e-Highway 2050: A new multi-criteria cost-benefit methodology to compare new transmission investments

Challenge
How to define and to combine relevant indicators to quantify costs and benefits so as to compare transmission system investments at a 2050 time horizon?

Background and assumptions
Investment choices imply examining all possible options for achieving a given goal and sorting them in order to select the most promising one. Two alternative approaches are commonly used: cost-benefit analysis (CBA) and multi-criteria approaches (MCA). The former relies on economic indicators from which a single scoring parameter is drawn, whereas in the latter dimensionless values are combined with different weights. CBA is used more often for assessing infrastructural investments while MCA is preferred for analyses of projects in which social and environmental aspects are prevailing. The project choice was to implement a comprehensive CBA approach trying to appraise in monetary terms several aspects that are usually only investigated in a qualitative manner. A toolbox is also being implemented allowing to apply the proposed methodology in an automatic way and will be put available as a public deliverable of the project.

CBA approach in e-Highway2050
The proposed methodology for e-Highway2050 is a CBA approach completing existing approaches when dealing with long-distance trans-national transmission infrastructures. It enables scoring of investment alternatives for the European transmission grid by comparing simulation cases with and without network reinforcements.

Figure 1 below shows the main aspects of the CBA methodology.

Figure 1 - Relevant components included in the CBA methodology

Economic profitability indicators
- Lifecycle costs include all costs incurred during the life cycle of the transmission project, viz. by computing the NPV (net present value) including authorization expenses, asset capital expenses (CAPEX), installation/refurbishment expenses, operations and maintenance expenses (OPEX), decommissioning expenses, disposal net expenses.
- Social Welfare change (SW) resulting from transmission projects as the difference between the value of SW in the two scenarios “with” and “without” the studied set of reinforcements.
- Change of inter-zonal network losses due to a network reinforcement are evaluated by means of post-processing calculations.
- Change of CO2 emissions: costs for CO2 emission rights are implicitly accounted for within the generation cost curves adopted for the system simulations and monetized at the reference forecasts for emission trade prices at the targeted year: thus, their contribution has just to be unbundled from the overall SW figure to provide an evaluation of the potential benefit deriving from CO2 emission reduction due to the new transmission project.
- Further benefits from RES integrability: network reinforcement options lead to a more efficient exploitation of the generation capacity present in the system. This benefit is implicitly accounted for by an increase of the overall SW. However, the present transmission upgrade could allow hosting further RES generation, whose maximum hosting capacity could be appraised by a sensitivity analysis and an iterative approach on levels of installed RES capacity and thermal generation.
- Change of Social Welfare due to markets: CBA in transmission studies relies upon marginal cost pricing simulations for evaluating the economic benefits of potential transmission investment projects. However, neglecting the effect that generators’ strategic behavior (imperfect competition) may have on the overall system Social Welfare can lead to erroneous estimations of benefits. Actually, network reinforcements could result in an additional benefit for the system by reducing the potential for exercise of market power by incumbent generation companies and increasing overall SW. The methodology [1] includes the effect of price-cost markup on top of the market outcomes computed by assuming perfect competition: it is based on a regression analysis using historical values for the main EU countries allowing to quantify the correlations between some market variables and price-cost markup. This approach is similar to the one followed for market monitoring by the Californian ISO and proposed by [2].
- Distribution network investments: a gross estimation of the investments that could be necessary in the distribution network [1] as a consequence of the considered inter-zonal transmission reinforcements is provided by comparing the net power exchange of each cluster resulting from the economic operation of the system before and after transmission expansion. Demand Side Management and distributed storage effects are also considered.

Socio-environmental aspects
The main socio-environmental aspects to be considered for the assessment of the socio-environmental impacts for transmission systems are land use and public acceptance (other aspects include for instance real estate prices, biodiversity and landscape, human health and well-being). Land use values can be estimated with a quantification of the rights-of-way compensation costs by means of a five-step approach: (i) Create a land taxonomy; (ii) Collect values for the European countries; (iii) Analyze average characteristics of clusters borders based on the ground taxonomy; (iv) Use a “brown field approach” in case of long borders with variable characteristics (v) Assume infrastructure length according to inter-distance between clusters centers. Public acceptance has an impact on the implementation time of a new transmission infrastructure. Statistics for selected countries are collected and then typical values for extra delays are assumed depending on the category of network infrastructures.

System resilience and security of supply
- Reliability costs are estimated as the cost of service interruptions under normal conditions, i.e. the amount of Energy not Served (ENS) times the unit Value of Lost Load (VoLL).  VoLL levels are estimated here for all EU countries for a one-hour interruption per type of energy consumption and country.
- Resilience costs (service interruptions under extreme events). Here, the amount of ENS occurring as a result of an extreme event is calculated for each node which allows to compute the cost of the lack of resilience.
- “Reliability related” DSM costs (costs of mobilizing demand to preserve system security). The cost of DSM measures applied to avoid service interruptions is deemed equal to the cost for the system of interruptible contracts, or other reliability driven measures like regulating energy markets. It comprises the cost of procuring a load available to be interrupted if necessary and the cost of the use of this service. Both actions can be undertaken either through contracts or any reliability market scheme.

Financial and regulatory aspects
The interplay of regulation, financing and risk is at the heart of transmission network financing [5] and an integrated approach is necessary. The level of risk allocated to the firm by regulation design impacts the incentives and the market perception of the firm which translates into a specific cost of the capital provided by investors.

Individual systematic risks are identified, given equal weight and summed into a single overall systematic risk category. Typical asset beta values corresponding to each overall systematic risk category have been pre-identified by screening the cost of capital profiles in a European context [6]. Then the asset beta value, as representative of cost of capital, is selected by matching the target regulation and risk model with the corresponding overall systematic risk [7].

Assembling all the CBA indicators
An algebraic sum of benefits and costs is constructed since all CBA components are expressed in monetary terms. A scoring parameter can then be used for selecting one solution among several investment alternatives.

A classification of CBA indicators is provided, cf. Table 1 below.  Core indicators are the ones where a consolidated experience is available. Experimental indicators require further validation and assumptions due to a lack of data. Extra indicators are also given but not used in the CBA calculations since they provide additional information when performing sensitivity analyses.

Table 1 – Core, experimental and extra indicators
Sensitivity analyses are based upon the uncertainty over the different scenarios and possible modifications in the scoring due to a change in the reciprocal importance given to the costs and benefits.

Conclusions
A CBA toolbox has been developed as a public deliverable of the e-Highway2050 project to appraise the grid expansion architecture options for the 2050 time horizon, starting from the ENTSO-E 2020 planned network layout, for each of the five reference scenarios adopted by e-Highway2050.  

References 
[1] Rossi, S., Careri, F., Migliavacca, G., Özdemir, O., van Hout, M., “Linear Estimation Approach for Including Strategic Competition in Market Simulations”, 11th International Conference on the European Energy Market (EEM) May 2014
[2]  Sheffrin, A.Y., Chen, J., Hobbs, B.F., “Watching watts to prevent abuse of power”, IEEE power & energy magazine, July/August 2004
[3]  Losa, I., Bertoldi, O., “Regulation of continuity of supply in the electricity sector and cost of energy not supplied” International Energy Workshop 2009, June 2009. [Online]. 
[4]  Council of European Energy Regulators (CEER, 2010), “Guidelines of Good Practice on Estimation of Costs due to Electricity Interruptions and Voltage Disturbances” Ref: C10-EQS-41-03, December 2010. 
[5]  Rabensteiner, P., 2013, “Multi-Dimensional Risk and Investment Return in the Energy Sector: The Case of Electric Transmission Networks”.
[6] ACER, “On Incentives for Projects of Common Interest and on a Common Methodology for Risk Evaluation”, Technical paper,
[7] New South Wales Government, 2007, “Determination of Appropriate Discount Rates for the Evaluation of Private Financing Proposals”, Technical paper
[8]  G. Sanchis, RTE et alia, “A methodology for the development of the pan-European Electricity Highways System for 2050”, CIGRE Paris, August 2014  
[9]  B. H. Bakken, M. Paun, R. Pestana, G. Sanchis, “e-Highway2050: A Modular Development Plan on Pan- European Electricity Highways System for 2050”, Cigre Lisbon, April 2013

[1] “distribution” in the sense that it also includes all the levels of transmission voltage that are not considered in the e-Highway2050 project.