economic efficiency (reduction in the total
cost per unit 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 least regrets infrastructure
investment under 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 re-dispatch costs, where some plant that is
scheduled to generate is compensated for curtailment if the network is revealed to be
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 given
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. Nodal pricing is
briefly illustrated in Box 3.
Box 3: Nodal pricing
Figure 68 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.
In City A, generators can produce up to
150 MW. Generation costs $10/MWh.
Consumers demand 50 MW. In City B,
generators have 50 MW capacity. Generation costs $20/MWh. Consumers demand
90 MW, exceeding the local generation
capacity. Consumer demand in both cities
is price-inelastic. In other words, consumer
demand is constant and does not change
with price. The interconnection between
City A and City B can carry up to 80 MW.
Special Report 4: China’s Energy System Revolution
567
cost per unit 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 least regrets infrastructure
investment under 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 re-dispatch costs, where some plant that is
scheduled to generate is compensated for curtailment if the network is revealed to be
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 given
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. Nodal pricing is
briefly illustrated in Box 3.
Box 3: Nodal pricing
Figure 68 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.
In City A, generators can produce up to
150 MW. Generation costs $10/MWh.
Consumers demand 50 MW. In City B,
generators have 50 MW capacity. Generation costs $20/MWh. Consumers demand
90 MW, exceeding the local generation
capacity. Consumer demand in both cities
is price-inelastic. In other words, consumer
demand is constant and does not change
with price. The interconnection between
City A and City B can carry up to 80 MW.
Special Report 4: China’s Energy System Revolution
567