ASSISTANCE TO ENERGY SECTOR TO STRENGTHEN ENERGY SECURITY AND REGIONAL INTEGRATION CONTRACT NUMBER EPP-I

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1 Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins ASSISTANCE TO ENERGY SECTOR TO STRENGTHEN ENERGY SECURITY AND REGIONAL INTEGRATION CONTRACT NUMBER EPP-I APRIL 2011 This publicatin was prduced fr review by the United States Agency fr Internatinal Develpment. It was prepared by Tetra Tech ES, Inc.

2 Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins ASSISTANCE TO ENERGY SECTOR TO STRENGTHEN ENERGY SECURITY AND REGIONAL INTEGRATION CONTRACT NUMBER EPP-I The authr s views expressed in this publicatin d nt necessarily reflect the views f the United States Agency fr Internatinal Develpment r the United States Gvernment.

3 Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins ASSISTANCE TO ENERGY SECTOR TO STRENGTHEN ENERGY SECURITY AND REGIONAL INTEGRATION CONTRACT NUMBER EPP-I April 2011 Tetra Tech 2011 Prepared fr: Prepared by: United States Agency fr Internatinal Develpment Armenia Missin 1 American Ave. Yerevan 0082 Armenia Tetra Tech ES, Inc. Tetra Tech ES, Inc N. Fairfax Drive Suite 601 Arlingtn, VA Tel: Fax: Versin: 1.0 iii Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April 2011

4 TABLE OF CONTENTS 1. Intrductin Scenari definitin Transmissin Line Scenaris Supply Optins Transmissin Pricing Effects n Transactins Other Sensitivity Cases Outline f General Methdlgy fr Cmputing Csts and Benefits Ecnmic Cst and Benefits withut Envirnmental Benefits r Regulatry Impacts Transmissin pricing and regulatry issues assciated with new transmissin line Envirnmental effects f new Armenia/Gergia transmissin Details f GTMax Analysis 4-1 Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April 2011 iv

5 1. INTRODUCTION This dcument presents the general methdlgy that will be used t analyze the csts and benefits f a prpsed new transmissin cnnectin between the Armenian and Gergian pwer systems. The methdlgy invlves (1) measuring the ptential benefits frm increased electricity trade via a new transmissin line that will allw generating units in Armenian and Gergian t perate in a mre efficient manner, and (2) cmparing thse benefits t the cst f cnstructing and financing the line. Efficiency benefits arise because electricity demand in the tw cuntries can be met thrugh the use f generating units in either Gergia r Armenia. Jint system benefits arise frm imprved thermal/hydr integratin, cst savings via pwer purchase, system lad shifting and diversity, peak lad reductins, and lad augmentatin fr increased dispatch efficiency and enhanced unit cmmitment scheduling. Emplying cmbined supply resurces t serve the demand in bth cuntries cntrasts with the situatin tday whereby transmissin cnstraints and differences in grid peratinal regimes mean that it is difficult fr generating units in Gergia t be used t prvide supply fr Armenia and fr units in Armenia t prvide supply t Gergia. Since the tw cuntry grids are nt synchrnus the systems perate independently with relatively small pwer trades. Currently pwer transfers are nly pssible if lad frm ne cuntry is islanded int the neighbring system s grid. Pwer flws ver a 220 kv transmissin line that cnnects Gergia and Armenia serve the island lad. There are als tw 110 kv lines that cnnect the tw grids, but these lines are currently nt peratinal. The prpsed intercnnectin wuld allw pwer transfers withut islanding lads using a DC 400 kv transmissin line with back-t-back cnverters. The estimated magnitude f ptential benefits frm a new transmissin line depend n a number f assumptins that include: (1) trades made n current transmissin lines; (2)generating capacity expansin and retirement (such as a new nuclear plant and renewable prductin); (3) the cst f imprts and revenue realized frm exprts between Gergia and Russia and between Gergia and Turkey; (4) existing and future plant efficiencies; (5) lad grwth in Armenia, Gergia and neighbring cuntries; (6)fuel prices and (7) imprt and exprt pwer cmmitments that have been made by Armenia and Gergia. In additin t quantifying raw ecnmic csts and benefits f a new transmissin line, the reprt will cnsider alternative regulatry framewrks fr cst recvery and pricing f the transmissin line as well as the effect f the transmissin line n CO2 emissins. The prject reprt will include a general descriptin f the current status f the Armenian and Gergian grids including generatin, transmissin, and demand. It will als include varius sectins that measure the benefits and csts f a reference scenari and f alternative transmissin intercnnectin scenaris. Dcumentatin f the analysis will list scenaris used in the cst benefit analysis and prvide a detailed explanatin f each transmissin ptin. Assumptins invlving the cst f the line, the financing f the line and a financial mdel that quantifies the csts and benefits f the investment will be presented in separate sectins. Mdel results will be explained in terms f the ecnmic thery f transmissin grids alng with simple graphics that illustrate cst-saving strategies. Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April

6 2. SCENARIO DEFINITION Given the imprtance f develping assumptins related t the value f increased energy trade in quantifying benefits f transmissin integratin, the definitin f alternative scenaris is presented in this sectin befre discussing hw the cst f the line is integrated int a cst and benefit analysis. Scenari categries include: (1) Gergian transmissin system intercnnectin/transmissin ptins; (2) pwer plant capacity expansin alternatives; (3) transmissin pricing scenaris; and, (4) ther assumptins. Initial sets f ptins fr scenari cmpnent are prvided in the list belw. T accurately measure the benefits f a transmissin line, details f the future generating systems in bth Gergia and Armenia shuld be accurately represented. In additin, the effect f cnnectins between Gergia and Russia and between Gergia and Turkey need t be cnsidered. Currently, detailed representatin f Armenia has been created in the GTMax sftware, but similar infrmatin has nt been develped fr Gergia. T prceed with the analysis, initial investigatins will use a simple representatin f the Gergian system thrugh assuming varius levels f time and seasn differentiated energy value. Simulatins will be run fr a histrical base year, 2015, 2020, and Results fr intervening and subsequent years will be extraplated frm results in these years. 2.1 TRANSMISSION LINE SCENARIOS Because the electricity systems in Armenia and Gergia cannt be directly cnnected due t stability prblems, definitin f the current ptential fr electricity trade and the ptential future transfers is nt as simple as defining ne case with a transmissin line and ne case withut a transmissin line. Currently, apprximately 100 MW can be transferred between Gergia and Armenia, but nly if a sectin f the Gergia r Armenia system is islated in an electrical island. Further, the current system des nt allw imprts and exprts t simultaneusly ccur in shrt time perids such as a day r a week. Finally, if a new 400 kv transmissin line is built, it may nt be feasible t create an electrical island rendering current lines bslete. Given these issues, the fllwing different transmissin scenaris are prpsed: 1. T1: Withut new transmissin 400 kv DC line and existing 220 kv &2X110 kv lines are nt used fr imprt/exprt. 2. T2: Withut new transmissin 400 kv DC line and existing 220 kv &2X110 kv lines are used fr imprt/exprt islands. The existing transmissin is assumed t have a limit f 100 MW and nly be available in ne directin per week (e.g. nly imprts frm Gergia r nly exprts t Gergia). 3. T3: With new transmissin 400 kv DC line and existing 220 kv & 2X110 kv lines are nt used fr imprt/exprt. This allws transfer f 350 MW with lsses f apprximately 3% due t the DC cnversin. 4. T4: With new transmissin 400 kv DC line and existing 220 kv & 2X110 kv lines are used fr imprt/exprt islands. This allws apprximately 450 MW f transfer. 5. T5: Alternative DC lines with varius kv ratings and assciated MW carrying capacities (cntingent n results frm initial set f alternatives) Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April

7 Scenari definitin. cntinued... Cases T1 and T2 are reference cases that are intended t represent the current system. The remaining cases are evaluated relative t the reference cases t measure the benefits f the transmissin line. Befre detailed representatin f Gergia is established in GTMax, a simple representatin f ptential transactins with Gergia will be develped. This will invlve a series f different hurly energy values where the energy value is assumed t higher in the winter than in the summer. This technique recgnizes that the precise value f electric energy in Gergia is uncertain. (Frm a technical perspective, the Gergian system will be represented a single market nde in GTMax which represents the pprtunity t buy and sell t Gergia at specific time-f-day prices.) Thrugh evaluating different energy value levels in Gergia, the set f cnditins that make the transmissin line ecnmically attractive and financially viable can be determined. This is hencefrward referred t as a break-even apprach. When detailed representatin f the Gergian system is mdeled in GTMax, uncertainty with respect t value f electric energy in Turkey and Russia will cntinue t be an issue. The cnnectins between Gergia and Turkey/Russia are an imprtant issue with respect t Armenia/Gergia intercnnectin because with a transmissin line, the transactins between Armenia and Gergia will be cmpeting with transactins between Gergia and the ther cuntries. T deal with the uncertainty in the value f pwer trades t and frm Russia and Turkey, a similar break-even apprach as used in the simple Gergia representatin will be used. This will allw determinatin f the Turkey and Russia pwer values that are required t make the Gergia/Armenia line ecnmic. 2.2 SUPPLY OPTIONS Because different generating capacity cnfiguratins have an imprtant effect n the ecnmic benefits f a transmissin line, alternative capacity expansin and retirement ptins will be develped fr each transmissin scenari. Currently, the GTMax mdel is develped fr the years 2015 and In 2015, the mdel includes the exiting nuclear pwer plant in Armenia. In 2020 the existing nuclear plant is retired and a new 1,000 MW nuclear plant is assumed t be placed in service. Given uncertainties in cmpleting the new nuclear plant and uncertainties in cmpleting new hydr capacity in Gergia, the fllwing three capacity expansin scenaris fr 2020 are suggested. 1. S1: With a new 1,000 MW nuclear plant 2. S2: Delayed cnstructin f the new 1,000 MW nuclear plant with a lw natural gas price 3. S3: Alternative Gergia supply scenaris (e.g., hydr pwer plant capacity expansin) 2.3 TRANSMISSION PRICING EFFECTS ON TRANSACTIONS Currently, Armenian law dictates that the cst f pwer that is transferred between Armenia and ther cuntries is assessed a transmissin charge. This cntrasts with the manner in which transmissin cst related t pwer transfers within the cuntry is assessed, where csts are impsed at the retail level and transmissin pricing des nt affect the manner in which plants are dispatched. The prblem is mre significant fr the new transmissin line because this single line will likely have higher capital csts than all f the existing investment in Armenia. This means that if csts f the line are impsed directly n imprts r exprts using current tariff mechanisms, the measured ecnmic Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April

8 Scenari definitin. cntinued... benefits f the line culd be reduced. T evaluate the effect f different regulatry plicies n the ecnmics f the transmissin line, alternative transmissin tariffs will be applied in selected sensitivity cases. The transmissin tariffs will include scenaris with three alternative transmissin csts nthing,.2 cents per kwh (represents the current level f transmissin exprt tariff AMD/kWh), and.6 cents per kwh (cnsiders investment int new transmissin prjects). 2.4 OTHER SENSITIVITY CASES As deemed necessary further sensitivity analyses will be cnducted fr selected transmissin cases. The additinal sensitivity analyses may include: high and lw demand grwth, different natural gas prices, alternative Gergian hydrlgy levels (e.g., rainfall years that have 10% and 90% prbability), varying levels f renewable energy and representatin f cntractual arrangements that require blck pricing and energy deliveries. Sensitivity analyses will als be cnducted t investigate varius pwer exprts and imprts frm Russia and Turkey, have different capacity expansin paths in Gergia and Armenia, and investigate varius financing ptins. Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April

9 3. OUTLINE OF GENERAL METHODOLOGY FOR COMPUTING COSTS AND BENEFITS The utline described in this sectin summarizes the general apprach t the cst and benefit analysis where by GTMax runs are put tgether with financial cst f the transmissin line. Questins f hw transmissin pricing and ther regulatry issues will be analyzed in the study are als addressed. The final sectin presents the apprach t measuring envirnmental effects f the transmissin line. 3.1 ECONOMIC COST AND BENEFITS WITHOUT ENVIRONMENTAL BENEFITS OR REGULATORY IMPACTS The mst fundamental task in the study is t cmpute the pure ecnmic benefits and csts under different scenaris (withut allcating benefits t Armenia, Gergia r private exprt cmpanies etc. and withut envirnmental adders r transmissin tariffs.) T accmplish this, a tw step prcess will be used: Step 1: Cmpute the ttal cst f Armenia and Gergia system with and withut added transmissin lines Run GTMax cases fr 2015, 2020 and 2025 (described abve) with current transmissin and new transmissin lines. This invlves cmparing the ttal cst cmputed in GTMax fr reference case scenaris (T1 r T2) with the scenaris that include new transmissin (T3, T4 r T5). The analysis will initially be develped withut detailed representatin f the Gergian system and assume that the value f energy in Gergia is lw in the summer because f surplus hydr energy and capacity. Assumptins fr nn-winter values will range between $0-$35/MWH while winter values are assumed t be $60/MWH during peak perids. Assumptins will be made with increased values in $10/MWH increments until values reach $60/MWH fr all hurs. Making alternative runs in this manner will allw determinatin f the break-even value in Gergia that is required t make the transmissin line ecnmic. When the detailed representatin f the Gergian system is available that includes specificatin f hurly lads, hydr inflws, thermal peratin, and transmissin links t Russia and Turkey, alternative energy value scenaris will be develped fr trades between Gergia and the Turkey and Russia pwer systems. The value f pwer in Turkey and Russia will be evaluated in a similar manner as that described abve fr the simple Gergia representatin, where a range f alternative pwer prices will allw cnstructin f a break-even analysis. Fr the years 2020 and 2025, GTMax cases will be develped with and withut the ptential new Armenia nuclear unit and reflecting ther scenari definitins described abve. After 2025 thrugh the end f the ecnmic life f the transmissin line, prjected savings gradually diminish at different rates in real terms as new generating units built in bth Gergia and Armenia that are assumed t have similar characteristics. Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April

10 Outline f General Methdlgy fr Cmputing Csts and Benefits. cntinued... T be cnsistent with capital cst assumptins (which are measured in USD) savings are assumed t inflate in a manner cnsistent with general inflatin utlks fr USD (derived frm U.S. EIA, IMF etc.) In presenting energy values in the reprt, GTMax utputs fr selected days and selected pwer plants will be presented t demnstrate hw increased transmissin affects detailed peratin f nuclear, thermal and hydr units. Step 2: Cmpare the ttal energy cst savings in Gergia and Armenia with the ttal transmissin line cst fr bth the Gergia and Armenia sectins f the line Develp alternative carrying charge assumptins using different assumed financing csts f the transmissin line (this will apply interest rates, tax rates and ther financial assumptins used in ther Armenian investment analyses invlving the prpsed new nuclear plant). The cst f DC cnversin will be included in the transmissin investment as the Armenian and Gergian systems cannt perate synchrnusly. Carrying csts will be cmputed with and withut tax effects (in case with taxes, the ecnmic savings are reduced frm the prfit tax.) The analysis will include bth an ecnmic IRR and a financial IRR. The financial analysis will accunt fr length f time required t cnstruct the line and the peratin and maintenance cst f the line. 3.2 TRANSMISSION PRICING AND REGULATORY ISSUES ASSOCIATED WITH NEW TRANSMISSION LINE Part f the task in evaluating csts and benefits f the line is assessing regulatry issues that culd arise frm increased electricity trade between Armenia and Gergia and increased investment n the balance sheet f the natinal transmissin cmpany. Befre presenting varius regulatry ptins, selected statistics will be presented as backgrund including: Assumed allcatin f the ttal benefits f the line t Armenia and Gergia (since the regulatry issues are nly relevant t the Armenia prtin f the line and Armenian benefits frm perating efficiencies.) The annual financing cst f the transmissin relative t ttal electricity revenues in Armenia and relative t ttal transmissin revenues currently cllected thugh tariffs in Armenia. The magnitude f required transmissin tariffs that wuld be assigned t imprt and exprt cmpanies if the entire cst f the Armenian prtin f the line were assigned t imprt and exprt cmpanies n a per MWH basis. (T cmpute the per MWH amunt, the simulated transfers n the line frm GTMax runs will be used.) The magnitude f the rate increase that wuld be impsed n retail cnsumers frm the transmissin if the cst f the line were t be impsed as a part f retail rates. Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April

11 Outline f General Methdlgy fr Cmputing Csts and Benefits. cntinued... Details f which Armenian plants wuld increase prductin t meet exprts t Gergia in varius seasns and times f day. In particular, the amunt f revenues generated frm gvernment wned plants versus privately wned plants culd affect the plicy analysis. Fr example, in the scenari that includes the new nuclear plant, ff peak nuclear pwer wuld likely be sld frm Armenia t Gergia. Quantificatin f the pwer imprts n the line and the pwer exprts n the line. (It is generally the case that imprts wuld benefit retail cnsumers while exprts frm Armenia wuld ften yield prfit t private cmpanies with exprt licenses rather than retail cnsumers.) The effect f the transmissin line and assciated pwer trades n VAT and prfit tax cllectins in Armenia. After presenting the backgrund statistics, an analysis f the prblems assciated with the current regulatry framewrk alternative regulatry appraches will be discussed. (Given the cst f the line and current regulatins, n regulatry ptin yields an ideal slutin fr all parties.) Analysis f transmissin pricing and the regulatin f exprts and imprts will include (but nt be limited t) the fllwing issues: If the transmissin benefits are realized by imprt and exprt cmpanies while retail cnsumers pay fr sme r all f the line, the cnsumers will unfairly pay the csts f the line withut receiving any benefits. If the cst f the line is assigned t imprters and exprters then the ecnmic value f the line will diminish because trades will nly be made if the efficiency benefits exceed the attributed sunk cst f the line in per MWH r per kw/mnth charges. If the transmissin cst was cmpletely assigned t imprters and exprters and nt much pwer was transferred n the line, then retail cnsumers r the Gvernment f Armenia wuld be left paying csts f the line. If retail cnsumers pay the full capacity r sunk cst f generating plants such as the new nuclear plant r ld units at Hrazdan while exprting cmpanies receive prfits frm the exprts related t the plant, then retail cnsumers will be prviding direct subsidies t the exprters withut receiving any benefits. If exprting cmpanies must pay a prtin f the capital csts f plants that are used t exprt, they will be less inclined t make exprts and the ecnmic benefits f the line will be reduced r even eliminated. If the Armenia plicy with respect t limiting exprts t plants that are n the margin is changed, there is a risk f game playing and nntransparency. After weighing these and ther issues the analysis will present specific plicy ptins alng with the benefits and csts f alternative ptins. Discussin will include hw similar issues have been addressed in ther cuntries. Using GTMax utputs, the effects f different plicy ptins n retail cnsumers and Armenian taxpayers will be quantified t best extent pssible. Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April

12 Outline f General Methdlgy fr Cmputing Csts and Benefits. cntinued ENVIRONMENTAL EFFECTS OF NEW ARMENIA/GEORGIA TRANSMISSION The final issue addressed invlves the amunt f CO2 emissins that result frm peratins with and withut the new transmissin line. If Gergia and Armenia did nt have any cnnectin ther than with each ther, then cmputing the amunt f CO2 emissins with and withut the line wuld be straightfrward and culd be derived directly frm GTMax runs. Hwever, if the Gergia system is nt represented in a detailed manner the emissins must be estimated thrugh deriving the type f pwer plant that is likely t be n the margin given the pwer price. Similarly, if the Armenia/Gergia line affects pwer trades between Gergia and Russia r Turkey, the changes in emissins in Russia and Turkey must be estimated frm the assumed pwer prices. Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April

13 4. DETAILS OF GTMAX ANALYSIS In GTMax, Grid expansin paths and mdes f peratins will be evaluated using predefined metrics f financial, ecnmic, and envirnmental measures. These may include, but are nt limited t the fllwing: 1. System level prductins cst, 2. Unit starts and stps and assciated csts, 3. When applicable new transmissin line usage (imprts/exprts), 4. Ttal revenues cllected frm line tariffs, 5. Custmer electricity tariffs by usage perid (i.e., night and day), 6. Ttal prductin fr each system (i.e., Armenia & Gergia), 7. Line cngestin cst, 8. Marginal value f increased line capacity, 9. Seasnal/mnthly marginal value f hydrpwer, 10. Air emissins, and 11. Nn-pwer water releases. An initial set f high pririty scenaris fr prject evaluatin will be frmulated. This will include, but nt limited t the reference and preferred scenaris. As time permits, additinal alternatives may be frmulated and analyzed utilizing the insights gained frm the examinatin f the initial scenari set. Since many GTMax runs are required, weekly simulatin will be made fr either each seasn (4 runs) r each mnth (12 runs) f the year. Mdel results will then be scaled t annual levels. Mre detailed simulatins (i.e., 52 weekly runs per year) will then be cnducted n thse alternatives that are the mst appealing t decisin makers. If detailed infrmatin n the Gergian system is available, the GTMax mdel will include a single tplgy that has a detailed representatin f bth systems alng with existing transmissin linkages and the prpsed intercnnectin. The tplgy will include the pssibility t simulate and ptimize transmissin system islanding and cntractual arrangements fr energy exchanges with Gergia. Depending n the scenari that is simulated capacities f these links will be adjusted and turned n r ff. Methdlgy fr Evaluating the Ecnmics, Financial Viability, and Envirnmental Cnsequences f Prpsed Gergian Intercnnectin and Transmissin Line Optins April