Economic Benefits of Cross-regional Power Supplies: A case of east-west interconnection lines
Faculty Fellow, RIETI
At the latest meeting of the Electricity Supply-Demand Review Committee (Note 1) on May 16, 2014, it was revealed that Japan will be facing tight power supply again this summer. Up until last year, the supply-demand situation in eastern Japan was at the center of concerns. But this time around, it is western Japan that will likely be walking a tightrope. Reserve margins for the areas served by the Kansai Electric Power Co., Inc. and the Kyushu Electric Power Co., Inc. are expected to be 1.8% and 1.3% respectively, falling far below the 3% threshold, which is considered to be the minimum level to ensure stable electricity supply. However, transmitting surplus power supply from eastern Japan, where supply-demand situations will be relatively loose, would raise the reserve margin in central and western Japan to 3.4%. Against this backdrop, there is a renewed focus on the importance of enhancing the capacity of the so-called east-west interconnection (frequency converters) between eastern and central/western Japan.
Following the March 11, 2011 earthquake, the importance of cross-regional power transmission from surplus areas to deficit areas has been under intense discussion. In particular, since Japan has two networks of power grids--one running at 50Hz in eastern Japan and the other at 60Hz in central/western Japan--transmission across the frequency boundary involves converting alternating current into direct current to change the frequency at interconnection points. Currently, the capacity of the east-west interconnection lines is only 1.2 million kilowatts, and it has been pointed out that such insufficient transmission capacity was one reason why rolling blackouts had to be implemented in the service area of the Tokyo Electric Power Company in the post-quake period. Also, the question arose as to why the capacity is so limited, prompting many to suspect that general electricity utilities--i.e., regional electric power companies such as the Tokyo Electric Power Company--might have been reluctant to invest in transmission infrastructure because of their desire to suppress cross-regional competition and maintain their monopolies within their respective service areas. Considering the fact that those formed the starting point of the ongoing discussion on electricity system reform, it makes sense to establish an organization to promote and coordinate cross-regional electricity transmission as the first step of reform. Going forward, this organization will be responsible for balancing power supply and demand across service areas and operating interconnection facilities with an aim to achieve the optimum utilization of the existing power supply capacity of Japan. In conjunction with this development, the expansion of interconnection capacity will be put on the agenda.
Economic benefits of expanding the capacity of the east-west interconnection lines
Why are interconnection lines so important? Lately, major power utilities one after another have announced plans to start supplying electricity to customers outside of their conventional service areas. Such cross-boundary expansion is possible only because interconnection lines exist. For consumers, this means that they may be able to purchase lower-priced electricity from suppliers outside of their regions. From the viewpoint of economics, expanding the capacity of interconnection has the following two benefits: 1) facilitation of competition (constraints on market power) and 2) arbitrage between different power generation markets. In this article, I would like to focus on the second benefit (Note 2).
Where the marginal cost of power generation differs between Area A and Area B as shown in Figure 1, cross-boundary transmission of electricity via an interconnection line would improve the cost efficiency of power generation for both areas combined. By allowing power supply to move from Area A to Area B, the cost of generating power in Area B would be reduced by an amount that exceeds the incremental increase in the cost of generating power in Area A. In economics, this means that the utilization of the interconnection line generates the economic benefit represented by the blue-shaded area in Figure 1.
Using two power system models--i.e., EAST 30-machine and WEST 30-machine system models--developed by the Institute of Electrical Engineers of Japan (IEEJ), my research team at the University of Tokyo simulated the power supply and demand situation in 2013 and calculated the economic benefit of expanding the east-west interconnection lines. Data for the IEEJ models have not been updated since 2001, after the liberalization of the power sector began on a significant scale. Therefore, we collected publicly available data on 605 power plants with a rated output of 30,000 kilowatts or more (246 million kilowatts in total), allocated them to the 60 nodes of the models, and carried out simulations using load flow calculation software (Note 3). Simulation results are shown in Figure 2. It shows values calculated for various cases, each defined by two factors, i.e., the operating rate of nuclear power plants and the penetration of photovoltaics (PV). We found that the economic benefit of expanding the capacity of the east-west interconnection lines, which is to be derived in the form of a reduction in the total annual variable cost (i.e., sum of fuel and running costs), would be 2.8 billion yen per year if the current capacity of 1.20 million kilowatts is expanded by 900,000 kilowatts, and 1.0 billion yen per year if expanded by 1.80 million kilowatts (Note 4). The difference in the average marginal cost of power generation between eastern and central/western Japan was 0.42 yen in 2013. Expanding the east-west interconnection capacity by 900,000 kilowatts and 1.8 million kilowatts from the current level would reduce this gap to 0.18 yen and 0.06 yen respectively. The economic benefit of interconnection capacity expansion would increase with a rise in the operating rate of nuclear power plants. For instance, if the operating rate increases to 64% (average for the years from 2005 through 2010), the capacity of the east-west interconnection lines would be boosted by 900,000 kilowatts, resulting in the economic benefit of 9.3 billion yen per year. The figure also shows that the economic benefit of interconnection capacity would increase with the penetration of PV (Note 5). Although we took up the case of PV as an example, the benefit of introducing renewable energies would be increased by expanding the capacity of the east-west interconnection lines.
|Annual variable cost a) (in trillion yen)||Reduction in annual variable cost resulting from capacity expansion (in billion yen)|
|Operating status of nuclear power plants||Total PV capacity installed||1.20 million kW||2.10 million kW||3.00 million kW||900,000 kW increase|
(1.20 mil. kW → 2.10 mil. kW)
900,000 kW increase
(2.10 mil. kW → 3.00 mil. kW)
|Actual operating rate in 2013 b)||None||8.68||8.67||8.67||24.6||9.9|
|8.98 million kW d)||8.52||8.51||8.51||28.1||9.9|
|27.86 million kW d)||8.18||8.18||8.18||35.2||16.4|
|66.58 million kW d)||7.55||7.54||7.54||51.6||22.9|
|64% operating rate c)||None||5.41||5.40||5.40||86.9||41.0|
|8.98 million kW||5.28||5.27||5.26||9.27||4.80|
|27.86 million kW||5.01||5.00||4.99||108.3||65.0|
|66.58 million kW||4.51||4.50||4.49||129.3||77.2|
Notes: a) Total variable cost is the sum of fuel and running costs; b) No. 3 and No. 4 reactors of the Oi Nuclear Power Plant were in operation until September 2 and 15, 2013 respectively; c) The figure represents the average percentage of estimated uptime during the period from April 2005 through March 2010, calculated based on the assumption that all of the exiting nuclear power reactors except for No. 1 through No. 4 reactors in the Fukushima Daiichi Nuclear Power Plant will resume operations; d) Of the figures listed as the total PV capacity installed, 8.98 million kilowatts represents the actual total capacity as of the end of June 2013, whereas 27.86 million kilowatts (median projection for 2020) and 66.58 million kilowatts (median projections for 2030) are the median estimates provided in the Ministry of Environment's report, "Teitanso-Shakai-Zukuri no tameno Energy no Teitansoka ni muketa Teigen [Proposals for Promoting Low Carbon Energies toward the Realization of a Low Carbon Society]," published in March 2012.
The figures shown above as the economic benefit of expanding the east-west interconnection lines differ significantly from the estimated benefit of approximately 60 billion yen presented to the Electricity Systems Reform Subcommittee's working group on system design (Note 6). The figure is estimated for all cross-regional interconnection lines, whereas our figures are specifically for the east-west interconnection lines. Still, I am curious from an academic perspective as to how and based on what sort of data the working group has derived the estimate. The benefit of expanding cross-regional interconnection capacity is not limited to a reduction in the cost of power generation. For instance, enhanced interconnection capacity would provide an additional option in times of power shortages, enabling a power provider operating in a shortage area to receive emergency power supply from those in other areas. In any case, the cost of expanding interconnection capacity would be passed on to consumers in the form of increased electricity (wheeling) charges. Therefore, a cost-benefit evaluation must be carried out in a verifiable manner before making any decision on the expansion of interconnection capacity.
Insufficient public data and basic models available to analyze Japan's power market
What we realized during the course of our analysis is the fact that power grid system models that should set a premise for arguments are poorly defined and the publicly available data are limited. A nationwide power grid system model that has only 60 machine nodes hardly reflects the reality of Japan. In addition, the disclosure of data on power generation, which were far from being sufficient in the first place, has become even more limited following the liberalization of the power industry in 2001. Our estimates presented in this article are subject to change depending on what assumptions we make on various constraints such as those in terms of the fuel storage capacity and minimum output of power generation facilities. However, due to the lack of reference data, we had no choice but to perform simulation based on what we believed to be reasonable assumptions.
Researchers conduct research using objective data as a crucial ingredient. If Japan has fewer researchers specializing in the electricity market than in other countries, it may be attributable to the poor availability of publicly accessible data and relevant basic models. Concerning the ongoing electricity system reform, we have been hearing such catch phrases as the liberalization of the power retail market and the unbundling of the power sector into power generation and distribution. However, as evident from this article, the actual work involved is rather technical. Success of the electricity system reform hinges on how we can broaden the base of human resources specializing in power generation and distribution systems and to what extent we can elevate the overall level of knowledge and expertise.
- ^ Electricity Supply-Demand Review Committee, "2014-nendo no Denryoku Jukyu Taisaku ni tsuite [Electricity Supply and Demand Measures in Summer 2014]," May 16, 2014 http://www.kantei.go.jp/jp/singi/electricity_supply/20140516/taisaku.pdf
- ^ In order to determine the first effect, i.e., facilitation of competition, deadweight loss must be measured, but it is not material in value when the price elasticity of demand for electricity remains small. Where the price elasticity of demand is zero, differences in electricity rates merely affect the proportion of consumer and producer surplus given the size of social surplus.
- ^ See Saito, Keiji, Shinichi Hanada, and Hiroshi Ohashi (2014), "Taiyoko Hatsuden no Daikibo Donyu ni kansuru Simulation Bunseki [Simulation Analysis on the Impact of the Large-scale Introduction of Solar Power Generation]," CIRJE-J-258.
- ^ The Electric Power System Council of Japan (ESCJ) has been calling for expanding the capacity of the east-west interconnection to 2.1 million kilowatts (ESCJ proposal dated January 23, 2013). Meanwhile, an interim report put forward in April 2014 by the Study Group on Master Plans for Enhancing the Transmission Capacity of Power Grids between Regions, an advisory panel for the Ministry of Economy, Trade and Industry, states that from a policy making viewpoint, the capacity should be expanded to 3 million kilowatts as soon as possible. The interim report (in Japanese) is available at: http://www.meti.go.jp/committee/sougouenergy/sougou/chiikikanrenkeisen/report01.html
- ^ Specifically, we assumed that the number of PV installations for home use is proportional, and the number of those for non-home use is inversely proportional to the number of residents in a mesh cell of one square kilometer within each prefecture (no PV installations in unpopulated areas).
- ^ Material 4-3 prepared and presented by the secretariat for the 5th meeting of the working group on system design, pp10-13, available (in Japanese) at: http://www.meti.go.jp/committee/sougouenergy/kihonseisaku/denryoku_system/seido_sekkei_wg/pdf/005_04_03.pdf
May 28, 2014
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