Economics for Tres Amigas

Michael Giberson

Tres Amigas is a proposed project to link the Eastern Interconnection, Western Interconnection, and the Texas Interconnection (ERCOT) by means of a high-tech three-way superconducting AC-DC-AC connection. You might wonder what economics has to say about such an unprecedented and innovative proposal.

Consider this summary from Ralph Turvey, “Interconnector Economics,” Energy Policy, 34 (2006) 1457–1472:

Interconnectors yield undoubted benefits, but whether their likely level would justify their probable cost is in most cases subject to great uncertainty. Benefits from an existing interconnector could be maximised if a single system operator was responsible for both unit commitment and dispatch in the connected areas. But when there is no such single operator, securing optimal utilisation of an interconnector presents great difficulties, even with a single DC link, as the phenomenon of two-way nominations attests. The vastly more complex problem of achieving an approximation to optimal use of multiple AC links raises additional difficulties….

In the Tres Amigas case we can rule out the idea of “a single system operator responsible for both unit commitment and dispatch in the connected areas.”  Theoretically ideal.  Ain’t gonna happen.

Fortunately, it is possible to approach that ideal by implementation of concepts like “virtual regional dispatch.”  Turns out that VRD has been a tough sell even in cases like New York ISO and ISO New England where it seems to make a lot of sense.  At least the Tres Amigas proposal doesn’t rise to the level of a “vastly more complex problem of … multiple AC links.”  And besides, we don’t need to attain optimal in order to capture a worthwhile amount of gains from trade.

Here’s another related article, Laura Malaguzzi Valeri, “Welfare and competition effects of electricity interconnection between Ireland and Great Britain,” Energy Policy, 37 (2009), Pages 4679-4688. From the abstract:

… Social welfare increases with interconnection, although at a decreasing rate. As the amount of interconnection increases, there are also positive effects on competition in Ireland, the less competitive of the two markets. Finally, it is unlikely that private investors will pay for the optimal amount of interconnection since their returns are significantly smaller than the total social benefit of interconnection.

6 thoughts on “Economics for Tres Amigas

  1. I had similar thought when I first read of this project. If you don’t have a unified dispatch, greater inter-tie capacity doesn’t get you much. For example, when PJM expanded to include AEP and ComEd, a massive amount of previously undispatched cheap coal and nuke power started to flow east. Nothing physical changed on the ground, just the common dispatch algorithm. Also, the inter-tie capacity between Carolinas/TVA and PJM is very large, but utilized hardly at all.

    The only way the project works is if there are large price discontinuities between the three interconnects, but to capture those opportunities, the builder of the link has to also be a power trader or wheeler, which brings in a whole new level of risk.

  2. For such a link to be anything other than small might require significant transmission enhancements inside the regions to deal with the changes in flows. Remember that there are great distances involved and little population at interconnection boundaries. Connecting west and east either connects exporting supply regions or connects nowhere to nowhere. Many systems have yet to recognize (in price) the effects of losses at the margin. (This may have had something to do with the changed flows west-to-east when ComEd joined no-losses PJM. It’s not clear that the added flows were really economic.) This is especially true in the West where lines are long and are already heavily loaded.

  3. With respect to transmission enhancements within the region, one news story pointed out that Sharyland Transmission is interested in possibly partnering. Since Sharyland is the company currently planning the CREZ line buildout that will come closest to the Tres Amigas planned location, presumably the relevant possibilities are under consideration.

    The SPP EHV transmission plans also currently link up near to the proposed Tres Amigas location, and since they are in an even earlier planning stage they could be bent to match up. Obviously coordinating these four parts – transmission enhancements in each of the three regions and the construction of the three-way interconnector will be less than perfect, so the project will probably limp before it runs.

    I’ve not followed Western Interconnection transmission planning efforts much, but certainly folks there are talking about accommodating renewable power development around the region as well.

  4. Doug:

    PJM didn’t explicitly price marginal losses when AEP and ComEd joined, but they do now – they have done so since May 2007. Marginal losses usually result in about a $2-3 discount for ComEd generators, not enough to change their commitment decisions, because the ComEd plants have several advantages – lots of nukes, low-priced PRB cioal and cheaper gas than the rest of PJM.

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