Transmission Asset Investment in Electricity Markets Javier Contreras 1 and George Gross 2 Abstract: We construct a general analytic framework for the transmission network investment problem in the market environment and demonstrate its application to some test systems. We define a set of metrics to quantify the improvement attained in terms of welfare for all the participants and make use of them in the evaluation of the impacts of new transmission investments under competition. The proposed metrics are useful to the central entity responsible for transmission planning to provide meaningful measures of the effects of a modification in the grid over the planning horizon. The proposed framework is particularly useful to transmission network planners to support desired environmental targets. The analysis of the effects of new investments on the participants affected by the expansion includes the assessment of appropriate environmental attributes. The consistency of the measured values in terms of these metrics allows the comparison of disparate transmission investment projects and their effective prioritization. A key element of the framework is the deployment of an optimization scheme to maximize the social welfare with and without the transmission asset investments under various bidding behaviors of the market players and contracting conditions. We report the application of the proposed framework to investigate several transmission expansion scenarios on the IEEE 24-bus reliability test system network. The results on both pool-based markets and combined pool-bilateral contract markets provide a good illustration of the capability of the framework to effectively address realistic questions in transmission investment. DOI: 10.1061/ASCE0733-94022009135:355 CE Database subject headings: Investments; Planning; Assets; Grid systems; Electric power supply; Public welfare. Introduction In the prerestructuring times, grid operations and planning were in the hands of the centralized entities that owned the grid as well as the generation and distribution facilities under a vertically in- tegrated structure. However, the introduction of open access, the growth of competitive electricity markets and the unbundling of the electricity business have raised new challenges that the re- structured industry must face. The restructuring of the electricity industry has resulted in the advent of many new players, such as brokers, marketers, and independent power producers. A key as- pect of restructuring is the creation of new structures, such as the independent grid operator IGO, and the separation of the control and operation of the grid from its ownership. We use the generic term IGO to refer to the entities called transmission system op- erators, independent system operators, and regional transmission organizations. These entities have the responsibility for regional planning in addition to ensuring reliable system operations and, in some cases, market operations. A salient characteristic of the new structure is the decentralized decision making. One critically im- portant outcome of the restructuring is the more frequent stressing of the transmission grid due to the creation of congestion situa- tions. Congestion impacts market players in many different ways. Congestion may prevent the use of lower-priced generators to meet the load and consequently may result in a generation/ demand schedule with higher total costs and losses of market efficiency. Also, congestion facilitates the opportunities to exer- cise market power through gaming by some players to increase their profits. A key requirement, therefore, is to have appropriate metrics to meaningfully measure the congestion impacts in power/energy and monetary terms. In the planning of new trans- mission asset additions, the reduction of congestion plays a key role. But, the objectives of market efficiency increase and social welfare maximization compete with those of the individual mar- ket players and of the investors. A key complication is that each market participant may be differently affected, faring better or worse as a result of congestion relief under the new investments. Network expansion is a rather complex, multiperiod, and mul- tiobjective optimization problem Rosellón 2003; Sauma and Oren 2007. Its nonlinear nature and the inherent uncertainty of future developments constitute major complications. Under the vertically integrated structure, the construction of new transmis- sion facilities has been associated with the addition of new gen- erating resources and their integration into the existing network. This was done under the strong control exerted by the regulators over virtually every aspect of the regulated utility’s activities. In the case of transmission asset investments, the planning objec- tives were, typically, simplified to the minimization of total costs. Under the new paradigm, the electricity markets, given the result- ing prices and congestion metrics, need to be considered side-by- side with the economics of investment in the new assets. The fact that this is carried out in an environment of regulatory and legis- lative uncertainty and with the operational control of the facilities being vested in hands different than the ownership adds further complications. There are various mathematical models used for solving the 1 Associate Professor, Dept. of Applied Mechanics and Project Engi- neering, Univ. of Castilla-La Mancha, 13071 Ciudad Real, Spain corre- sponding author. E-mail: javier.contreras@uclm.es 2 Professor, Dept. of Electrical and Computer Engineering, Univ. of Illinois at Urbana-Champaign, Urbana, IL 61801. E-mail: gross@ illinois.edu Note. This manuscript was submitted on June 6, 2008; approved on May 7, 2009; published online on August 14, 2009. Discussion period open until February 1, 2010; separate discussions must be submitted for individual papers. This paper is part of the Journal of Energy Engineer- ing, Vol. 135, No. 3, September 1, 2009. ©ASCE, ISSN 0733-9402/2009/ 3-55–63/$25.00. JOURNAL OF ENERGY ENGINEERING © ASCE / SEPTEMBER 2009 / 55 Downloaded 01 Sep 2009 to 161.67.25.34. Redistribution subject to ASCE license or copyright; see http://pubs.asce.org/copyright