The Economic Value of Improving the Reliability of Supply on a Bulk Power Transmission Network

Department of Applied Economics and Management and School of Electrical and Computer Engineering Cornell University Abstract The two basic criteria used by the North-American Electric Reliability Council (NERC) to measure reliability are 1) “Adequacy” (to ensure that the installed capacity of the supply system is sufficient to meet projected future loads and limit the Loss of Load Expectation (LOLE) to one day in ten years), and 2) “Operating Reliability” (to commit generating units with sufficient reserve capacity to withstand sudden disturbances such as equipment failures). Assuming that the transmission system meets the adequacy criterion, adopting a specific LOLE standard makes it feasible to determine the corresponding reserve margins for generating capacity that are needed to maintain operating reliability in real time. However, there is no established way of measuring the economic value of reliability, and as a result, regulators have adopted various proxy measures for meeting reliability standards such as specifying a required level of reserve generating capacity in a region. Although it is convenient to adopt such proxy procedures, by doing so, the underlying reasons for requiring a specific level of reliability are obscured, and more importantly, it is then virtually impossible to determine the true economic benefits of making additional investments in transmission, for example, that improve reliability. The objective of this paper is to present an analytical framework that makes it feasible to determine the economic benefits of both operating reliability and system adequacy in a mutually consistent way.