GS SQSS Review Onshore Intermittent: Guidance on Economic Analysis

1. GS SQSS Review – Onshore Intermittent:Guidance on Economic Analysis Paul Plumptre 2 and 4 May 2007

2. Agenda Historic Experience of Constraint Costs Guidance on Economic Studies Likely Study Conclusions

3. England & Wales Constraints 2001-2006( Cost in £M) England&Wales Constraint Costs: Have been in the range £10m to £30m since NETA Go-Live Costs arise over >10 constraint boundaries in each year No one constraint boundary causes >25% of the annual cost In early years, import constraint costs predominate More recently, we have experienced export constraints Our investments to reduce Constraints have been efficient

4. Scottish Constraints ‘Cheviot’: constraints across the former Scotland-England interconnector circuits Mainly export; can be import c. half thermal : half stability Half summer under transmission outages; half winter ‘Within-Scotland’: constraints across a number of boundaries within-Scotland Both export and import Export constraints mainly under summer transmission outages Import constraints both summer, and winter under intact transmission

5. Scottish Constraints 2005/6 In 2004, we forecast costs at: Cheviot: £36.9m Within-Scotland: £17.0m Costs have outturned at: Cheviot: £31.6m (export 30 import 1) Within-Scotland £28.5m (export 6 import 22) Constraint Volume & Price Details are confidential – parties are making significant pricing decisions Cheviot £30m is 250–500GWh × 60–120 £/MWh constraint price and 60–120 breaks down 60–140 £/MWh English Offer price minus 0–20 Scottish Bid price

6. Scottish Constraints 2006/7 In 2005, we forecast costs at: Cheviot: £20.4m Within-Scotland: £31.0m Costs are projected to: Cheviot: £28m (export 27 import 1) Within-Scotland: £56m (export 30 import 26) Constraint Volume & Price Cheviot volume is ¼ up on 2005/6 Cheviot price is ¼ down on 2005/6, mainly due to use of commercial inter-trip services Within-Scotland, both volume and price are up on 2005/6

7. Scottish Constraints 2007/8 onwards In 2006, we have forecast costs for 2007/8 at: Cheviot: £36m Within-Scotland: £40m We have not yet forecast detailed costs for 2008/9 onwards Cheviot volume will increase with: Cheviot re-conductoring outages Gradual windfarm commissioning Within-Scotland volumes should ease, subject to gradual Transmission reinforcements

8. 1. Historic Constraints – Conclusions Scottish Constraint volumes and costs are already significant Costs: Cheviot £30–40m within-Scotland £30–50m Volumes: Cheviot 300 – 600GWh of export restriction All export constraint prices have been 40 – 120 £/MWh Our track record of forecasting constraint costs is good

9. Transmission Reinforcements Justified by security: To achieve the desired level of (implicit) security, the capability to transmit power across a boundary must be greater than the following level – eg Planned Transfer plus half Interconnection Allowance This is known as a Deterministic rule Justified by economics: To provide sufficient capacity to facilitate year-round market operation against reasonably foreseeable conditions of generation Relative to the base case of ‘Do Nothing’, a proposed reinforcement must be shown to deliver a cost-benefit Thus the investment cost of the reinforcement is less than the reduction in operating costs (transmission constraints, maybe transmission losses) expected over the lifetime of the reinforcement This is often termed a Probabilistic rule It is a given that both approaches will still be included in SQSS

10. Guidance on Economic Study (1) What reinforcements to consider? In theory, a very large number of conceivable reinforcements In practice, engineering judgment leads to a limited number of options, which are distinct in terms of investment cost and boundary capability What years to assess? In theory, should consider all <25> years of an asset life In practice, it is hard enough (see below) to assess operating costs for even one planning year. The uncertainties of demand, generation presence, running, and pricing swamp the analysis even 10 years out. Proposed Guidance: in majority of cases, it suffices to consider one year, 3-5 years into the future. If the reduction in mean Constraint costs > 20% of the Investment capital cost, then the reinforcement is economically justified.

11. Guidance on Economic Study (2) Study Tool: Spreadsheet or Optimising DC Load Flow or AC Load Flow No Guidance (spreadsheet often suffices) Representation of Demand: 10 or 100 or 8760 demand levels - No guidance Should consider at least: Winter Intact; Summer Intact; Summer Outage Representation of Generation: Deterministic – inadequate to represent range of unconstrained flows Combinatoric (all cases by genset) – only possible up to ~6 gensets Probabilistic – almost always necessary Operating Costs Usually Constraints only suffices Additionally assess Transmission Losses, if methods permit

12. Guidance on Economic Study (3) Number of weeks per summer of circuit outage In the main, assume 2 weeks per circuit per year, indefinitely Boundary Capabilities, without / with reinforcement: winter, summer_intact, summer_outage Either: direct from load-flow model (but stability limit still off-line) Or: off-line from a generic seasonal load-flow (there may be different boundary limits for different circuit outages) Assume zero unplanned transmission outages Assume good operation by TO and SO Ie optimised substation running arrangements and Quad Booster settings Degree of usage of inter-trips, and price thereof, on case-by-case basis

13. Guidance on Economic Study (4) Degree of co-ordination of Generator and Transmission outages Assume none – eg outages taken independently over the summer Generator Availabilities: winter, summer: as per history Will need care on degree of independence of distributed windfarms Generator Running: Central case: Assume a fairly neutral, national ranking of fuel-types Sensitivity case of increased running of mid-merit generation in an export group; and decreased running of mid-merit generation in import group Generator Pricing: Central case: Assume a fairly neutral, national pricing, as per history Sensitivity case of more aggressive pricing, on both export and import side

14. 2. Economic Guidance – Conclusions Large number of data assumptions Easy for two practitioners to disagree by ±50% on (at least): Generation / Transmission outage co-ordination Generation Running Generation Pricing Hence cost-benefit (‘economic’) approach too variable to form the central case for most transmission reinforcements We are looking for guidance, for cost-benefit studies to support a main deterministic (‘security’) rule for transmission planning Consultation Question: Do you support my indicative points of guidance above?

15. A Generic Constraint Analysis Suppose: Transmission Reinforcement costs 30 £/MW.km for a 200km boundary = £6,000 per MW = 6 £/kW Constraint price is 60 £/MWh Then the cost-benefit break-even point = 6 £/kW ÷ 60 £/MWh = 100 hours = 1% of a year Thus Constraint assessments are very much looking at the tails of the distribution of Operating conditions

16. Another Generic Constraint Analysis - Theory Assumes Cost of Reinforcement = 6 £/kW Cost of Constraints = 1MW (per MW below 3000) × 0.5hr (per MW below 3000MW) × 60 £/MWh Theoretical break-even point ~ 2900MW of boundary capacity

17. Another Generic Constraint Analysis - Practice In practice: ‘Do Nothing’ Option 0 has 2500MW capability – Cost £25-75m Reinforcement Option 1 delivers 3300MW capability – Cost £15-30m Is this sufficiently certain to justify reinforcement?

18. Working Group: Economic Studies We are building an elementary model, to assess constraint costs by boundary for the WG scenarios Expected Conclusions: Provided the security criterion provided boundary capability at least at (current) Planned Transfer, Constraints will not predominate (eg > 1000 hrs pa) Constraint assessments are very sensitive, at the tail of the distribution of operating conditions Scottish Constraint assessments are particularly sensitive to assumptions on the running of mid-merit and low-merit generation

19. Summary Historic Experience of Constraint Costs Guidance on Economic Studies Likely Study Conclusions