Financing Transmission Expansion: Network Effects

Abstract

Transmission investment faces multifaceted problems. Not only do transmission lines face NIMBY or BANANAs (Build Absolutely Nothing Anywhere Near Anything) opposition, they are also resisted by those who face economic disbenefits other than those arising from proximity to the project (e.g., decreased property values and perceived health impacts). This further resistance comes from consumers and public officials located in areas that stand to lose from increased electricity prices that often accompany such projects. The resultant political conflict and legal wrangling can create indefinite delay in project implementation – even when the latter represent potential Pareto improvements over the status quo. This source of these problems is the geographically imbalanced distribution of project benefits, as discussed by Benjamin (2011). As in the earlier work, the author advances a two-part approach to financing transmission expansion consisting of a variable component, which provides essentially the same remuneration as an FTR, adjusted for lumpiness of transmission and a fixed component, as necessary, to compensate generation-pocket consumers, who would otherwise be left worse off by the imposition of the new line. This paper expands upon the previous analysis by considering the complications arising in a looped network. In particular, the paper demonstrates role of transmission congestion in creating differential impacts of a new line on spatially differentiated consumers and producers. This work then shows the implications these disparate impacts have for cost allocation for new transmission projects on the transmission pricing scheme proposed in the author’s former work.

Keywords: Looped Transmission Network, Two-part tariff, Transmission Expansion, FTRs, Transmission Congestion