Abstract
Government led reforms of the electric industry have taken place in the United States of America (USA) since the 1990s. The restructuring of the industry was concerned with changing the system historically treated as a natural monopoly to a free market industry. The generation and the distribution segments of the system were opened to competition. Transmission services, because of its characteristics, stayed as a monopoly under regulation. While the generation and distribution sectors were thus flourishing under the reforms, the transmission sector experienced a shortfall in necessary investment because it lacked incentives for development. The system has become congested in various areas as growth in electricity demand and investment in new generation facilities have not been matched by investment in new transmission facilities.
This paper was originally published as: Rosellón, J., Mysíková, Z., and E. Zenón (2011), Incentives for transmission investment in the PJM electricity market: FTRs or regulation (or both?). Utilities Policy January 2011, 3–13. We thank Jeff Pavlovic for valuable help with data processing, and Hannes Weigt for helpful comments. Juan Rosellón acknowledges support from Pieran_Colegio de México, the Alexander von Humboldt Foundation, and Conacyt (p. 60334). The usual disclaimer applies.
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Notes
- 1.
- 2.
PJM is an abbreviation for the region operated by PJM Interconnection. The letters P-J-M represent names of its three original principal member states: Pennsylvania, New Jersey and Maryland.
- 3.
Apart from the three main approaches, usually one more is mentioned in the literature. This approach defines optimal expansion of the transmission network according to the strategic behavior of generators, and considers conjectures made by each generator on other generators’ marginal costs due to the expansion. It explicitly models the existing interdependence of generation investment and transmission investment. However, it also relies on a transportation model with no network loop flows.
- 4.
The model reconciles allocative, productive and even distributive efficiencies as well as promotes convergence to Ramsey prices. Likewise, the expansion process is incentivated since, with the use of the mechanism, the expected revenues from expanding the network become greater than or equal to the revenues from keeping the network congested. Convergence to a “congestion” equilibrium –where the marginal cost of expanding the network equals the congestion cost of not adding an additional unit of capacity – is also achieved (see Crew et al. 1995; Vogelsang 2001; Hogan et al. 2010).
- 5.
For example in PJM area, New England, New York or California.
- 6.
Joskow (2005b) argues that states in the USA have a variety of different views on the desirability of transitioning to competitive wholesale and retail electricity markets, and that there are has no clear and coherent national laws that adopt a competitive wholesale and retail market model as national policy.
- 7.
The values correspond to the year 2000 (Department of Energy, Energy Information Administration 1).
- 8.
In the New York Independent System Operator (NYISO)’s region FTRs are also known as long-term transmission rights or firm transmission rights.
- 9.
All or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia.
- 10.
After establishing competition in wholesale markets in the USA, PJM was the first largest wholesale competitive operating market in the world. Currently it is one of the biggest Operators in the USA together with NYISO, New England ISO, California ISO, and the Midwest ISO (MISO).
- 11.
It is also responsible for maintaining the integrity of the regional power grid and for managing a regional planning process for generation expansion needed to ensure the reliability of the electric system (PJM Interconnection).
- 12.
The administrated energy markets consist of real time and day-ahead markets.
- 13.
Also the financial trading hubs, bilateral markets, day-ahead markets, real-time markets, ancillary services and installed capacity.
- 14.
The ten hubs for which PJM posts prices are: AEP Gen (all generator buses in AEP), AEP-Dayton (all buses in AEP and Dayton), Chicago Gen, Chicago, Eastern, N Illinois, New Jersey, Ohio, West Int., and Western.
- 15.
Parallel to FTRs, another tool exists on FTR markets – it is called an Auction Revenue Right (ARR). ARRs are allocated annually and provide their holders with revenue based on locational price difference between ARR sources and sink determined in the annual FTR auction (see Frayer et al. 2007).
- 16.
The critical congestion area is defined as a place where it is critically important to remedy existing or growing congestion problems because the current and/or projected effects of the congestion are severe. In these locations of the network it has frequently been necessary to interrupt electric transactions or redirect electricity flows because the existing transmission capacity was insufficient to deliver the desired energy without compromising grid reliability (US Department of Energy 2006, p. 21).
- 17.
The nodal prices reflect the described congestion problem for the west-east deliveries. For instance, at the western AEP-Dayton hub the nodal price in given moment in 2005 was $46/MWh while at PJM Eastern Hub it was $66/MWh at the same time (PJM Interconnection 2006, and PJM Summer 2007, Reliability Assessment).
- 18.
The other components of the average weighted nodal price are the price corresponding to generating NOx, SO 2 , VOM and markup.
- 19.
- 20.
Wilson (2002) defines two possible structures for an ISO: a centralized structure and a decentralized structure. Generally speaking, in the former structure the ISO coordinates the equilibrium of the various electricity markets as a central planner, while the latter approach would reach such equilibrium in a sequential way through the free participation of economic agents. No electricity market has been proven to work in practice under a decentralized ISO.
- 21.
The idea that the throughput has to reach the capacity upper limit of the line to be congested is simplified. In reality, an important factor in congestion is also the susceptance of the transmission lines. Certain susceptance of a line can cause the line to be a source of congestion even though the throughput in the line has not reached the upper limit capacity of the line. This is considered in the constraints of the lower level problem.
- 22.
The model relaxes from an auction FTR price setting and the distribution of FTRs to the specific market participants.
- 23.
Rosellón and Weigt (2008) use this approach in order to obtain a more straightforward expression of the consumer rent and generators’ rent.
- 24.
The analysis assumes a closed area with a closed system of transmission lines. While in reality PJM trades energy to NYISO to the north, MISO to the west, and also to states in the south, congestion linked to these exchanges is not considered in the topology.
- 25.
The decision to assign one node to each zone comes from the fact that each utility owner within the region of PJM is given monopoly over the zone where it operates.
- 26.
The original PJM-West region was modified for the purpose of the simulation. First, it excludes the territory nowadays corresponding to Virginia Electric and Power Company which was added to PJM Interconnection in 2004 under the name of “Dominion Power”. This territory is considered neither in the topology (and consequently nor in the simulation) because the data base does not include it. Second, given that the analysis is for a closed area only (so as to preserve integrity of the topology and avoid bias of results), the zone corresponding to Commonwealth Edison Company – which is a part of PJM-West situated in the state Illinois – is excluded from the data set. The exclusion was made because the zone has stronger transmission connections and commerce with zones which are parts of different ISOs’ regions, and does not have common frontiers with any part of the remainder area of PJM.
- 27.
We only consider in this paper the case where new capacity can only be added to already existing transmission lines.
- 28.
Weights for each level of marginal cost are settled according to the proportion of the maximum generating potential of each plant type within the node.
- 29.
The value of the depreciation factor is taken from Rosellón and Weigt (2008). Twenty years are supposed to represent the depreciation time of assets in electricity markets and 8% represent an investment with rather low risk. For simplification, we do not account for inflation or efficiency factors within the Transco’s price cap.
- 30.
As the values are obtained in hours, the Transco’s revenue is multiplied by 8,760 for each period so as to represent yearly income.
- 31.
The benevolent ISO case is obtained from the maximization problem:
\( \mathop{\max}\limits_{d,g}\quad W=\sum\limits_{i,t } {\left( {\int\limits_0^{d* } {{p_i}(d_i^t)} \mathrm{ d}d_i^t} \right)} -\sum\limits_{i,t } {m{c_i}g_i^t} -\sum\limits_{i,j } {c\left( {k_{{^{ij}}}^t} \right)} \), subject to the restrictions in the lower level problem.
- 32.
The peak demand values were obtained adjusting the original demand data according to the February 2006 peak values reported in “PJM Summer 2007 Reliability Assessment (2007)” for the zones at PJM Classic.
- 33.
However, a comparison with the results for 17-node PJM topology should be made with precaution as there are some significant differences between the cases. The PJM Classic topology does not include three nodes with quite high demands and generation potential. Another important detail is that it is tested for demand in different periods of the year and day.
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Appendix
Appendix
15.1.1 PJM Classic: Peak Demand Testing
The second data set includes the zones which comprised PJM prior to 2006, referred to by the term “PJM Classic”. It takes account of the PJM region after the establishment of a competitive wholesale power market and before it expanded, when its operating territory consisted of eastern Pennsylvania, New Jersey, and part of Maryland, Delaware and District of Columbia. Figure 15.5 represents the simplified topology of the transmission network of PJM-Classic which has 14 nodes, and 26 transmission lines connecting the nodes.
Topology of PJM Classic region (Source: Own elaboration with information from PJM Interconnection)
Compared to the 17-node PJM region, this data sample excludes the zones corresponding to nodes 15, 16 and 17. The PJM Classic topology is used in order to test the mechanism facing a peak demand conditions.Footnote 32 If not specified differently, the starting conditions and all the details of the simulation are the same as in the case of simulation of the mechanism for 17-node PJM topology.
The results of nodal price development are shown in Fig. 15.6. In Table 15.6, the welfare properties results are specified.
Price development for PJM Classic region (Source: Own elaboration)
The general results are the same for both topologies – the nodal prices converge to an equilibrium level after the first six periods of the transmission network expansion. However, when comparing the welfare properties of the mechanism for the simulation of the peak demand, the results are more pronounced, highlighting the power of the mechanism. The average nodal price is almost 36 % lower after the mechanism is applied, the transmission network capacity is doubled compared to the first period, and both consumer and producer surplus increase. The price fall is steeper and, given that the demand is higher, the consumers’ surplus increase is higher than in the case of 17-node PJM case.Footnote 33 The congestion rent after the 20 periods of simulation decreases to 16 % of its original level.
In general, the welfare properties in case of higher demand are expected to be more pronounced as the need for transmission network expansion in the network that suffers high levels of congestion could be higher.
15.1.2 PJM Zones
Map of PJM region and the utilities operating in each zone in the year 2008 (The map was obtained from PJM Interconnection (http://www.pjm.com). The correspondence with the abbreviations used in the topology are the following: AE Atlantic City Electric, BC Baltimore Gas and Electric Company, DELM Delmarva Light and Power Company, JC_N Jersey Central Power and Light Company (North), JC_S Jersey Central Power and Light Company (South), ME Metropolitan Edison Company, PE PECO Energy Company, PEP Potomac Electric Power Company, PL and PN Pennsylvania Electric Company, PS_N Pennsylvania Electric Company (North), PS_S Pennsylvania Electric Company (South), UGI Public Service Electric and Gas Company.) (Source: PJM Interconnection)
Fixed fee development (Source: Own elaboration)
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Rosellón, J., Myslíková, Z., Zenón, E. (2013). Incentives for Transmission Investment in the PJM Electricity Market: FTRs or Regulation (or Both?). In: Rosellón, J., Kristiansen, T. (eds) Financial Transmission Rights. Lecture Notes in Energy, vol 7. Springer, London. https://doi.org/10.1007/978-1-4471-4787-9_15
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