Transmission upgrades in the Southwest Power Pool (SPP) from 2012 to 2014 resulted in more than $240m in fuel cost savings for utilities during the first year of operation of SPP’s Integrated Marketplace, SPP said Jan. 26 in a study on the value of SPP transmission additions.
The net present value of all quantified benefits from the transmission investments is expected to exceed $16.6bn over a 40-year period, resulting in a benefit-cost ratio of at least 3.5, meaning that the investments are expected to produce more than $3.50 in benefits for every $1 in transmission-related costs, SPP said.
The study analyzed the value provided by 348 transmission upgrades that involved almost $3.4bn of capital investment.
Previous studies by SPP projected the expected future value of transmission construction based on forecast data, while the new study used actual historical operating data obtained during the first year of operation of SPP’s Integrated Marketplace to document transmission value already realized.
The Integrated Marketplace, which began March 1, 2014, is a day-ahead market with transmission congestion rights, a price-based operating reserves market, a real-time balancing market, virtual trading and a reliability unit commitment process, according to SPP.
While several large transmission projects in the study were not in service at the launch of the Integrated Marketplace, their value in the mid-to-late portion of 2014 is partially captured in the assessment and will continue into the future, the report noted.
The transmission additions examined include major Extra High Voltage (EHV) backbone projects that were approved with SPP’s Balanced Portfolio and Priority Projects studies. While their costs are significant, “their ‘bang for the buck’ in creating an effective, efficient network in the SPP footprint is also noteworthy,” SPP said.
SPP’s costs to install EHV backbone facilities were roughly one-third of the cost of projects being built and installed by other transmission system operators during the same time period, SPP said, using cost data from the Edison Electric Institute.
Transmission expansions provide system flexibility and versatility that facilitates efficient resource planning and economic transfers that are difficult to forecast in advance and hard to quantify, the report said.
“Most transmission projects pay for themselves in a matter of years and provide net benefits of up to hundreds of millions of dollars over their considerable lifespan,” SPP said.
The study determined power production cost benefits realized during actual operations resulting from the transmission enhancements placed in service between 2012 and 2014, with the operational models reflecting actual system conditions from March 2014 through February 2015. The Adjusted Production Cost (APC) savings were calculated at $240m per year, which was higher than planning model projections.
The study used a “re-run” of SPP’s day-ahead and real-time markets without the added transmission facilities for 40 representative days during the first year of operations for the Integrated Marketplace, comparing those results to actual market results, which provides more complete and accurate data on generation cost savings, SPP said.
In addition to fuel cost savings shown in the APC benefits, the study quantified other benefits associated with the transmission expansion upgrades, including reliability and resource adequacy benefits, generation capacity cost savings, reduced transmission losses, increased wheeling revenues and public policy benefits associated with more optimal wind power development facilitated by the transmission upgrades.
Some sources of additional value, such as environmental benefits, economic development benefits, lower costs of future transmission and “storm hardening,” which were either partially captured or excluded, have not been quantified, SPP said. The value of those benefits may be large, with some perhaps larger than those included in the study, the grid operator noted.
The report mentions examples of savings, such as Xcel Energy (NYSE:XEL) providing refunds to retail customers in Texas in September 2015 due to lower fuel and purchased power costs made possible by investments in SPP’s transmission system.
Also in September 2015, OGE Energy (NYSE:OGE) subsidiary Oklahoma Gas and Electric (OG&E) said its customers would see lower bills due to the benefits of SPP’s Integrated Marketplace, SPP said.
Among the transmission additions mentioned in the report are several 345-kV projects completed in 2Q14 in different areas of Kansas, Oklahoma and Texas, including the Woodward to Thistle project in Oklahoma, a 100-mile line built by OG&E, and the Great Plains project, a 122-mile, $300m project added in western Kansas by ITC Great Plains, in conjunction with Sunflower Electric Power and Mid-Kansas Electric.
The transmission enhancements in the study have enhanced access to generation from wind, solar and hydroelectric facilities, with wind power representing more than 13% of the generation mix in SPP at the end of 2015, compared with less than 1% in 2007, SPP noted.
“Transmission does more than just keep the lights on,” Nick Brown, president and CEO of SPP, said in a Jan. 26 statement. “It’s an enabling resource that paves the way for numerous benefits to our stakeholders and their customers.”
Three officials from The Brattle Group examined the study and included comments in the report, along with a few recommendations for further consideration by SPP.
Compared with transmission planning studies, the SPP analysis “provides a more accurate estimate of the total benefits that a more robust and flexible transmission infrastructure provides to power marketers, market participants and, ultimately, retail electric customers,” said the letter from Brattle officials Johannes Pfeifenberger, Judy Chang and Onur Aydin.
The value of the production cost savings in the SPP study likely is understated due to several factors, including that many of the major projects evaluated were not yet in service during most of the time period analyzed, the Brattle letter said.
Among the recommendations in the letter for future studies by SPP are that SPP select a time period where all transmission projects are in service, that it refine methodologies to estimate public policy benefits and that SPP strive to quantify some of the benefits not captured in the study. Examples in that latter category could include insurance benefits that stem from reduced exposure to high-cost events such as extreme weather conditions or generation and transmission outages, along with lower-cost options being available to comply with environmental rules.