Valuing Electricity Transmission: The Case of Alberta

Abstract

Transmission economics remains a difficult area. Market forces alone are generally felt to be insufficient for signaling investment due to appropriability problems and the challenges of “parallel (loop) flow.” Further, there is no generally recognized method of estimating the value of transmission expansion. Here we extend the approach of Kleit and Reitzes (2008) to the nearly isolated electricity grid of Alberta, essentially eliminating the problems of parallel flow. With this model, we are able to determine the value of electricity flows to and from Alberta, as well as the transactions costs associated with those flows. We are also able to value the impact of transmission expansion in Alberta. We apply this model to a project currently being developed, the Montana-Alberta Tie Line (MATL). Depending on the relevant elasticity of supply, we find that the MATL owners will be able to appropriate between 80% and 96% of the societal value of their new transmission capacity. This high level of appropriability is in contrast to the conclusions of most of the literature in this area, suggesting that market forces may in some instances be effective in providing incentives for optimal transmission investmen.