(2) Strategic transmission planning
The design of new transmission investment is
a complex process and requires strategic planning. Specific challenges are: the uncertainty in
volume and location of future demand, the
coordination problem facing generation and network investors, and the large number of possible
transmission investments. These challenges can
be mitigated by strategic planning. Key characteristics of strategic planning include:
• Define the objectives of new transmission
investment. Transmission planning is more
effective when the objectives of new investment are clearly defined. These include reliability (security and adequacy of supply) and
economic efficiency (reduction in the total
cost per unit of output). Defining these criteria allows the benefits of new transmission
infrastructure to be measured.
• Estimate and compare the benefits of each
proposed investment. Cost-benefit analysis is
a key planning tool to identify proposals that
meet investment objectives. Reliability and
economic efficiency can be assessed with
electricity system modelling, and modelling
of multiple scenarios can help identify the
best possible infrastructure investments in
conditions of uncertainty. If available, locational pricing provides a clear signal of congestion costs and can substantiate the
economic benefits of new network
infrastructure.
• Consult all relevant stakeholders. As the
costs of investments are borne by network
users, they have incentives to ensure that only
the most valuable network infrastructure is
developed. Stakeholder consultation can elicit
views from generators, consumers (municipalities, consumer interest groups) and connected transmission and distribution systems
to inform the cost-benefit analysis.
(3) Appropriate level of locational pricing
Investing in networks efficiently requires an
understanding of current network congestion.
New network investments that relieve significant
network congestion are particularly valuable.
Many electricity systems operate a system of
uniform transmission pricing, which does not
signal network congestion. Under a system of
uniform pricing, the price of electricity is the
same at every network connection, regardless of
the degree of congestion. It does not signal the
need to invest in solutions to relieve network
congestion—such as new network investment,
generation or non-network alternatives to new
transmission assets, such as electricity storage
and demand-side response. While, in principle,
the system operator can signal the need to invest
through location-specific transmission charges,
the rate of these charges is difficult to determine
if the electricity price does not signal network
congestion. Furthermore, uniform pricing results
in redispatch costs, where a plant that is scheduled to generate is compensated for curtailment if
the network is congested.
Nodal pricing can help signal network congestion. Nodal pricing, or locational marginal
pricing, is a price mechanism that reflects the
cost of supplying additional electricity at a
specific network connection (node), given the
demand for electricity, transmission constraints
and options for local generation at that node.
When there is no network congestion, overall
demand is met at least cost and all nodal prices
are the same. When network congestion occurs,
demand is met by costlier local generation rather
than cheap generation from another node, raising
prices at congested nodes. Nodal pricing therefore signals the need to invest in solutions to
relieve network congestion, such as new network
investment, new local supply, and non-network
alternatives to new transmission assets, such as
electricity storage and demand-side response.
(1) Nodal pricing
Figure 32 provides a simple example of balancing an electricity system under nodal pricing. In
this example, a system operator balances a system of two cities interconnected with a
capacity-constrained transmission line under
nodal pricing. The numbers in green, blue and
purple are the inputs for the system operator’s
balancing problem. The numbers in red are the
outputs.
Special Report 1: A Study of China’s Energy Supply Revolution
93
The design of new transmission investment is
a complex process and requires strategic planning. Specific challenges are: the uncertainty in
volume and location of future demand, the
coordination problem facing generation and network investors, and the large number of possible
transmission investments. These challenges can
be mitigated by strategic planning. Key characteristics of strategic planning include:
• Define the objectives of new transmission
investment. Transmission planning is more
effective when the objectives of new investment are clearly defined. These include reliability (security and adequacy of supply) and
economic efficiency (reduction in the total
cost per unit of output). Defining these criteria allows the benefits of new transmission
infrastructure to be measured.
• Estimate and compare the benefits of each
proposed investment. Cost-benefit analysis is
a key planning tool to identify proposals that
meet investment objectives. Reliability and
economic efficiency can be assessed with
electricity system modelling, and modelling
of multiple scenarios can help identify the
best possible infrastructure investments in
conditions of uncertainty. If available, locational pricing provides a clear signal of congestion costs and can substantiate the
economic benefits of new network
infrastructure.
• Consult all relevant stakeholders. As the
costs of investments are borne by network
users, they have incentives to ensure that only
the most valuable network infrastructure is
developed. Stakeholder consultation can elicit
views from generators, consumers (municipalities, consumer interest groups) and connected transmission and distribution systems
to inform the cost-benefit analysis.
(3) Appropriate level of locational pricing
Investing in networks efficiently requires an
understanding of current network congestion.
New network investments that relieve significant
network congestion are particularly valuable.
Many electricity systems operate a system of
uniform transmission pricing, which does not
signal network congestion. Under a system of
uniform pricing, the price of electricity is the
same at every network connection, regardless of
the degree of congestion. It does not signal the
need to invest in solutions to relieve network
congestion—such as new network investment,
generation or non-network alternatives to new
transmission assets, such as electricity storage
and demand-side response. While, in principle,
the system operator can signal the need to invest
through location-specific transmission charges,
the rate of these charges is difficult to determine
if the electricity price does not signal network
congestion. Furthermore, uniform pricing results
in redispatch costs, where a plant that is scheduled to generate is compensated for curtailment if
the network is congested.
Nodal pricing can help signal network congestion. Nodal pricing, or locational marginal
pricing, is a price mechanism that reflects the
cost of supplying additional electricity at a
specific network connection (node), given the
demand for electricity, transmission constraints
and options for local generation at that node.
When there is no network congestion, overall
demand is met at least cost and all nodal prices
are the same. When network congestion occurs,
demand is met by costlier local generation rather
than cheap generation from another node, raising
prices at congested nodes. Nodal pricing therefore signals the need to invest in solutions to
relieve network congestion, such as new network
investment, new local supply, and non-network
alternatives to new transmission assets, such as
electricity storage and demand-side response.
(1) Nodal pricing
Figure 32 provides a simple example of balancing an electricity system under nodal pricing. In
this example, a system operator balances a system of two cities interconnected with a
capacity-constrained transmission line under
nodal pricing. The numbers in green, blue and
purple are the inputs for the system operator’s
balancing problem. The numbers in red are the
outputs.
Special Report 1: A Study of China’s Energy Supply Revolution
93