The Value of Unused Transmission: Estimating the Opportunity Cost for the Province of Quebec, Canada

Transcription

1 The Value of Unused Transmission: Estimating the Opportunity Cost for the Province of Quebec, Canada Summary Pierre-Olivier Pineau, HEC Montréal, Canada Vincent Lefebvre, HEC Montréal, Canada Pierre-Olivier Pineau, Associate Professor, Department of Management Sciences HEC Montréal 3000, chemin de la Côte-Sainte-Catherine, Montréal (QC) H3T 2A7 CANADA / / piere-olivier.pineau@hec.ca Electricity planners and regulators often warn about the alleged underinvestment in electricity, especially in transmission. Their analysis, however, often overlooks the actual use of transmission networks, and even more of interregional lines. We looked at three years of hourly transmission data (2006, 2007 and 2008) between Quebec and its main neighbours: New Brunswick, New England, New York and Ontario. We found that although trade across these transmission lines increases, especially exports, much unused capacity remains available. About 25 TWh could have been profitably exported from Quebec every year, taking into account both the hourly unused capacity of lines and the hourly spot price in adjacent jurisdictions. This unrealized trade had a huge opportunity cost for the Quebec utility, about Can$1 billion every year or about 50% of its dividend. While transmission upgrades may still be required for reliability purposes, this analysis shows that the lack of transmission capacity is not preventing profitable electricity exports to take place. The problem is rather regulation in low-cost electricity jurisdiction, limiting the amount of power available for export. Because there are also many unrealized environmental benefits when the price of hydropower is regulated (as it is the case in Quebec, but also all across North America and in many places around the world), the real cost of such regulation is still unknown. This papers points to the need of further research into the economic and environmental gains to be made from electricity market integration. Keywords: Electricity integration; Interregional transmission; Opportunity Cost; Quebec; Northeastern United States. Introduction Open access to transmission networks is considered by many to be the foundation for wholesale electricity market competition (e.g. Benjamin, 2007). In the United States, the 1996 Federal Energy Regulatory Commission (FERC) orders 888 and 889 are two landmarks of US electricity market reforms. The first provides non-discriminatory access to transmission services, and the second establishes an Open Access Same-Time Information System (OASIS), to foster use and transparency in transmission networks. However, despite the importance of transmission, investment in transmission lines is considered by many to be lagging behind needs and to require important additional investments in the future. The International Energy Agency (IEA), for instance, estimated that 8% of all worldwide energy infrastructure investments during the period should be made in transmission networks (IEA, 2008:151). This represents US$2,106 billion over 23 years, or just about US$92 billion every year. In North America only, about US$15 billion should be invested every year, according to the IEA, while between 2000 and 2005 only US$2 to 4 billion were invested in transmission (Hirsh, 2004:7). The state of the transmission network in North America is a concern according to Hirsh (2004), and this conclusion is shared by the North American Electric Reliability Corporation (NERC). Indeed, the NERC 1

2 identifies the need for more transmission as one of its five Key Findings for the period (NERC, 2008). 1 The lack of transmission capacity is often criticized for wasting many opportunities to lower consumer power costs (Hirsh, 2004:vi), by isolating cheaper power from demand (see also Hale et al., 2000). This could be especially true for interregional transmission, because significant price differences exist between regions. For instance, in January 2009, the US industrial electricity prices varied between 4.17 /kwh (Idaho) and /kwh (Hawaii) (EIA, 2009:111). Even without reaching such extreme difference, important gaps exist between contiguous states: for instance Oregon (4.71 /kwh) and California (8.93 /kwh, +90%) or West Virginia (4.71 /kwh) and Pennsylvania (6.81 /kwh, +45%). Between the province of Quebec (Canada) and New York (immediately South of Quebec), the industrial price jumps from 4.47 /kwh to /kwh (+239%), according to Hydro-Quebec (2008a:50). Although price regulation and generation technology largely explain these price differences (lower prices usually being found in price-regulated jurisdictions with cheaper generation), lack of transmission is still considered a problem. Regulatory differences would even be part of the explanation of the under investment in transmission. Indeed, Benjamin (2007:41) connects opposition to transmission investments to the fear of seeing cheap power exported to higher-priced areas. This paper s objective is to two-fold. First, to bring some new evidence on the alleged transmission inadequacy (as already characterized by Brennan, 2006), and second, to estimate the value of the unused transmission capacity between Quebec and the adjacent jurisdictions with which it has active trading connections (clockwise: New Brunswick, New England Maine, New Hampshire, Vermont 2 New York and Ontario). To achieve the first objective, we analyze three years of exports and imports on the interregional transmission lines connecting Quebec to its neighbours (2006, 2007 and 2008). Then, for the second objective, we estimate for each hour of these three years how much transmission capacity was left unused when it would have been financially profitable to export. Through these objectives, the paper s contribution is to shed a different light on the discussion about transmission investment and to try to bring the debate on the opportunity cost of not optimizing electricity use, within the existing power network. In the next section, we provide an overview of how transmission capacity is usually assessed. Section 2 presents the context and data we use and explains the methodology. Results and discussion are presented in section 3. Finally, a conclusion summarizes our key points and possible future questions of interest. 1. Assessing Transmission Capacity A traditional approach to assess transmission capacity is to look at the amount of transmission and to compare it to peak demand. Transmission, in this approach, is measured by the total length of transmission lines (NERC, 2008:15). Figure 1 provides an illustration of this approach, followed by Hirsh (2004:6) in his much cited Edison Electric Institute report. The indicator, in miles of transmission lines per gigawatt (GW) of peak demand, is seen declining since 1990 in the NERC region (comprising the US, Canada and some small parts of Mexico). 1 The four other Key Findings are the improvement of capacity margins, the significant projected increase in wind capacity, the increasing role of demand response to meet resource adequacy requirements and the emphasis on maintenance, tools and training to provide adequate power supply (NERC, 2008). 2 The other New England states (Massachusetts, Rhode Island, and Connecticut) are not considered because they do not share a border with Quebec. 2

3 Figure 1. Miles of Transmission Lines (230 kv and above) per GW of Peak Demand (NERC, 2009) Northeast Power Coordinating Council (NPCC) - Quebec only NERC region NPCC US - NY & New England Figure 1 also shows that there are important differences between jurisdictions. Quebec, for instance, has much more transmission lines per GW of peak demand than the NERC average, and even more than other Northeast Power Coordinating Council (NPCC) members in the US. 3 Although the decline in this indicator shows that there is relatively less transmission relative to peak power demand, it says nothing on what the right amount of transmission should be. Variations across jurisdictions can largely be explained by population density and the remoteness of power plants, but no optimal value is known, even if these geographic elements are factored in. This observed decline is a concern, because of possible increased congestions and additional strains on existing resources (NERC, 2008:17). But while these reliability issues are important, the conclusion that more transmission is needed may be precipitous. Brennan (2006) analyzes the transmission inadequacy question and points that the decline may simply be explained by the end of vertical integration, which may have led to overinvestment in this capital intensive sector. Now that this era has ended, with the unbundling and liberalization of the power sector, we might simply return to a more normal state of less transmission. Also, other approaches can be used to maintain reliability, such as advanced load management through a smarter grid. What an analysis of the literature reveals, however, it is that assessing transmission capacity is a difficult task. Not only access to the grid (for new power plants, such as wind generation) and reliability should be taken into account, but also the economic value of transmission. This value is mostly influenced by energy prices at both ends of lines, by the cost of reserve margins and by the value of outages. Including economic assessments is therefore essential to assess transmission capacity, as Hirsh (2004:2), Brennan (2006:43) and Benjamin (2007:42) point out, among others. Such economic assessment is however only partially done, at best. This is one conclusion of Hirsh (2004:37), from his review of 20 transmission plans across the US, which roughly split in their focus on transmission needed to maintain reliability vs. transmission needed to reduce congestion. It is also illustrated by the fact that 3 The NERC s mission is to ensuring the reliability of the bulk power system in North America (NERC, 2008:1). It does so notably through eight regional entities, enforcing reliability rules in their region. The NPCC is one of these eight regional entities. It includes Ontario, Quebec and the Maritimes in Canada and New York and New England in the US. 3

4 NERC named its key finding More Transmission Needed to Maintain Bulk System Reliability and Integrate New Generation (NERC, 2008). No mention is made of the net economic gains to be made with new transmission. This can be understood by the fact that NERC s mission is to ensure reliability in the power system, not economic efficiency (see footnote 2). Assessing transmission capacity is even more complex with interregional lines, because approvals and permits have to be obtained from two regulatory bodies, wealth transfers happen (through increased trade) and no single entity is fully responsible of integrated planning. This paper does not provide a full economic assessment of transmission capacity, but an additional element to assess it: the value of unused transmission. In other terms, it estimates the opportunity costs of selling power within a jurisdiction (in this case, Quebec) rather than exporting it, while transmission capacity is available. 2. Data and Approach 2.1 The Quebec Power System and its Interconnections Quebec accounts for 33% of Canada s power generation capacity with 41,018 MW of installed power, out of which 91% is hydropower. 4 The provincial production was 192 terawatt-hours (TWh) in 2007, almost entirely from hydro sources (94%), and mostly (90%, or 174 TWh) from the government-owned utility, Hydro-Quebec. 5 The utility sells within the province at cost-based regulated prices: its average 2007 residential revenue was 6.90 /kwh. As illustrated in Figure 2, Quebec is well interconnected with its neighbours and can actively trade in New Brunswick, New England, New York and Ontario. 6 In order to obtain the right to trade in the US wholesale market from the FERC, Hydro-Quebec had to offer reciprocity in terms of access to its transmission network. A distinct subsidiary of Hydro-Quebec, HQ TransEnergie, was therefore created in 1997 to operate the transmission network (HQ TransEnergie, 2009b). Two other subsidiaries were also created for production and distribution. As an obligation imposed by the FERC to market players active in the US, hourly transmission data have to be made available on the OASIS. Figure 2 is taken from the website created to comply with this FERC regulation. 4 The source of the information provided in this paragraph is Statistics Canada (2009a). 5 In addition to its own provincial production, Hydro-Quebec receives a further 30 TWh every year from Newfoundland. 6 Although Hydro-Quebec is the dominant producer and electricity trader, other small players also trade in these regional markets, such as Brookfield EMI, DC Energy, Powerex and Silverhill (NEB, 2009). 4

5 Figure 2. Quebec Path diagram with its Neighbours, 2009/03/12 10:22 EDT (HQ TransEnergie, 2009a) As shown in Table 1, providing the voltage and capacity limits of interregional transmission lines, there is a combined maximum export capacity of 7,130 MW and a maximum import capacity of 4,875 MW. It allows Quebec to export up to 17% or import up to 12% of its production at any given moment, if there are no other network constraint. These numbers can appear high, and may not reflect a fear to see cheap power fleeing to higher cost jurisdictions (which adequately describe Quebec neighbours). Nevertheless, more transmission capacity is claimed to be needed. A new transmission line to Ontario is scheduled to be available in 2009 (Table 1), and a project for a 1,200-1,400 MW transmission line, to New England, is examined (FERC, 2008). Table 1. Quebec Interregional Transmission Lines (HQ TransEnergie, 2009a) Capacity (MW) Name kv Export Import DYMO OTTO CHNO P33C Ontario Q4C LAW CORN Total 1, Announced for 2009 ON 230 1,250 1,250 New York New England DEN MASS 765 1,800 1,000 Total 2,125 1,100 HIGH DER NE 735 2,000 2,000 Total 2,305 2,170 New Brunswick NB 230 & 315 1, Total 7,130 4,875 5

6 2.2 Methodology Starting from hourly data, we analyze the aggregate use of transmission lines and estimate the opportunity cost of unused transmission over the years 2006, 2007 and All transmission data come from HQ TransEnergie (2009c). Hourly market prices for electricity come from the ISO New England (ISO NE, 2009), NY ISO (NYISO, 2008) and the Ontario IEMO (IEMO, 2009). The following subsections provide additional details. Use of interregional transmission lines For each line listed in Table 1, the OASIS keeps track of how many MWh circulated on the line, for every hour of the year. For a single hour, both some export and import quantities can be recorded, as the direction of trade can change within an hour. For instance, in 2008 on the Massena (MASS) line between Quebec and New York, electricity flowed out of Quebec unidirectionally during 4,783 hours, was imported to Quebec during 220 hours and was both imported and exported during 3,114 hours. The line was left idle during 667 hours, for a total of 8,784 hours. 7 To know how much transmission capacity remained unused, the difference between the total transit capacity of the line (in MW during one hour, so in MWh) and its actual use (in MWh) can be computed. The Total Transfer Capability (TTC) of lines, defined as the amount of electric power that can be transferred over the interconnected transmission network in a reliable manner while meeting all of a specific set of defined pre- and post-contingency system conditions (NERC, 1996:2), is reported according to NERC standards into OASIS (NERC, 2005). TTC changes over time, from its maximum value (shown in Table 1) because of certain network contingencies. This means that in practice, values of Table 1 are not always technically available, but lower capacities are. In determining the unused portion of the transmission capacity, we used the listed TTC values, as reported by HQ TransEnergie (2009c). Let s note that an Available Transfer Capability (ATC) is also defined by NERC. However, we could not directly use these values because HQ TransEnergie does not directly post the ATC of its lines. It is probably exempted from this standard, as allowed in some cases (NERC, 2005:1). When both export and import occurred during the same hour, the unused capacity estimate is the amount of further possible exports (in MWh), given how much export and import already took place. We assume that listed exports and imports were done at full capacity to compute the used capacity. For instance, if a line had a TTC of 1,000 MW during a specific hour, 1,000 MWh could transit through the line. If 100 MWh of export and 200 MWh of import were listed, we assumed that the export were done at full capacity (therefore over 6 minutes, 10% of an hour), that import were also done at full capacity (therefore over 12 minutes), so that the line remained fully available during 42 minutes, allowing 700 MWh (1,000*42/60) to be exported. This latter value is the unused transmission capacity of the line. Opportunity cost Hydro-Quebec sells every year 165 TWh of hydroelectricity at a regulated cost of Can$27.90/MWh to Quebec consumers. As total energy requirements are above these 165 TWh, some power has to be produced or purchased at higher, non-regulated price (by HQ Production, the generation subsidiary). However, the resale of this power (by HQ Distribution, another subsidiary) is regulated and linked to the procurement cost. In 2007, HQ Production sold TWh in Quebec, and obtained an average revenue of Can$30.53/MWh. In contrast to this average revenue, the 17.5 TWh sold by HQ Production outside its jurisdiction generated on average Can$89.37/MWh. See Hydro-Quebec (2008b:9) for the source of the information provided in this paragraph. This means that per MWh, the electricity sold outside the Quebec border in 2007 generated almost three times the revenue of local sales. Production costs were however mostly similar, as electricity production is almost entirely hydro-based. There is therefore an opportunity cost for Hydro-Quebec, when it sells within its jurisdiction. The opportunity cost is the difference with the market price in neighbouring markets. Using the hourly market price in New England, New York and Ontario, as defined in their respective spot market, this opportunity cost can be computed. For the sake of simplicity, the opportunity cost is defined as the difference being a leap year, there are 366 days of 24 hours and hence 8,784 hours. A common year has 8,760 hours. 6

7 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 between the hourly spot market price (converted in Can$, at the daily exchange rate; Statistics Canada, 2009b) and the Quebec energy only price of Can$30/MWh. 8 Of course, this opportunity cost is only estimated up to the unused transmission capacity defined previously. For the case of New Brunswick, as there is no established spot market (the market is based on free bi-lateral contracts, as in Texas), we use the New England spot price at the New Brunswick interconnection as a market price proxy. 3. Results and discussion 3.1 Electricity Trade and Unused Capacity During the study period ( ), Quebec exported on average 1.46 TWh of electricity every month, and imported 0.44 TWh/month. As Figure 3 shows, the US market (New York and New England) are the main buyers of Quebec electricity. Less exports take place during Fall (especially September) and Spring months (April and May), as weather conditions require less cooling and heating. Figure 3. Monthly Exports, in TWh New England New York Ontario New Brunswick As Figure 4 illustrates, imports are much less important than exports, especially imports from New Brunswick and New England. From these four jurisdictions, Ontario represents the steadiest supplier of electricity for Quebec, and the only jurisdiction from which Quebec imports more than it exports to (monthly average of TWh of imports, compared to 0.09 TWh of exports). This is explained by both lower import and export prices in Ontario (see Figure 7). 8 The rounded number of Can$30/MWh was used as an approximation of slightly different 2006, 2007 and 2008 average revenue for Quebec sales. 7

8 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Figure 4. Monthly Imports, in TWh New England New York Ontario New Brunswick In terms of use of transmission lines, Table 2 presents some key results. First, many of the interconnections with Ontario remain idle most of the time (more than 6,000 hours per year). This is not the case, however, of the main Ontario line (LAW), which has seen its number of hours with no activity going down, the percentage of its TTC actually used steadily growing, both when used for exports and imports. For the South (New York and New England) and East (New Brunswick) connections, there are much less hours without activity (less than 1,000 for most of them), and the use of the export capacity has been also steadily growing over the three years. Imports from these jurisdictions, however, are becoming more marginal. It is however a likely consequence of more exports, as these jurisdictions lack power. Table 2. Use of Transmission Lines Hours with no activity % of TTC - Export % of TTC - Import Name Ontario New York New England DYMO % 15% 5% OTTO % 69% 55% CHNO % 20% 5% P33C % 15% 11% Q4C % 63% 61% LAW % 17% 37% 34% 37% 51% CORN* % CRT** % 33% 29% DEN** % % MASS % 41% 47% 28% 33% 22% HIGH % 83% 83% 7% 13% 3% DER % 24% 35% NE % 47% 56% 4% 18% 8% New Brunswick NB % 32% 43% 22% 8% 2% * This line entered in operation on October 1 st, 2008 ** The CRT line ended its operation on September 30 th, 2008, and then DEN took over. 8

9 To better illustrate the usage pattern of these transmission lines, Figure 4 focuses on one line, the Quebec-New York Massena line. It displays, by decreasing hourly export and import values, how much of the line is used during each of the three years under review. We can clearly observe that export grew, with more capacity being used, on average, every year (from 609 MW every exporting hour in 2006 to 767 MW in 2008). However, with a maximum export capacity of 1,800 MW (which comes down, on average to about 1,600 MW in terms of TTC), it becomes obvious that the transmission line is not used to its full capacity most of the time. It is indeed used at less than 50% of its capacity, on average. Figure 4. Transmission Load Duration Curve for the Quebec-New York Massena (MASS) line, in MW Average Hourly Export 2006: 609 MW 2007: 745 MW 2008: 767 MW Average Hourly Import 2006: 408 MW 2007: 395 MW 2008: 347 MW Export (2008) Export (2007) Export (2006) Import (2006) Import (2007) Import (2008) Figure 6 and Table 3 present the main results of this section: the amount of available transmission capacity, that would have been profitable to use (because the export price was greater than the average Quebec price of Can$30/MWh), but wasn t. New England and New York lead in terms of monthly average: TWh and TWh could have been profitably exported from Quebec, every month, given the market price and transmission availability. In Ontario and New Brunswick, only 0.46 and 0.41 TWh could have been exported. The monthly total average is 2.28 TWh. 9

10 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Figure 6. Monthly Unused Transmission Capacity (hours with market price above Can$30), in TWh New England New York Ontario New Brunswick Table 3 summarizes key export, import and unused transmission results. Over the three years, if Quebec exported 52.7 TWh (and imported 16 TWh), we see that it could have profitably exported an additional 82 TWh. The distribution of this potential is relatively well distributed across the four markets: between 15 and 27 TWh could have been exported in each of these markets over the three years. Table 3. Quebec Exports, Imports and Unused Transmission Capacity, in TWh New Brunswick New England New York Ontario Export Total Import Total Unused Total Electricity Trade: Value and Opportunity Cost The trade that took place between Quebec and its neighbours was driven by sound economics. As Figure 7 shows, export prices are on average higher than import prices: they range between $50 and $100/MWh while import prices mostly stay around $50/MWh. As mentioned before, it is Ontario that has the lowest average import price, with $40.51/MWh and the lowest export price: $68.31/MWh. This is to compare against export prices of $75.93 for New Brunswick 9, $77.42 for New England and $68.73/MWh for New York. 9 Let s however recall that the New Brunswick price is estimated with the New England-New Brunswick zonal price, which means that is only a proxy market price. 10

11 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Figure 7. Average Monthly Export and Import Prices, in Can$ per MWh 150 Export NB Export NE Export ON Export NY Import NB Import NE Import NY Import ON Overall, as shown in Table 4, the market value of Quebec exports grew every year: from just about a billion dollar to $1.5 billion. Imports stayed relatively stable, between $200 and $300 million. The opportunity cost of not using the unused transmission lines was close to one billion every year totalling $2.8 billion over the three years. This is really an opportunity cost: it is the revenue above the Quebec sales price of Can$30/MWh that could have been made in the export markets. The main markets are New England and New York, where most of the transmission capacity is already in place (more than 50% of it connects Quebec to these markets). Table 4. Market Value of Trade and Opportunity Cost, in Million of Can$ New Brunswick New England New York Ontario , , Total Export Value , , , Total Import Value , Total Opportunity Cost , , Discussion Two main conclusions can be drawn from our results: (1) In the Northeast region, significant profitable trade could technically be made at least from the perspective of interregional transmission lines. (2) The opportunity cost for Quebec is significant: about $1 billion per year, which is about half of the declared dividend for Hydro- Quebec in 2007, which was $2.095 billion (Hydro-Quebec, 2008b). 11

12 This missed economic benefit for Quebec does not take into account other benefits: increased supply of lower cost energy in importing regions and environmental benefits obtained by substituting Quebec hydropower to some of the thermal power of its neighbours. Clearly, the main problem here is not the lack of interregional transmission capacity. The hourly transmission and market price data show that a lot of profitable and feasible trading opportunities were left on the table. The question, therefore, is why was the capacity left unused? Two hypotheses could be devised to explain this. The first would be purely technical: some network constraints, beyond interregional transmission lines, prevented the delivery of energy from generation to load. It is beyond the scope of this paper to explore this hypothesis. However, given the fact that peak load in Quebec is during the winter (due to heating), while it is during the summer in the US (due to air conditioning), and given the fact that interregional transmission lines were designed with the knowledge of current power networks, there is no reason to believe that networks would be internally constraints before interregional transmission lines are. At least, this is unlikely to explain entirely all of the unused capacity. The second is purely physical (but derives from a costly regulatory choice): there is not enough water in Hydro- Quebec s dams to supply the additional yearly 25 TWh (see Table 3) that could be soaked into the regional markets. Additional water could come from additional dams and further derivation of rivers, in such a way that Quebec low prices are maintained and export opportunities are satisfied. This seems to be the path chosen by Hydro-Quebec, with current hydropower developments (see Hydro-Quebec, 2009). Alternatively, better price signals to Quebec consumers could be provided, making them pay a price closer to the regional market price. Such a policy could mean to double the price of the energy component in the Quebec market (from the current $30 to about $60/MWh). Given a price elasticity of -0.2 (a realistic short-term value, see Lijesen, 2007), this would immediately free about 10 TWh from the local Quebec consumption. With more aggressive energy efficiency programs, which would be much easier to implement under higher electricity price, an additional 4 TWh/year could be saved from the industrial sector (AEE, 2008a:20) and 8 TWh/year from the residential sector (AEE, 2008b:19). This would provide another 12 TWh/year, available for export, before any analysis of the institutional and commercial sector is made (which represents 18% of the Quebec electricity consumption of 192 TWh in 2006, see Statistics Canada, 2008:21). Finding 25 TWh, or at least a good share of it, from Quebec consumers is therefore far from being unrealistic. Additional environmental benefits would also have to be taken into account, as much of the additional hydropower export would substitute coal and natural-gas produced electricity. Conclusions Complains and warning of underinvestment in the transmission network, and in interregional transmission lines are frequent. The analysis behind such statements is however usually superficial, looking only at the length of transmission networks, and comparing it with peak load demand. Economic analysis of transmission projects is lacking, and so are detailed studies of the actual use of transmission lines. This paper considered the case of interregional trade between Quebec and its neighbours (New Brunswick, New England, New York and Ontario) over the years 2006, 2007 and The actual use of all transmission lines was analyzed, and the value of the unused transmission capacity was estimated. Although all interregional transmission lines were found to be increasingly used, some of them remain idle most of the time (more than 6,000 hours per year) and most of them are used, on average, at much less than 50% of their capacity. Given the market price of electricity in Quebec and in the bordering jurisdictions, a lot of technically feasible, profitable exports could take place. There is therefore an important opportunity cost, borne by Hydro-Quebec, which sells within its market at a much lower price than the export price. These trade opportunities (totalling about 25 TWh per year) would generate about $1 billion/year in additional profit for Hydro-Quebec (increasing by about 50% its dividend). This opportunity cost shows that price regulation in Quebec has a high cost, because it prevents the utility to sell where the price is the highest. Further environmental benefit would be derived from such exports, as hydropower 12

13 (from Quebec) would mostly replace thermal power in the importing markets. Estimating the extent of the environmental greenhouse gas reduction is a research area to explore. Contrary to many claims in the literature, interregional transmission capacity is not lacking to the point of limiting profitable trade. This is true for the Northeast American region, and would have to be studied in other regional contexts. This does not mean that more transmission capacity is not needed for reliability purposes, but simply that some significant amounts of transmission capacity remain unused. It also points that a major problem for the power sector may not be transmission, but price regulation in jurisdictions with lower price. Although consumers benefit from these low prices, the overall social cost is greater. Both economic and environmental gains could be made by better integrating electricity markets. References AEE (2008a) Secteur industriel CAHIER DU PARTICIPANT - Consultation en vue de l élaboration du plan d ensemble en efficacité énergétique et nouvelles technologies, Quebec: Agence de l efficacité énergétique. AEE (2008b) Secteur résidentiel CAHIER DU PARTICIPANT - Consultation en vue de l élaboration du plan d ensemble en efficacité énergétique et nouvelles technologies, Quebec: Agence de l efficacité énergétique. Benjamin, R. (2007) Principles for Interregional Transmission Expansion, The Electricity Journal, vol. 20 (8) Brennan, T.J. (2006) Alleged Transmission Inadequacy: Is Restructuring the Cure or the Cause?, The Electricity Journal, vol. 19 (4) EIA (2009) Electric Power Monthly - April 2009, With Data for January 2009, Energy Information Administration, Office of Coal, Nuclear, Electric and Alternate Fuels, U.S. Department of Energy, Washington: EIA. FERC (1996a) Order No. 888 Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Issued April 24, 1996, Washington: Federal Energy Regulatory Commission. FERC (1996b) Order No. 889 Open Access Same-Time Information System (formerly Real-Time Information Networks) and Standards of Conduct, Issued April 24, 1996, Washington: Federal Energy Regulatory Commission. FERC (2008) Petition of Northeast Utilities Service Co and NSTAR Electric Co for Declaratory Order in EL09-20 (replacement for filed on Dec. 13, 2008), Accession No: , Washington: Federal Energy Regulatory Commission. Hale, D.R., Overbye, T.J. and Leckey, T. (2000) Competition requires transmission capacity: The case of the U.S. Northeast, Regulation, vol. 23 (2) Hirst E. (2004) U.S. Transmission Capacity: Present Status and Future Prospects, Prepared for Edison Electric Institute and Office of Electric Transmission and Distribution, U.S. Department of Energy, Washington: Edison Electric Institute. HQ TransEnergie (2009a) Path Diagram Metered interchanges (MW), 2009/03/12 10:22 EDT, webpage accessed on March 12, HQ TransEnergie (2009b) Discover Hydro-Québec TransÉnergie and its system Profile, webpage accessed on April 29, HQ TransEnergie (2009c) OASIS Transactions - Yearly logs Schedule, webpage accessed on March 12, Hydro-Quebec (2008a) Comparison of Electricity Prices in Major North American Cities - Rates in effect April 1, 2008, Montréal: Hydro-Québec. Hydro-Quebec (2008b) Annual Report 2007, Montréal: Hydro-Québec. Hydro-Quebec (2009)Construction Projects in Quebec, webpage accessed on April 30, IEA (2008) World Energy Outlook 2008, vol. 2008, no. 24, Paris: OECD. IESO (2009) Market Summaries, Ontario Independent Electricity System Operator, webpage accessed on March 12,

14 ISO New Englant (2009) Historical Data Hourly Zonal Information, webpage accessed on March 12, Lijesen, M. G. (2007) The real-time price elasticity of electricity, Energy Economics, vol. 29, NEB (2009) Electricity Exports and Imports Monthly Statistics for December 2008, Calgary: National Energy Board. NERC (1996) Available Transfer Capability Definitions and Determination A framework for determining available transfer capabilities of the interconnected transmission networks for a commercially viable electricity market, Princeton: North American Electric Reliability Council. NERC (2005) Documentation of Total Transfer Capability and Available Transfer Capability Calculation Methodologies, Standard MOD-001-0, Princeton: North American Electric Reliability Corporation. NERC (2008) 2008 Long-Term Reliability Assessment , Princeton: North American Electric Reliability Corporation. NERC (2009) Electricity Supply & Demand 2008, Princeton: North American Electric Reliability Corporation. NYISO (2009) Market Data Exchange - Day-Ahead Market LBMP, webpage accessed on March 12, Statistics Canada (2008) Report on Energy Supply-Demand in Canada 2006, Statistics Canada Manufacturing, Construction and Energy Division, X, Ottawa: Statistics Canada. Statistics Canada (2009a) Electric Power Generation, Transmission and Distribution 2007, Catalogue no X, Ottawa: Statistics Canada. Statistics Canada (2009b) CANSIM Table Foreign exchange rates in Canadian dollars, daily (Dollars unless specified), V Canada; United States dollar, noon spot rate(02-oct-1950 to 11-Feb-2009), Ottawa: Statistics Canada. Statistics Canada (2009c) CANSIM Table Electric power statistics, monthly (megawatt hour), Ottawa: Statistics Canada. 14