ECONOMIC TRANSMISSION PLANNING

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ECONOMIC TRANSMISSION PLANNING

Wholesale Market Subcommittee

March 22, 2006

CMWG Proposal #1

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Reject Project

Coalition Position• We agree that projects with a net present value (NPV) of Societal

Surplus (SS), which exceeds the NPV of the incremental transmission cost of service (TCOS) should be built

• However, in recognition of how transmission is paid for in ERCOT (i.e. REPs/loads pay), we believe that projects whose NPV of Consumer Surplus (CS), which exceeds the NPV of TCOS should also be built

• Proposed benefit metric:

NPV of SS > NPV of TCOS

NPV of CS > NPV of TCOS

Quantify SS & CS over life

of project

RPG Recommend Project Approval


Request of WMS• Vote to support the proposed metric, which appropriately identifies

and recommends projects with long-term system benefit (SS), as well as, near-term benefits to loads (CS)

Yes

No No

Yes

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Presentation Overview

• Utilized a two area system to examine a series of individual transmission upgrade proposals both incrementally (on a project by project basis) and cumulatively (as a set of projects)

• An example of a project that has negative Consumer Surplus, but positive Societal Surplus will be reviewed

• An example of a worthwhile project that passes both the Societal and Consumer Surplus test will be reviewed

• An example of a worthwhile project that passes only the Consumer Surplus will be reviewed

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Scenario1: Base Case

Generator Term DefinitionsEquiv. Hourly OOMC Start Cost ($/hr) – cost to start out of merit unit ($18k in this example) divided by total run hours (10 hrs in this example)

Running Cost ($/hr) – Output MW * Production Cost

Production Cost ($/hr) – Running Cost + Equiv. Hourly OOMC Start Cost

Generator Revenue ($/hr) – Output MW * Locational Marginal Price (LMP) at the bus + reimbursement for OOMC Start Cost

Generator Profit ($/hr) – Generator Revenue minus Production Cost

Load Term DefinitionsClear Price ($/MWh) – Load Zone LMP

Initial Cost ($) – Load MW * Load Zone LMP

Out Of Merit Uplift ($) – Equivalent Hourly OOMC Start Cost allocated to each Load Zone on a load ratio share (LRS) basis

Congestion Refund ($) – [Initial Cost + Out Of Merit Uplift] minus Generator Revenue, which is allocated to each Load Zone on a LRS basis

Final Cost ($) – Initial Cost minus Congestion Refund

Net Load Cost ($/MWh) – Final Cost by Load Zone divided by Load Zone MWs

Market Gas Cost ($/mmBtu) = 6.00

LMP ($/MWh) = 20.00 Delivered Load Cost ($/MWh)= 17.40 LMP ($/MWh) = 75.00 Total Load Cost ($/MWh)= 72.40

Generator W1 Generator E1Coal Fired Steam Gas Fired CCCTRange: 100 - 500 MW Output (MW) = 499 Range: 250 - 500 MW Output (MW) = 500Prod cost 20.00$ West-East INTERFACE Prod cost 47.00$

99

Load W 99 Load E400 MW 1000 MW

Generator W2 Generator E2Gas Fired CCCT Gas Fired STRange: 250 - 500 MW Output (MW) = 0 Range: 50 - 500 MW Output (MW) = 401Prod cost 45.00$ Prod cost = $75.00

Equiv. Hrly OOMC Start Cost = $1,800

Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction

CostGenerator Revenue

Generator Profit

Load (MW)

Clearing Price Initial Cost

Out of Merit Uplift

Congestion Refund Final Cost

LMP ($/MWh)

Delivered Cost

($/MWh)W1 499 0 9,980 9,980 9,980 - West 400 20.00 8,000 514 1,556 6,959 20.00 17.40W2 - 0 - - - - East 1000 75.00 75,000 1,286 3,889 72,396 75.00 72.40E1 500 0 23,500 23,500 37,500 14,000 E2 401 1,800 30,075 31,875 31,875 -

Total 1,400 1,800 63,555 65,355 79,355 14,000 Total 1,400 83,000 1,800 5,445 79,355 56.68

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

Generation Pocket Load Pocket

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Scenario 7: Completely De-Bottlenecked Upgrade SetMarket Gas Cost ($/mmBtu) = 6.00



699




Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction


Generator Profit

Load (MW)


Out of Merit Uplift


LMP ($/MWh)

Delivered Cost

($/MWh)W1 500 0 10,000 10,000 23,500 13,500 West 400 47.00 18,800 0 0 18,800 47.00 47.00W2 500 0 22,500 22,500 23,500 1,000 East 1000 47.00 47,000 0 - 47,000 47.00 47.00E1 400 0 18,800 18,800 18,800 - E2 - - - - - -

Total 1,400 0 51,300 51,300 65,800 14,500 Total 1,400 65,800 0 - 65,800 47.00

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

• Note: refer to the Appendix for a detailed project-by-project walk forward of successive projects that build serially upon one another to achieve the end state shown above

Generation Pocket Load Pocket

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Observations

• A project with a large Societal Surplus, but a Negative Consumer Surplus, is an indication that more upgrades are likely needed

• Project would be recommended if NPV of SS > NPV of TCOS

• 3 projects where the Societal Surplus consists entirely of Consumer Surplus• Each project would be recommended if NPV of SS > NPV of TCOS

• Project with substantially smaller Societal Surplus than Consumer Surplus• Without considering a Consumer Surplus metric this project may not be

funded leaving loads / REPs in a precarious situation

• Project with negligible Societal Surplus and negative Consumer Surplus• Loads / REPs shouldn’t be required to fund this project

Scenario #

Transfer Capability Increase

Production Cost

Producer Revenue

Producer Surplus

Consumer Surplus

Society Surplus

1 - - - - - -2 100 (3,025) 9,475 12,500 (9,475) 3,025 3 100 (3,000) (3,000) - 3,000 3,000 4 100 (3,000) (3,000) - 3,000 3,000 5 100 (3,000) (3,000) - 3,000 3,000

6 100 (2,028) (16,028) (14,000) 16,028 2,028 7 100 (2) 1,998 2,000 (1,998) 2

Incremental Project Summary

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Observations (cont.)

• It is important to look at the cumulative Societal & Consumer Surplus of the package of individual projects within a project set

• If the de-bottlenecking of a constraint is stopped too soon, the loads / REPs will be left paying for a set of upgrades without recognizing a fair return for their investment

• This example illustrates that projects up through Scenario 6 should be approved to properly treat the loads / REPs who are funding the project(s)

Scenario #

Transfer Capability Increase

Production Cost

Producer Revenue

Producer Surplus

Consumer Surplus

Society Surplus

1 - - - - - -2 100 (3,025) 9,475 12,500 (9,475) 3,025 3 100 (6,025) 6,475 12,500 (6,475) 6,025 4 100 (9,025) 3,475 12,500 (3,475) 9,025 5 100 (12,025) 475 12,500 (475) 12,025 6 100 (14,053) (15,553) (1,500) 15,553 14,053 7 100 (14,055) (13,555) 500 13,555 14,055

Cummulative Project Summary

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Conclusion• We have illustrated:

– Why the potential concern of approving a project based on Societal Surplus benefits, but has negative Consumer Surplus is a non issue. It means that more upgrade projects are still needed

– How it is necessary to approve projects based on Consumer Surplus even if Societal Surplus alone doesn’t justify it. This is necessary to allow loads to recognize a fair & timely return on their transmission upgrade investments

Request of WMS• Approve the proposed economic benefit metric shown below:

Reject Project

NPV of SS > NPV of TCOS

NPV of CS > NPV of TCOS

Quantify SS & CS over life

of project



Yes

No No

Yes

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APPENDIX

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Scenario1: Base Case

Generator Term DefinitionsEquiv. Hourly OOMC Start Cost ($/hr) – cost to start out of merit unit ($18k in this example) divided by total run hours (10 hrs in this example)

Running Cost ($/hr) – Output MW * Production Cost

Production Cost ($/hr) – Running Cost + Equiv. Hourly OOMC Start Cost

Generator Revenue ($/hr) – Output MW * Locational Marginal Price (LMP) at the bus + reimbursement for OOMC Start Cost

Generator Profit ($/hr) – Generator Revenue minus Production Cost

Load Term DefinitionsClear Price ($/MWh) – Load Zone LMP

Initial Cost ($) – Load MW * Load Zone LMP

Out Of Merit Uplift ($) – Equivalent Hourly OOMC Start Cost allocated to each Load Zone on a load ratio share (LRS) basis

Congestion Refund ($) – [Initial Cost + Out Of Merit Uplift] minus Generator Revenue, which is allocated to each Load Zone on a LRS basis

Final Cost ($) – Initial Cost minus Congestion Refund

Net Load Cost ($/MWh) – Final Cost by Load Zone divided by Load Zone MWs

Market Gas Cost ($/mmBtu) = 6.00



99




Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction


Generator Profit

Load (MW)


Out of Merit Uplift


LMP ($/MWh)

Delivered Cost

($/MWh)W1 499 0 9,980 9,980 9,980 - West 400 20.00 8,000 514 1,556 6,959 20.00 17.40W2 - 0 - - - - East 1000 75.00 75,000 1,286 3,889 72,396 75.00 72.40E1 500 0 23,500 23,500 37,500 14,000 E2 401 1,800 30,075 31,875 31,875 -

Total 1,400 1,800 63,555 65,355 79,355 14,000 Total 1,400 83,000 1,800 5,445 79,355 56.68

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

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Scenario 2: Upgrade Transfer Capability by 100 MWMarket Gas Cost ($/mmBtu) = 6.00



199




Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction


Generator Profit

Load (MW)


Out of Merit Uplift


LMP ($/MWh)

Delivered Cost

($/MWh)W1 500 0 10,000 10,000 22,500 12,500 West 400 45.00 18,000 514 1,706 16,809 45.00 42.02W2 99 0 4,455 4,455 4,455 - East 1000 75.00 75,000 1,286 4,264 72,021 75.00 72.02E1 500 0 23,500 23,500 37,500 14,000 E2 301 1,800 22,575 24,375 24,375 -

Total 1,400 1,800 60,530 62,330 88,830 26,500 Total 1,400 93,000 1,800 5,970 88,830 63.45

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

Production Cost

Generator Revenue

Producer Surplus

Consumer Surplus

Society Surplus

From Previous (3,025) 9,475 12,500 (9,475) 3,025From Base (3,025) 9,475 12,500 (9,475) 3,025

Change in

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Scenario 3: Upgrade Transfer Capability by 200 MW Market Gas Cost ($/mmBtu) = 6.00



299




Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction


Generator Profit

Load (MW)


Out of Merit Uplift


LMP ($/MWh)

Delivered Cost


Total 1,400 1,800 57,530 59,330 85,830 26,500 Total 1,400 93,000 1,800 8,970 85,830 61.31

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

Production Cost

Generator Revenue

Producer Surplus

Consumer Surplus

Society Surplus

From Previous (3,000) (3,000) 0 3,000 3,000From Base (6,025) 6,475 12,500 (6,475) 6,025

Change in

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399




Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction


Generator Profit

Load (MW)


Out of Merit Uplift


LMP ($/MWh)

Delivered Cost


Total 1,400 1,800 54,530 56,330 82,830 26,500 Total 1,400 93,000 1,800 11,970 82,830 59.16

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

Production Cost

Generator Revenue

Producer Surplus

Consumer Surplus

Society Surplus

From Previous (3,000) (3,000) 0 3,000 3,000From Base (9,025) 3,475 12,500 (3,475) 9,025

Change in

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499




Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction


Generator Profit

Load (MW)


Out of Merit Uplift


LMP ($/MWh)

Delivered Cost

($/MWh)W1 500 0 10,000 10,000 22,500 12,500 West 400 45.00 18,000 514 4,277 14,237 45.00 35.59W2 399 0 17,955 17,955 17,955 - East 1000 75.00 75,000 1,286 10,693 65,593 75.00 65.59E1 500 0 23,500 23,500 37,500 14,000 E2 1 1,800 75 1,875 1,875 -

Total 1,400 1,800 51,530 53,330 79,830 26,500 Total 1,400 93,000 1,800 14,970 79,830 57.02

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

Production Cost

Generator Revenue

Producer Surplus

Consumer Surplus

Society Surplus

From Previous (3,000) (3,000) 0 3,000 3,000From Base (12,025) 475 12,500 (475) 12,025

Change in

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599




Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction


Generator Profit

Load (MW)


Out of Merit Uplift


LMP ($/MWh)

Delivered Cost

($/MWh)W1 500 0 10,000 10,000 22,500 12,500 West 400 45.00 18,000 0 342 17,658 45.00 44.14W2 499 0 22,455 22,455 22,455 - East 1000 47.00 47,000 0 856 46,144 47.00 46.14E1 401 0 18,847 18,847 18,847 - E2 - - - - - -

Total 1,400 0 51,302 51,302 63,802 12,500 Total 1,400 65,000 0 1,198 63,802 45.57

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

Production Cost

Generator Revenue

Producer Surplus

Consumer Surplus

Society Surplus

From Previous (2,028) (16,028) (14,000) 16,028 2,028From Base (14,053) (15,553) (1,500) 15,553 14,053

Change in

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699




Generators Loads

Gen NameOutput

MW

Ouf Of Merit Start

CostRunning

CostProduction


Generator Profit

Load (MW)


Out of Merit Uplift


LMP ($/MWh)

Delivered Cost

($/MWh)W1 500 0 10,000 10,000 23,500 13,500 West 400 47.00 18,800 0 0 18,800 47.00 47.00W2 500 0 22,500 22,500 23,500 1,000 East 1000 47.00 47,000 0 - 47,000 47.00 47.00E1 400 0 18,800 18,800 18,800 - E2 - - - - - -

Total 1,400 0 51,300 51,300 65,800 14,500 Total 1,400 65,800 0 - 65,800 47.00

Limit (MW) =

Flow (MW) =

West Node East Node

~

~ ~

~

Production Cost

Generator Revenue

Producer Surplus

Consumer Surplus

Society Surplus

From Previous (2) 1,998 2,000 (1,998) 2From Base (14,055) (13,555) 500 13,555 14,055

Change in

ECONOMIC TRANSMISSION PLANNING

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