The Truth about the Need for Electric Transmission Investment: Sixteen Myths Debunked
Julia Frayer, Eva Wang, Marie Fagan, Barbara Porto, Jinglin Duan, September 2017 (London Economics for the WIRES Group)
WIRES commissioned London Economics International LLC (“LEI”) to provide a White Paper on the myths and truths about transmission investment. The views of key decision makers regarding the need for transmission investment are often governed by widely-believed but outdated or inaccurate myths regarding the key drivers for investment, such as: trends in electric demand and supply; the cost of infrastructure and who should pay for it; benefits of investment; and the interplay between transmission and various new technologies. This White Paper identifies the principal myths surrounding consideration of transmission projects in regulatory, industry, and political circles and then explains why those myths are typically baseless, false, and misleading. The paper uses real-life examples of transmission investment projects to debunk these harmful misconceptions. In order to offer a more accurate portrayal of the need to invest in transmission infrastructure, this White Paper concludes with recommendations for practical and feasible improvements to the process of evaluating transmission projects.
Introduction And Roadmap To This Report
Why are there myths around transmission investment?
Myths are sprouted from small “seeds” that are grounded in reality but then grow to be “larger than life.” The factual foundations begin to fade, and the embellishments soon become the focus of the story. With respect to transmission investment, myths have arisen as a shorthand to help navigate the complexities of transmission investment decisions. Unfortunately, trying to simplify the decision of investors and system planners down to a sound bite of several words creates inaccuracies and gives rise to myths that undermine beneficial investment opportunities.
Transmission investments are complex and large-scale, and they require careful evaluation, forward-looking analysis, and long-term commitments. Key issues in the decision-making process include the following considerations:
• Transmission investment decisions are multi-faceted. Electric transmission investment is a highly regulated, complex undertaking which involves many decision-makers.
• Transmission investment is large-scale. This creates almost an immediate natural tendency to consider deferral and smaller-scale, sometimes piecemeal, options because the costs and consequences of not pursuing a large-scale investment are typically ignored because they are more difficult to come to grips with.
• Transmission investment requires long-term commitments and planning. It can take 10 to 15 years to plan, permit, and construct new transmission, and sometimes much longer. Once built, transmission projects typically have economic and operating lives that are more than 50 years.
It is tempting to tame these complexities by relying on familiar myths to guide transmission investment decisions. However, as this report shows, using outdated myths to guide investment will result in missed opportunities for benefits to the power system, transmission users, and to electricity consumers. This report uses real-life examples to debunk the myths around transmission investment.
In Section 2, we briefly explain the important changes to the transmission system over the past two decades and the new realities that have resulted for the transmission system. In sections 3-7 we identify the myths and replace them with the new realities, or truths, about transmission. In Section 8, we provide recommendations for practical and feasible improvements to the process of evaluating the need for transmission investment to reflect these new realities. Some of the recommendations are already being practiced by system planners – if other decision-makers adopt these recommendations then their decisions around investment would more truly reflect the value that transmission investment brings to consumers and the power grid.
Why Do We Need Transmission?
Electricity service is not simply about which power plants are running. Keeping the lights on involves an integrated network of resources, including: transmission lines, substations, control equipment, and local distribution lines (see Figure 1 below). Transmission infrastructure also ensures that the system is “reliable,” meaning that the lights stay on even when power demand surges or an individual power plant goes offline.
Transmission investments are generally grouped into three categories:
• Reliability: Projects that are necessary to resolve a reliability issue (such as keeping the lights on);
• Economic: Projects that, while not necessary to resolve a reliability issue, allow cheaper generation to reach more load; and
• Public policy: Projects that assist in meeting public policy goals (e.g., lines built to support state renewable portfolio standards (“RPS”) by, for example, allowing new remote wind generation to access load centers).
Investing in each of these three types of transmission requires long-term planning and a coordinated effort to ensure transmission is built where and when it is needed. The “drivers” of the need for new transmission were simple and straightforward: growing demand for electricity in a utility’s service territory and the location of its power plants. The benefits of a new line were often taken for granted by the regulator, as long as the costs seemed reasonable and it was a straightforward exercise to allocate costs to consumers.
2.1 The evolving role of transmission
In the past, most transmission projects were developed by “vertically integrated” utilities that served a well-defined service territory and built power lines to connect its plants with its consumers, and consumers would only take services from this utility.
Nowadays, however, many regions of the US are served by independent power generators who own only power plants, and transmission and distribution utilities who focus only on delivering electricity to consumers. Even in areas where a single utility provides all services to consumers (and owns its own generation along with its wires businesses), there are now rules and regulations that require open access of the transmission system and “arms-length” considerations between the generation and transmission businesses. Independent system operators known as Regional Transmission Operators (“RTOs”) or Independent System Operators (“ISOs”) are now operating across the North American grid, and are in charge of the system planning and evaluation of transmission projects. Meanwhile, non-traditional investors are now allowed to ‘compete’ with utilities to build and own transmission projects. The line between consumers and producers is also blurring. Not only do consumers in some states have the right to choose their own supplier, but they also have an option to invest in their own generation facilities, thanks to the evolution of technology and regulatory reforms. In addition, many states have targets for renewable investment, which often call for additional transmission facilities to connect new generations with the load centers.
Thus, over the past few decades, the simple drivers of transmission have become less relevant, and new realities are driving the sector.
2.2 From myths to truths
Many common misconceptions around transmission investment have evolved from high-level generalizations about why transmission investment is needed and has led to oversimplification of the cost and benefits. These common misconceptions – “myths” – are detached from realities, or “truths,” about transmission, and impose great challenge on efficient transmission development to meet current and future transmission needs.
These myths generally fall into five different categories, namely: (i) myths about power demand; (ii) myths about power supply; (iii) myths about alternatives to transmission; (iv) myths about costs; and (v) myths about benefits of transmission investments. We have identified a total of sixteen myths (see Figure 2) that need urgently to be corrected to better help system planners make informed decisions1—a topic which will be discussed in detail in the following sections…
Myths And Truths About Electricity Demand…Myths And Truths About Electricity Supply…Myths And Truths About Alternatives To Transmission…Myths And Truths About The Cost Of Transmission…Myths And Truths About The Benefits Of Transmission…
From Myths To Reality: Recommendations For A Change Of Perspectives In Investment Planning And Decision-Making
To avoid myths and to think about transmission investment realistically, decision makers need to adopt a comprehensive and consistent approach to evaluating the costs and benefits of transmission.
LEI recommends that this approach recognize a common set of evaluation criteria (or metrics) across all types of transmission projects (see Figure 17). Even if a project has been proposed for reliability, for example, it might also have benefits related to market efficiency and/or policy. Applying a broad set of metrics to every transmission investment would ensure that all potential benefits would be captured for evaluation.
8.1 Costs and benefits should be evaluated as a whole package Some benefits of a transmission project tend to increase over time with both load growth and fuel price inflation. At the same time, costs tend to leave an impression of being “front-loaded,” although in fact, the investment costs are typically spread over many years in rates to consumers, and decline over time as capital cost is depreciated. Transmission investments have benefits and cost lives that extend well beyond 40 years. In spite of this, many transmission investment decisions are made based on comparisons of costs and benefits over a much shorter period than the typical 40-year useful life of the asset, for example, for the first 10 years of a project. Requiring a comparison of the first 10 years of estimated benefits with annual transmission consumer costs for the same number of years raises the benefit-to-cost threshold that projects must overcome.43 Instead, we recommend analysis of benefits over a longer period to better match the life of the investment. In addition, it is important for benefits of investments to be measured against an accurate view of the world of not doing the project. Frequently, opportunity costs are ignored even though the costs of a reliability shortfall are well recognized.44
There are many other dimensions of costs and benefits that need to be paired accurately to ensure that sound decisions are being made, as discussed below.
8.2 Transmission alternatives need to be examined comprehensively
As noted previously, alternatives to transmission ([Non-Transmission Alternatives] NTAs and [Market Resource Alternatives] MRAs) and transmission investment offer a range of different types of benefits. While it is true that MRAs can provide valuable services, transmission infrastructure tends to provide a broader array of benefits that accrue to a wider variety of parties over a larger geographical dimension (as well as to local areas). Thus, an optimal process is not one that poses an either/or decision (treating transmission and MRAs as substitutes), but one which treats them as potential complements, and asks “how much of each should we use in this circumstance?” When considering the costs, the cost of subsidies provided to some distributed generation such as behind-the-meter solar PV should also be included as an indirect cost. In addition, positive and negative externalities should be considered, thereby evaluating indirect benefits or costs on various stakeholders.
8.3 Recognize that certainty of costs and uncertainty of benefits can be an illusion
It is easier to perceive the costs of an investment than to envision its benefits. The cost of an investment is up-front (at least when described in capital spending terms) and “known” while benefits can be of varying magnitudes over time and will depend upon how the future unfolds. In addition, it is difficult for most stakeholders to perceive the cost of not taking action. However, there are real costs to inaction—system reliability can hamper local economic activities (for example, if there is simply insufficient electricity to meet demand, some economic activities will need to be interrupted). Inaction can also increase the cost of electricity (due to the lack of efficient resources and rising congestion when existing transmission capacity is “used up”).
8.4 Plan for the future
Not only is transmission a long-lived asset, its required siting, permitting and construction time frames are also lengthy, as noted previously. Thus, investors need to project drivers for transmission investment many years into the future, so that when the transmission development project is finally completed and energized, it will be the right size, and in the right place. For example, the timing of many nuclear license expirations (for the 2030s and early 2040s) seems far into the future right now; but a transmission development process that begins in 2018 and takes 10-15 years to complete will result in a project that will serve the market for many years after those nuclear plants retire.
8.5 Overcome the natural human tendency to over-rely on recent experience
Looking out over the long term, developing realistic assumptions for forward-looking investment analysis and system planning is not straight forward. The use of scenario analysis to understand and quantify some of the uncertainties in long-term investment can be valuable. Scenarios should include a “business as usual” scenario, as well as alternative scenarios that contain various transmission solutions and technically-suitable alternatives, or alternative values for drivers (such as varying assumptions for future natural gas prices, economic activities and consumer behavior patterns around electricity use).
Scenario analysis is built on plausible futures that are intended to envelop the range of outcomes, not just outcomes that mirror recent experience. If all the scenarios were to identify meaningful benefits, that suggests that even if one were uncertain about the future, there would be benefits to the investment regardless of which scenario was actually realized.
8.6 Plan for the unexpected
A “most-likely” analysis cannot capture the impact of unlikely but extreme events. These events can have expensive consequences for consumers. For example, during the winter of 2013/14, the coldest winter in 20 years in many places,45 there were in fact three “Polar Vortexes” that extended across across the Eastern seaboard of the US. Many ISOs/RTOs saw unprecedently high winter peak loads and experienced very high energy prices (see Figure 18). For instance, the NYISO set a new record winter peak load of 25,738 MW, and requested voluntary reduction from about 900 MW of its demand resources. 46 ISO-NE reached a peak just short of its all-time historic peak and also called for demand response resources to be ready for deployment.47 PJM and some providers in South Carolina had to cut voltage in their areas by 5%, while South Carolina Electric & Gas was forced to disconnect some consumers to ensure that the power grid could remain within safe operating limits and could withstand a worsening of the emergency.
A system-wide blackout can amount to billions of dollars of economic losses. For example, the total cost of a 12-hour system-wide outage in MISO, which has an outage cost of $3,500/MWh and an average hourly load of 76,850 MWs, would amount to $3.2 billion.49 Prior economic studies have pinpointed economic losses from the blackout of 2003 to as much as $4-$10 billion.50 A transmission line can help moderate consumer rate hikes due to weather driven events and could in some circumstances make the system more resilient and insure against an expensive system-wide blackout.
Decision-making around transmission investment is complex and multi-faceted, and each transmission project is unique to some degree in the mix of benefits it can provide to consumers and the electric system. As we have shown, relying on outdated myths can handicap the decision-making process, mistakenly reject valuable transmission investment, and result in missed opportunities to benefit consumers. We must strive to correct the myths in our thinking about transmission investment and must also move the investment analysis in a direction which will allow us to avoid the trap of making more “myths.” In doing so, we can thereby ultimately support more informed transmission investment decision-making in the future.