Generation and transmission expansion planning considering FTRs as a long-term regulatory risk-hedging and coordination mechanism

Abstract

Due to the deregulation process and the changes that the power system is undergoing in its transition to a decarbonised, sustainable, more integrated, one, power system stakeholders need instruments to manage the increasing risk they face associated with different types of uncertainty, and to coordinate their investment decisions, made in a decentralized manner. Typically, investors deploying generation capacity in remote areas with abundant primary energy resources are subject to a relevant market price risk associated with the unpredictability of the evolution in the long term of the price of accessing the network to trade their energy in large consumption centres, whose price tends to be more stable. Besides, there is a lack of coordination of the investment decisions made by them and the transmission expansion planners, which are partly due to the counterparty risk both face. LT-FTRs (Long-term Financial Transmission Rights) may be a suitable tool to hedge the risk and coordinate the generation and transmission investment decisions. Here we assess their impact on the system development and social welfare, assuming that generation investors in remote areas are strategic and both, them and transmission owners are risk-averse. We consider a reactive planning approach by the network planner and formulate the problem as a bi-level optimization one. Then, we apply this to a stylized case study where we investigate the impact of LT-FTRs on the development of wind generation in the North Sea and its integration in the European power system. According to the results, making LT-FTRs available could trigger additional socially-efficient generation investments in weakly linked areas and coordinate the development of this generation and the transmission capacity required.

Due to the deregulation process and the changes that the power system is undergoing in its transition to a decarbonised, sustainable, more integrated, one, power system stakeholders need instruments to manage the increasing risk they face associated with different types of uncertainty, and to coordinate their investment decisions, made in a decentralized manner. Typically, investors deploying generation capacity in remote areas with abundant primary energy resources are subject to a relevant market price risk associated with the unpredictability of the evolution in the long term of the price of accessing the network to trade their energy in large consumption centres, whose price tends to be more stable. Besides, there is a lack of coordination of the investment decisions made by them and the transmission expansion planners, which are partly due to the counterparty risk both face. LT-FTRs (Long-term Financial Transmission Rights) may be a suitable tool to hedge the risk and coordinate the generation and transmission investment decisions. Here we assess their impact on the system development and social welfare, assuming that generation investors in remote areas are strategic and both, them and transmission owners are risk-averse. We consider a reactive planning approach by the network planner and formulate the problem as a bi-level optimization one. Then, we apply this to a stylized case study where we investigate the impact of LT-FTRs on the development of wind generation in the North Sea and its integration in the European power system. According to the results, making LT-FTRs available could trigger additional socially-efficient generation investments in weakly linked areas and coordinate the development of this generation and the transmission capacity required.