A Mechanism for Allocating Benefits and Costs from Transmission Interconnections under Cooperation: A Case Study of the North Sea Offshore Grid.

• Author: Kristiansen, Martin
• Position: Report - Statistical table

1. INTRODUCTION

Many countries in the European Union (EU) plan to incorporate large shares of electricity supply from renewable energy technologies--particularly solar and wind power--in the coming decades (ECF, 2011). Unlike conventional generation technologies, the variability and unpredictability of renewable resources result in higher needs for flexibility in order to maintain the reliability of a power system (Denholm and Hand, 2011). One source of flexibility is the possibility of balancing distinct generation resources and demand across large geographical areas through high-voltage transmission lines (Munoz et al., 2012; Konstantelos and Strbac, 2015). Distant wind farms, for instance, can present synergistic effects by geographic diversification (Hasche, 2010), which can reduce the need for other sources of flexibility such as storage and fast-ramping generation units.

Transmission interconnections are one way to capture the benefits from the spatial diversification of resources. They can also result in economic and environmental benefits from avoided fuel costs, postponement of local generation investments and transmission reinforcements, and reductions in aggregate carbon emissions due to power exchange (UN, 2006). For these reasons, the EU Commission has identified the North Sea Offshore Grid (NSOG) as one of the strategictrans-European energy infrastructure priorities in the EU Regulation No 347/2013 (EUL, 2013). In a recent study, Strbac et al. (2014) estimate that the aggregate economic benefits from the NSOG are between [euro]8bn and [euro]40bn depending on the level of coordination that participant countries will achieve.

In practice, achieving a cost-effective portfolio of transmission developments for a NSOG from a system-wide perspective can be quite challenging since there is no centralized authority with the legal power to force countries to accept the proposed plan. The latest development plan by the European Network of Transmission System Operators for Electricity (ENTSO-E), an organization that promotes cooperation across Europe's Transmission System Operators (TSOs), states that nearly [euro]150bn worth of investments will be needed for pan-European infrastructure expansions in order to meet projections of demand and environmental targets at minimum cost by year 2030 (ENTSO-E, 2016). However, it is not clear how many of the proposed projects are actually supported by individual countries in the region.

A unique feature of international transmission interconnections is that they can be unilaterally vetoed by a country at one end of the proposed project if it considers that it will receive an unfairly low fraction of the net economic benefits that result from the project (i.e., net of imports, exports, local changes in electricity prices and carbon emissions, and the allocated portion of congestion rents (1) and investment cost of the transmission line). We refer to these as host countries. Moreover, third-party countries, which are part of the existing interconnected transmission grid but will not host any of the proposed lines, might also be affected by large grid developments elsewhere in the network. Ignoring the impacts on third-party countries could result in political tension among members of the interconnected system or failure to realize the full benefits of a highly interconnected grid. For instance, cost-bearing countries could have difficulties in achieving an agreement due to free-riding issues if a third-party country that receives positive net benefits from new transmission projects is not considered in the negotiations. On the other hand, a third-party country that is negatively affected by new transmission projects might be able to pose credible threats to the overall system if it does not receive a compensation that is commensurate with its local economic losses. One possible threat is to arbitrarily reduce the degree of coordination in the hourly dispatch of local generating resources with the rest of the system, a measure that could increase costs in some neighboring regions. A third-party country could also refuse to provide a required amount of balancing services in a synchronized area and cause frequency deviations that could put the system stability of an entire interconnected region at risk. (2) Consequently, achieving all the economic benefits that would, ideally, result from international transmission interconnections might require more than just bilateral agreements between hosting countries. Building a broad consensus among all countries in a region to support transmission interconnections is, in fact, in the spirit of Regulation (EU) No 347/2013 (EUL, 2013). (3)

Failure to achieve an agreement to develop a cost-effective portfolio of transmission in vestments in the region can also have an impact in the location, size, and type of new investments in generating capacity (Sauma and Oren, 2006; Munoz et al., 2013, 2014). For instance, many of the proposed transmission projects in the NSOG are actually needed if countries have goals of harnessing the vast amount of onshore and offshore wind resources available in the North Sea (Konstantelos et al., 2017a; Gorenstein Dedecca et al., 2018). If these are not developed, it is likely that demand projections and environmental goals will be met with less efficient resources at a much higher cost (e.g., distributed rooftop solar PV in areas with low radiation instead of large-scale offshore wind farms in windy regions). Large transmission investments can also change electricity prices in a network and shift investments of any type of generation technology, including conventional power plants, from one country to another (Hogan, 2018). Finding a mechanism to support the develop ment of cost-effective portfolios of transmission investments from a system-wide perspective is, therefore, just as important as identifying them in the first place under a central-planning paradigm as demonstrated by Grigoryeva et al. (2018) and Olmos et al. (2018) for the North-Western Eurov and Spanish power systems, respectively.

In this article we present a mechanism for allocating the net economic benefits that result from international transmission interconnections among a group of countries that are willing to reach a cooperative agreement to support a cost-effective portfolio of transmission investments. Our approach is based on a planning model that considers generator's response to transmission investments in a competitive setting and the Shapley Value (SV) from cooperative game theory. One of the great advantages of this mechanism is that it provides a. fair and unique allocation of benefits for all countries under the so called grand coalition based on the average incremental contribution from each country towards the cooperative agreement. This information can then be used to determine a set of side payments among countries that will be necessary to achieve the final allocation determined using the SV. Conveniently, this allocation satisfies an axiomatic definition of fairness.

We illustrate the proposed allocation method on a network that simulates power production and trade among six countries in the North Sea region in year 2030. We consider all the possible realizations (i.e., built or not built) of three offshore transmission projects that are planned in this region: the North Sea Link between Norway and Great Britain, the NordLink between Norway and Germany, and the Viking cable between Denmark and Great Britain (ENTSO-E, 2016). We apply the proposed mechanism to this case study and compare the difference between the ideal final allocation of benefits under the SV and two conventional allocation rules that allocate transmission costs and congestion rents among countries: 50/50 split and a proportional split with respect to estimated benefits from transmission upgrades. Assuming that interconnections will be initially funded through one of these conventional allocation rules, we determine the side payments needed to achieve the SV and define a set of Power Purchase Agreements (PPAs) that will achieve the desired distribution of benefits as countries trade power over time. We also verify that, in this case, the SV is in the core because the game is convex. This means that the SV allocation is not only fair but also stable since countries have no incentives to deviate from the grand cooperative agreement by forming smaller subcoalitions. Although stability is not a general result, the proposed mechanism can be helpful in supporting cost-efficient transmission interconnection projects.

We structure the rest of the paper as follows. In Section 2 we overview existing literature on transmission planning with a focus on centralized and cooperative mechanisms. In Section 3 we discuss the reasons for which it is unlikely that decentralized mechanisms will result in agreements to support a socially-optimal set of transmission interconnections. In Section 4 we use two simple examples to show how expanding the capacity of a congested transmission line could lead to asymmetric or even negative, net benefits for some countries in an interconnected system. In Section 5 we describe the proposed methodology, including a high-level description of the planning model and the steps to compute the SV. In Section 6 we describe the case study and present our results. Finally, in Section 7 we conclude.

2. TRANSMISSION PLANNING AND COST ALLOCATION MECHANISMS IN CENTRALIZED AND COOPERATIVE SETTINGS

Transmission planning is an active area of study, particularly in the field of operations research. This is because finding a socially-optimal plan (e.g., the one that minimizes total system costs) from a set of candidate portfolios can be computationally challenging, even if all transmission investment decisions are made by a central authority (e.g., a national energy commission or a regulated transmission organization) (Latorre et al., 2003...