Estimating the effects of transmission congestion on cost of carbon policies

Planned and potential future greenhouse gas (GHG) policies will rely on renewable portfolio standards (RPS) and may also rely on carbon charges (taxes or emission permits) to achieve policy goals.   In the electricity sector portfolio standards could be met by importing wind and solar power but such imports could drastically change power flows on transmission networks, creating transmission congestion. Congestion can have dramatic effects on regional power prices.  Given construction of new transmission corridors can take years, such standards could create equally long-lived price impacts. 

Carbon charges would also alter the relative costs of electricity generation by source. Assuming grid operators dispatch electricity in a cost-minimizing fashion, these cost changes could alter power flows, increasing congestion on transmission networks built to accommodate current flows.  We attempt to demonstrate the impact new GHG policies could have on transmission congestion to quantify the costs of such policies following their adoption.  A challenge to the empirical study of renewable energy integration is a lack of high frequency data.  Renewable generation changes and transmission congestion can occur for only minutes or for several hours and then disappear for several hours or days depending on network conditions.  To understand the effects of intermittent sources and congestion on price impacts, high frequency data is necessary.  To overcome this data paucity we create an electricity dispatch model to simulate of the Rocky Mountain Power Area, an area including 6 million people and parts of five states, to generate price and power data to investigate the interplay of renewable energy intermittency, transmission congestion and optimal dispatch.  Congestion rent estimates are used to estimate the value of new transmission capacity necessary to alleviate congestion-related price distortions caused by policy changes.  Estimates of GHG policies effects generally consider fuel cost changes on power prices, but none to our knowledge consider how transmission congestion caused by new power flows could affect power prices. 

Results indicate that price effects caused by changes in renewable power output are strongly dependent on supply conditions and the presence of market distortions caused by transmission constraints.  Peculiarities inherent in electric grid operation can cause system responses that are not always intuitive.  The distribution of the rents accruing to wind generation are strongly dependent on the allocation of transmission rights when congestion occurs.   Understanding these issues is necessary if optimal development of GHG policy, renewable energy and transmission is to occur.