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Press Release

Transmission Investment Valuation: Weighing Project Benefits

LCG Consulting, Los Altos, California, March 1st, 2004 – Many parts of the world have been moving away from the vertically integrated monopoly provision of electricity services, towards “market liberalization” with numerous suppliers and consumers interacting in a flexible, decentralized and competitive manner. Electrical transmission networks play key roles as “highways” for this commerce, but liberalization complicates transmission planning so that it is increasingly important to have realistic and objective methods for assessing the value of transmission investments.

In a restructured electricity industry, the market realities faced by generation and transmission investors are exceedingly complex. Sophisticated analysis and modeling faces many challenges. The first analytical challenge is an accurate representation of the various markets and the bidding behavior they encourage. To maximize profits, therefore, a plant has to bid its true opportunity cost, which is the greater of its marginal production cost and the expected prices in the different product, temporal, and spatial markets.

A second analytical challenge concerns the locational dimension. The value of energy is different across the power system, and an accurate representation of the physics of power systems is thus quite central. A load flow representation of the system is a detailed and accurate picture of the transmission lines, their links to one another, and the flow of power in and around them. For example, an optimal power flow (OPF) is a traditional engineering tool for analyzing the dispatch of plants in order to meet loads across the system. A load flow model could be used to evaluate two alternative investments, one in generation and another in transmission, and determine how they affect current and future prices across the network and for different products.

A third and final analytical challenge is the inherent uncertainty in complex phenomena. Electricity markets are subject to severe fluctuations in fuel prices (such as oil and natural gas), emission, loads, hydro availability, and regulatory interventions. Volatility analysis is crucial to the avoidance of costly investment mistakes. Moreover, investments in generation (and to some extent, transmission) are flexible and, in the event new information is obtained, can be postponed. A real options approach to investment under uncertainty has to be deployed in order to take advantage of the plant’s flexibility and acquisition of fresh commercial information.

In summary, the impact of generation and transmission investments on power prices is not easy to assess, and a large number of factors have to be taken into account. Only an integrated transmission and generation representation of an electric power system can do a proper job of capturing the key market, physical, regulatory, and climactic drivers underlying market outcomes.

LCG recently conducted a cost-benefit study of transmission upgrade using UPLAN Network Power Model with SCUC/SCED. A paper was published in The Electricity Journal March 2004 issue based on the simulation and results of this study.
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