source: Wu et al., 2006, p. 960

11. Remarks
 Each case and market model requiring a different approach to
the evaluation of benefits and costs and overall investment.
 But in all cases and market structure (not merchant expansion),
investments would have to pass approval by “regulators” and
regulator will authorize transmission capacity investment if the
savings in generation out of merit costs and losses (or even
savings from capacity) exceeded the capital and operating costs
of the reinforcement.
11

12. Costs and Benefits
12

13. Transmission Investment Costs
 Capital Expenditures - CAPEX
 Operating Expenditures - OPEX
Costs are function of various inputs including length of lines and capacity of lines.
Payment for the transmission investment ($/MWh), for instance, is based on Regulated
Revenue Requirement: Pay for capital expenditures made ( rate covers return on
capital and depreciation) and OPEX.
Payments are made on load factor and operating costs of transmission line, so regulated
price might higher in order to cover capital costs and depreciation expenses and earn
“fair” rate of return from invested capital.
These charges are allocated to network users. Methods and ways of payment vary across 13

14. Transmission Investment Benefits
Adding up the main short and long-run benefits of transmission capacity investments:
1.Production cost savings plus
2.Reliability and Resource Adequacy Benefits
3.Generation Capacity Cost Savings
4.Market Benefits (e.g. insurance benefits, competitiveness benefits)
5.Environmental Benefits
6.Other Benefits such as public policy benefits, impacts on fuel markets,
employment benefits etc.) 14

15. Why do we need to move away from
“traditional approach”?
Importance of taking into account all project benefits for project selection
Benefits are accrued over time, quantification and certainty of occurrence of project
benefits is harder than estimation of costs of the projects occurred during initial years –
but uncertainty costs must be also assessed.
15

16. Transmission Expansion Benefits
Without Expansion
Consumer Surplus: A
Producer Surplus: E
Congestion rent: B+C+D
With Expansion
Consumer Surplus: A+B+F
Producer Surplus: D+E+H
Congestion Rents: C+G
Net INCREMENTAL
Benefits: F+G+H
16

17. Challenges in Estimating Benefits
Estimation of benefits from transmission investments is not the only
challenge, but monetizing them in single numeric value is also
challenge.
In other words, the wholesale price for electricity might not reflect
all or large portion of benefits from new transmission investment.
E.g. Benefits from new transmission line (or new investment package such as
wind capacity and transmission integration costs) must be reflected in price and
corresponding quantities associated with the new price.
o Not an easy task: price determination happens in short or medium, and it is complex
task, load dispatch analysis might not reflect price changes due to project over time
o Long-term utility benefits, economy wide benefits cannot be captured from demand
o This particular transmission investment is tied to wind investment
17

18. Evaluation of Transmission Capacity
Investments using CBA Framework
18

19. CBA Framework for Market Efficiency
Net Benefits from each are measured by comparing total
system costs and benefits for:
future “with” the project to future “without” the project
(i.e. “base” case)
Both benefits and costs are subject to some level of
“uncertainty” and “risk”
 evaluate the project with a range of scenarios and
sensitivities
19

20. CBA Framework for Policy Objective
Policy Objective: Connecting hydro resources in North of Chile into grid
Question: Is it economically viable to invest on hydro in Chile?
Example: 600 km long transmission line to boost renewables in Chile; to address the main challenge that
the Chilean electricity system faces such as the interconnection between its various subsystems, to ensure
security of supply and to reduce the price of energy
Policy Objective: Connecting transmission infrastructure between Peru and Chile
Question: Is it economically viable to invest in such of interconnection of transmission infrastructure? What
are the gains from power exchange? How should allocation of benefits and costs be made? Who are the
gainers and losers from power exchange between Peru and Chile?
Example: Possibility of interconnection of transmission infrastructure between Peru and Chile could
happen before 2021.
Both of these investment in transmission line are attached to energy policy objective and most likely such
investments are undertaken if they are cost-efficient (not necessarily least-cost option), and CBA framework
is required to test the impacts of such policies on different actors involved in the project.
20

21. Steps for CBA Analysis
1. Get the comprehensive data from system planners and stakeholders
involved in the project (e.g. list of likely benefits and project costs)
2. Perform unbiased evaluation to value as many of the identified benefits
possible and costs of expansion
3. Evaluate to determine whether project is beneficial overall by adding up
estimated economy wide benefits (i.e. societal) benefits with estimates of‐
total project costs
4. Distribute costs including transmission pricing cost allocation) and benefits
to stakeholders
5. Work out on allocation of transmission costs via transmission pricing
mechanism so that costs are recovered and natural monopoly earns fair rate
of return from invested capital and operating costs.
21

22. What does CBA analysis actually do?
Evaluate the proposed project:
•Integrated financial, economic impact analysis and distributional assessments for
particular groups of concern (e.g. the private sector, electric utility, consumers,
country-economy and national government etc.)
•Incorporate risk and uncertainty within the evaluation, and their individual
impacts on each stakeholder.
•Re-allocate the benefits and costs according to the provision of the agreements.
•Address the important issues, and provide policy recommendations based on
careful CBA evaluation.
22

23. Investment Decision Criteria
1. Net Present Values ($)
Build an additional transmission capacity if discounted total
savings exceed the discounted total transmission expansion costs.
Add capacity until the marginal generation savings equal the
marginal cost of building additional capacity.
2. Levelized Costs ($/MWh)
23

24. What CBA analysis cannot not do?
You cannot decide on amount of optimal capacity,
location and timing of transmission capacity to be built.
You cannot estimate the benefits and costs of
transmission projects.
But, cost-benefit analyst will can do economic evaluation
and distribution of such impacts in a consistent maner
(see steps for CBA).
24

25. Application of CBA in Transmission Capacity
Investments
Example I: ATC’s Paddock-Rockdale Project
Example II: Southern California Edison’s Palo Verde-Devers 2 Project
25

26. • Install new 345 kV circuit on existing
right of way connecting Paddock
Substation in Rock County to the
Rockdale Substation in Dane County
• 35 miles new double and triple circuit
monopole and reused double circuit
lattice structures
• Substation upgrade work also required
at: Rockdale, Christiana and Paddock
– Replace 336 MVA transformer with 500
MVA
– 5 breaker replacements
– Substation footprint expansion
– Ground grid and grade work
26
Example I: ATC’s Paddock-Rockdale Project

27. • Aim is to reduce the delivered cost of energy to Wisconsin
customers by reducing congestion on the system and improving
access to additional energy sources. These savings from project
will passed onto end-use electricity consumers.
• ATC owns, operates, builds and maintains the high-voltage
electric transmission.
• Estimated project costs: $132 millions. Updated final total
project cost is about $116 millions.
• Approved in June 2008 and line entered service in March 2010
27
ATC’s Paddock-Rockdale Project

28. Results from ATC’s Paddock-Rockdale
Project
Source: American Transmission Company, Planning Analysis of the Paddock-Rockdale Project, April
2007, p.63
28

29. Example II: Southern California Edison’s Palo
Verde-Devers 2 Project
29
The proposed project consists of two electric transmission lines: the
Devers-Harquahala 500 kilovolt transmission line between
California and Arizona and the Devers-Valley No. 2 500 kilovolt
transmission line between SCE’s Devers and Valley substations in
California.
Objectives are to increase the ability to transfer electricity between
states in the southwestern US, create access to sources of cost-
effective energy (reduce energy dependency, large scale solar
investments), help facilitate development of new electrical
generation sources in the region (connect eastern Riverside
resources into grid), reduce congestion and improve reliability in the
Southwest network.

30. Southern California Edison’s Palo Verde-Devers II
Project
30

31. Southern California Edison’s Palo Verde-
Devers II Project
• Levelized Cost of the project Costs: $71 millions $.
• Southern California Edison (electric utility) Selected Quanta
Services for Construction of Devers-Palo Verde 2 Transmission
Project
• Approved 2005, project started July 2011 and operational since
Sept. 2013 (we will come to this point later)
31

32. Southern California Edison’s Palo Verde-Devers II
Project ($, millions)
Source: Zhang, (2010, p.262)*
(*): some benefits are excluded for illustration purpose.
32

33. Southern California Edison’s Palo Verde-
Devers II Project
Q: Is there any more electricity market benefits that are not captured in this
study?
A: Yes! Long-term benefits in the form of capacity, emission and competitive
benefits amount of $41 million (75% of total energy saving benefits), increasing
B-C ratio from 1.10 to 1.68.
Therefore, without accounting these savings, benefits are only 10% higher than
projected costs and under-estimation of benefits might cause refusal of “good”
transmission project. This holds also when actual costs are higher than costs
estimated.
33

34. Southern California Edison’s Palo Verde-
Devers 2 Project
34

35. Some Extension in the Evaluation of
Transmission Capacity
Investments
35

36. o Underlying the benefits for different groups
(new and existing connections) from
transmission capacity investments.
o Some notes on regulatory aspects of
transmission capacity business.
36

37. Transmission Expansion Benefits
New Connections (e.g. rural electrification)
Pd
0: Price of alternative source of energy
Pd
1 : Electricity tariff for new connection
QT
0 : Energy consumption per household in the absence
of electricity
QT
1: Electricity consumption per household at the
prevailing tariff
C+D = Value of resources used before connecting
consumers to electricity = Resource Savings from
Replacement (primitive to modern energy source)
37
C
D

38. Decision to Invest:
The “golden rule” is:
PV of all Benefits (sum of area A+B, C+D) > PV of Total Costs
of Power Supply
Compare with other options, for example off-grid renewable applications in
situations where transmission investments are not economically viable to
serve. Then compare and select least-cost option for rural electrification.
Transmission Expansion Benefits
New Connections (rural electrification)
38

39. Transmission Expansion Benefits
Existing Connections
Without Expansion
Consumer Surplus: A
Producer Surplus: E
Congestion rent: B+C+D
With Expansion
Consumer Surplus: A+B+F
Producer Surplus: D+E+H
Congestion Rents: C+G
Net INCREMENTAL
Benefits: F+G+H
39

40. The “golden rule” in both centralized and competitive
frameworks, regulator’s decision based on:
PV of all Benefits (sum F+G+H)* > PV of Total Costs
of Transmission Expansion
*add economic benefits from “new connected consumers” if there is any
additional connection results from transmission capacity investment.
* issue of benefits from new transmission capacity investment that are not
captured by the price of electricity
Transmission Expansion Benefits
Existing Connections
40

41. Examples of CBA in the Evaluation
of Transmission Capacity
Investments
41

42. Transmission Capacity Investments CBA
Analysis
1. Peligre Transmission Line Rehabilitation Project, PAP Region, Haiti
http://econpapers.repec.org/paper/pramprapa/78929.htm
2. Southern California Edison’s Palo Verde-Devers 2 Project (interconnection
project)
http://web.stanford.edu/group/fwolak/cgi-bin/sites/default/files/files/Using%20Market%20Simulations%20for
%20Economic%20Assessment%20of%20Transmission%20Upgrades_Applications%20of%20the%20California%20ISO
%20Approach.pdf
http://www.cpuc.ca.gov/Environment/info/aspen/dpv2/toc-feir.htm
3. TC’s Paddock-Rockdale Project (high-voltage connection to regional generation
sources)
http://www.atcllc.com/oasis/Customer_Notices/Filed_CPCN_Economic_Analy
sis_PR_051607.pdf
4. Vietnam: Power Transmission Investment Program (MFF)
http://www.adb.org/projects/42039-033/main
http://www.adb.org/projects/documents/power-transmission-investment-program-mff-0
42