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The economics of planning electricity transmission to accommodate renewables: Using two-stage optimisation to evaluate flexibility and the cost of disregarding uncertainty

  • van der Weijde, Adriaan Hendrik
  • Hobbs, Benjamin F.

Aggressive development of renewable electricity sources will require significant expansions in transmission infrastructure. We present a stochastic two-stage optimisation model that captures the multistage nature of transmission planning under uncertainty and use it to evaluate interregional grid reinforcements in Great Britain (GB). In our model, a proactive transmission planner makes investment decisions in two time periods, each time followed by a market response. Uncertainty is represented by economic, technology, and regulatory scenarios, and first-stage investments must be made before it is known which scenario will occur. The model allows us to identify expected cost-minimising first-stage investments, as well as estimate the value of information, the cost of ignoring uncertainty, and the value of flexibility. Our results show that ignoring risk in planning transmission for renewables has quantifiable economic consequences, and that considering uncertainty can yield decisions that have lower expected costs than traditional deterministic planning methods. In the GB case, the value of information and cost of disregarding uncertainty in transmission planning were of the same order of magnitude (approximately £100M, in present worth terms). Further, the best plan under a risk-neutral decision criterion can differ from the best under risk-aversion. Finally, a traditional sensitivity analysis-based robustness analysis also yields different results than the stochastic model, although the former's expected cost is not much higher.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 6 ()
Pages: 2089-2101

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:6:p:2089-2101
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 358-387, November.
  2. Parail, V., 2009. "Can Merchant Interconnectors Deliver Lower and More Stable Prices? The Case of NorNed," Cambridge Working Papers in Economics 0947, Faculty of Economics, University of Cambridge.
  3. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
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  5. Robert J. Lempert & David G. Groves & Steven W. Popper & Steve C. Bankes, 2006. "A General, Analytic Method for Generating Robust Strategies and Narrative Scenarios," Management Science, INFORMS, vol. 52(4), pages 514-528, April.
  6. Pollitt, M.G., 2009. "Electricity Liberalisation in the European Union: A Progress Report," Cambridge Working Papers in Economics 0953, Faculty of Economics, University of Cambridge.
  7. Junhua Zhao & John Foster & ZY Dong & KP Wong, 2010. "Flexible transmission network planning considering distributed generation impacts," Energy Economics and Management Group Working Papers 8-2010, School of Economics, University of Queensland, Australia.
  8. Greene, Nathanael & Hammerschlag, Roel, 2000. "Small and Clean Is Beautiful: Exploring the Emissions of Distributed Generation and Pollution Prevention Policies," The Electricity Journal, Elsevier, vol. 13(5), pages 50-60, June.
  9. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 261-290, November.
  10. Parail, V., 2010. "Properties of Electricity Prices and the Drivers of Interconnector Revenue," Cambridge Working Papers in Economics 1059, Faculty of Economics, University of Cambridge.
  11. Hu, Ming-Che & Hobbs, Benjamin F., 2010. "Analysis of multi-pollutant policies for the U.S. power sector under technology and policy uncertainty using MARKAL," Energy, Elsevier, vol. 35(12), pages 5430-5442.
  12. van der Weijde, A.H. & Hobbs, B.F., 2011. "Planning electricity transmission to accommodate renewables: Using two-stage programming to evaluate flexibility and the cost of disregarding uncertainty," Cambridge Working Papers in Economics 1113, Faculty of Economics, University of Cambridge.
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