Estimating the Value of Additional Wind and Transmission Capacity in the Rocky Mountain West

The expansion of wind generation in the United States poses significant challenges to policymakers. Of primary concern is how to optimally incorporate wind in the existing electricity-grid while maintaining power supply at low cost and high reliability. On the supply side, adding generation with the unique characteristics of wind power to the grid presents significant reliability and cost challenges. Wind's intermittency and unpredictability makes scheduling electricity sources in a reliable but efficient way challenging since electricity cannot be stored. To ensure reliability, backstop sources can be added to the grid for use when wind availability is low, but these large fixed capital investments are costly and using them primarily as a backstop ensures lower capital return and higher system costs than when the same technologies are used as primary generators. Transmission capacity and network congestion also limit wind development efforts. Location of wind resources often require new transmission capacity to deliver power to market. Without such capacity wind resources are restricted in their export potential, reducing the return to investment and welfare benefits of such renewable generation facilities. Wind's intermittency can also exacerbate problems of congestion on a transmission constrained grid. On the demand side, electricity demand is unresponsive to cost change, lacking both the information to react to cost conditions and the short-run flexibility with respect to power-use to meaningfully change an inelastic demand. Optimal policy-making with respect to development of wind energy and transmission resources requires some estimate of their costs and benefits, recognizing the stochastic nature of wind resources and transmission constraints on the dynamics of grid electricity cost. This requires a modeling framework that mimics the special nature of electricity markets. This paper attempts to inform such policy concerns by using a recursive optimization simulation model to estimate levels of generation across the two-state region and spanning seasonal variations. A dispatch model incorporates the stochastic aspects of wind generation on a grid with line loss and transmission constraints to estimate the value of additional transmission facilities and expanded wind resources in the Rocky Mountain region of the United States. The simulation model is used to estimate the value of newly built wind resources and planned transmission facilities in the Rocky Mountain Power Area (which includes the state of Colorado, along with most of Wyoming and portions of South Dakota and Nebraska). Price and welfare changes are estimated in these areas as new transmission and wind generation capacity is added to the system. The dispatch model is imbedded in a computable general equilibrium (CGE) model to estimate broader sectoral impacts and regional welfare changes. to estimate economy-wide production, employment, income, and welfare effects. Initial results indicate that the price effects caused by changes in power output at intermittent sources are strongly dependent on the demand conditions and the presence of market distortions caused by the transmission constraints. The peculiarity inherent in electric grid operation can generate responses to policies and congestion that are not always intuitive at the outset. The distribution of the rents accruing to wind generation, particularly in unexpectedly windy periods are strongly dependent on the allocation of transmission rights especially when congestion occurs, which impacts potential returns to developing wind resources. Incidents of congestion depend on the pace of development of transmission capacity. Not accounting for such distortions unique to the electricity grid may cause new development to worsen market outcomes in one region relative to another if mistaken estimates of benefits or costs lead to sub-optimal future development of wind and transmission facilities. Note from admin: see above Note from admin: see above