The diversification benefit of additional transmission capacity

Transmission investment yields two major benefits: (a) it allows cheaper remote generation to substitute for more expensive local generation, (the `efficiency (transportation) benefit´) and (b) by increasing the diversification of uncorrelated generation sources, allows a reduction in the volume of balancing services required (the `diversification benefit´). Conventional transmission planning processes tend to focus exclusively on the efficiency benefit. It is well known that increasing wind penetration increases the need for balancing services. The purpose of this study is to develop a mathematical model for quantifying the diversification benefit for transmission investment. To do this the day-ahead spot market and real-time balancing market are mathematically formulated as two-step economic dispatch. This two-step economic dispatch is formulated as one-shot optimization problem. The new optimization problem calculates the results of the day-ahead spot market dispatch and real-time balancing market dispatch in one optimization problem. The new formulation is a linear programming problem which calculates the dispatch cost and the economic deviation from the dispatch cost. This two-step economic dispatch is used for quantifying the diversification benefit of the additional transmission capacity. A decomposition approach is proposed to decompose the total benefit of additional transmission capacity into the efficiency benefit and the diversification benefit. To explain the diversification benefit and its developed two-step economic dispatch, the thirty-node example system is studied. The numerical results show that the proposed methodology in the paper can model and quantify the diversification benefit of additional transmission capacity.