developers of transmission projects. If locational
pricing is implemented, a merchant transmission
investor has the incentive to invest in a new
transmission link when the revenues from use of
that link are greater than the investment cost.
Therefore, in principle, merchant competition
offers the potential to increase the adequacy of
the transmission infrastructure by investing
where an incumbent is not willing to do so. This
might be the case if the incumbent is an unregulated monopoly or poorly regulated TSO.
Other attractive properties of the merchant
model are the ability to include non-network
alternatives to new transmission assets in planning processes, reduce the risk for consumers and
minimise investment costs. In liberalised power
markets, potential merchant transmission investors could invest in new transmission capacity or
enter the generation market to supply local generation to a node that is served by a congested
transmission link. Investment risk is transferred
from regulated transmission owners and consumers to the merchant. As the merchant is the
beneficiary of any cost saving, construction costs
may also be minimised.
However, merchant investment alone is
insufficient to ensure overall adequacy of the
network, underscoring the importance of a
well-designed institutional model. Transmission
investments exhibit economies of scale, where
large capacity investments carry only a small cost
premium relative to small investments. As large
capacity investments offer significant additional
benefits at little additional cost, they are socially
desirable; however, as these additional benefits
are reflected in lower locational prices (due to
lower congestion), they are less desirable for
private investors. In this setting, merchants will
tend to underinvest in new network capacity.
Alternatively, with an ISO institutional model,
the ISO can also ensure overall network adequacy by planning new network capacity and
delivering new investment at minimal cost by
running competitive tendering processes.
Merchant transmission investments have been
implemented in the USA, Australia and Argentina. In the USA, merchant investment is promoted by the Federal Energy Regulatory
Commission (FERC) Order 1000, and several
projects are in progress or have been completed
in recent years. Nearly all merchant-led investments have been on interconnectors, that is, links
between separate networks. Here merchants
alleviate coordination and cost allocation issues
between different system operators.
2.2.7 Network Arrangements
to Address Future
Challenges
This section discusses new network arrangements
to address the future changes brought on by
decarbonisation and decentralisation. They are:
• Strategic generation zones: Strategic generation zones coordinate investment in transmission and generation assets and connect
remote renewable energy resources to large
population centres.
• Markets for flexibility services: Flexible
resources, such as electricity storage and
demand response, can be a substitute for new
network investment, as well as providing a
range of different system services. A simple
set of markets for each system service can
reward flexible resources and avoid
underinvestment.
• System for controlling decentralised resources: While distribution networks today are
largely passive (one-directional flow between
the transmission system and the end user),
they will need to become active (distributing
power from various sources and bidirectional)
to accommodate distributed resources. Distributed resources increase the complexity of
the electricity system. If the system is too
complex for a single system operator to balance, a hierarchy of resource control will be
needed, with intermediaries such as virtual
power plants and distribution system operators interacting with the transmission system
operator. The hierarchy of resource control
may reflect computational requirements,
institutional characteristics or operational
vulnerability.
• Coordinated investment in decentralised
resources: Investment in generation and
Special Report 1: A Study of China’s Energy Supply Revolution
95
pricing is implemented, a merchant transmission
investor has the incentive to invest in a new
transmission link when the revenues from use of
that link are greater than the investment cost.
Therefore, in principle, merchant competition
offers the potential to increase the adequacy of
the transmission infrastructure by investing
where an incumbent is not willing to do so. This
might be the case if the incumbent is an unregulated monopoly or poorly regulated TSO.
Other attractive properties of the merchant
model are the ability to include non-network
alternatives to new transmission assets in planning processes, reduce the risk for consumers and
minimise investment costs. In liberalised power
markets, potential merchant transmission investors could invest in new transmission capacity or
enter the generation market to supply local generation to a node that is served by a congested
transmission link. Investment risk is transferred
from regulated transmission owners and consumers to the merchant. As the merchant is the
beneficiary of any cost saving, construction costs
may also be minimised.
However, merchant investment alone is
insufficient to ensure overall adequacy of the
network, underscoring the importance of a
well-designed institutional model. Transmission
investments exhibit economies of scale, where
large capacity investments carry only a small cost
premium relative to small investments. As large
capacity investments offer significant additional
benefits at little additional cost, they are socially
desirable; however, as these additional benefits
are reflected in lower locational prices (due to
lower congestion), they are less desirable for
private investors. In this setting, merchants will
tend to underinvest in new network capacity.
Alternatively, with an ISO institutional model,
the ISO can also ensure overall network adequacy by planning new network capacity and
delivering new investment at minimal cost by
running competitive tendering processes.
Merchant transmission investments have been
implemented in the USA, Australia and Argentina. In the USA, merchant investment is promoted by the Federal Energy Regulatory
Commission (FERC) Order 1000, and several
projects are in progress or have been completed
in recent years. Nearly all merchant-led investments have been on interconnectors, that is, links
between separate networks. Here merchants
alleviate coordination and cost allocation issues
between different system operators.
2.2.7 Network Arrangements
to Address Future
Challenges
This section discusses new network arrangements
to address the future changes brought on by
decarbonisation and decentralisation. They are:
• Strategic generation zones: Strategic generation zones coordinate investment in transmission and generation assets and connect
remote renewable energy resources to large
population centres.
• Markets for flexibility services: Flexible
resources, such as electricity storage and
demand response, can be a substitute for new
network investment, as well as providing a
range of different system services. A simple
set of markets for each system service can
reward flexible resources and avoid
underinvestment.
• System for controlling decentralised resources: While distribution networks today are
largely passive (one-directional flow between
the transmission system and the end user),
they will need to become active (distributing
power from various sources and bidirectional)
to accommodate distributed resources. Distributed resources increase the complexity of
the electricity system. If the system is too
complex for a single system operator to balance, a hierarchy of resource control will be
needed, with intermediaries such as virtual
power plants and distribution system operators interacting with the transmission system
operator. The hierarchy of resource control
may reflect computational requirements,
institutional characteristics or operational
vulnerability.
• Coordinated investment in decentralised
resources: Investment in generation and
Special Report 1: A Study of China’s Energy Supply Revolution
95