Sensitivity of economic criteria on selecting transmission upgrades in a competitive electricity market

In economic valuation - cost-benefit analysis - of transmission upgrades under competitive market environment, cost of transmission facilities is determined based on the annual carrying charge and benefit is defined based on the concept of `social welfare maximization'. A transmission upgrade is chosen to be built when its benefit exceeds its cost plus some percentage adder to account for future uncertainty. In this paper, we show that the choice of economic criteria, particularly the economic benefit, will affect the value of maximum social welfare which in turn will affect the choice of the transmission upgrade. We provide various definitions of economic benefit. Based on these definitions, we further look at the cost-benefit analysis (criteria) for transmission upgrades considered in a competitive market system. We illustrate the importance of these concepts and methodology by applying them to two potential transmission upgrades in PJM electricity market.