Energy 31 (2006) 954–966

www.elsevier.com/locate/energy

Transmission investment and expansion planning

in a restructured electricity market
F.F Wua,b, F.L. Zhengb,c, F.S. Wena,b,*
a
Center for Electrical Energy Systems, University of Hong Kong, Pokfulam Road, Hong Kong
b
Tsinghua-HKU Power Systems Research Institute, Graduate School at Shenzhen,
Tsinghua University, Shenzhen, 518055, China
c
College of Electrical Engineering, South China University of Technology, Guangzhou, 510640, China

Abstract
Transmission planning in a restructured electricity market becomes increasingly complicated. To bridge the gap
between economic and engineering considerations, this survey paper suggests a framework to clarify the
interactions among various economic and engineering issues by reviewing recent theoretical and practical progress
in transmission investment and transmission planning methodology. Thus, the paper makes economic literature
more accessible to the engineering community and engineering literature more accessible to the economic
community interested in the subject.
q 2005 Elsevier Ltd. All rights reserved.

1. Introduction

Electric power transmission lines were initially built to link remote generating plants to load centers,
thus allowing power plants to locate in regions that are more economical to do so. As systems grew, a
meshed network of transmission lines emerged, providing alternative paths for power flows from
generators to loads that enhance the reliability of continuous supply. In regions where generation
resources or patterns of load demand are different, transmission interconnection eases the need for
generation addition. Transmission addition is justified whenever there is a need to connect cheaper
generation to meet growing load demand, enhance system reliability, or both.
Transmission expansion planning has always been a rather complicated task. First of all, load demand
changes over both time and space. The change in load demand is met by the appropriate dispatch of

* Corresponding author. Tel.: C86 852 2857 8481; fax: C86 0852 2559 8738.
E-mail address: fswen@eee.hku.hk (F.S. Wen).
0360-5442/$ - see front matter q 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.energy.2005.03.001
 F.F. Wu et al. / Energy 31 (2006) 954–966 955

generation resources. As an electric power system is an alternating-current (AC) system obeying

physical laws, the effect of any change in one part of the network (e.g. changing the load demand at a
node, raising the output of a generator, or switching on or off a line or a transformer) will spread
instantaneously to other parts of the interconnected network, altering the loading conditions on all
transmission lines. The ensuing consequences may be more marked on some lines than others,
depending on electrical characteristics of the lines and the interconnection.
There is only a very limited capability in controlling this natural tendency of power flows. There exist
devices such as phase shifting transformers (PST), high-voltage direct-current (HVDC) lines, and other
power-electronics-based flexible AC transmission (FACTS) devices to exercise limited control of power
flows but they are expensive; and, therefore, they are only sparsely used. At the same time, the
transmission network is designed, placed and constructed to be a durable infrastructure with several
decades of life to it. During the lifetime of a transmission line, its functions in the network and impact to
generators and loads will undergo changes, ranging from small to rather major repercussion.
Restructuring introduces competition in the generation and, in some cases, in the retail segments of the
electric power industry. The primary reason for introducing competition in the developed countries
(e.g. North America and Western Europe) is to improve efficiency. For fast developing countries (e.g. China
and India), the typical reason is to create a more level playing field to attract private investment, thereby
relieving the government in funding the electric sector’s growth that is crucial to economic development.
A common element of restructuring is the unbundling of generation and transmission, with the latter
being opened for use by all eligible market participants under the so-called open access regime. This has
greatly transformed the traditional power industry and introduced many new challenges in all aspects of
generation, transmission and system operation.
In the restructured environment, the functions of the transmission system have expanded beyond the
historical roles of linking generation to load and enhancing system reliability. Interconnection enables
more generators to compete in a large aggregate market to serve the combined load. On the other hand,
inadequate transmission capability resulting in transmission bottlenecks enables generators at specific
locations in the network to exercise market power in a local market. Transmission system, therefore, can
enhance competition and mitigate market power in a restructured market environment.
This paper surveys the issues and the approaches to transmission investment and transmission
planning in a restructured market environment. The paper’s focus is on issues that are complex with wide
spread impacts. Hence, this paper does not discuss such topics as transmission planning related to
connecting an isolated generator to the grid, interconnection of two otherwise unconnected regions, and
transmission enhancement by installing apparatus to improve local performance (i.e. so-called network
deepening expansion).
Transmission expansion planning in the restructured environment encompasses economic and
engineering issues. To be sure, there are several existing books and papers on transmission planning in a
competitive market environment, each takes a different perspective. An extremely readable book by
Woolf [1] provides an excellent introduction on this topic. Hirst and Kirby [2] identify a number of
major issues related to transmission planning in a restructuring industry. The Consortium for Electric
Reliability Technology Solutions (CERTS), an organization under the aegis of US Department of
Energy, has studied various issues with some proposed solutions for transmission grid investment and
planning [3]. CERTS also proposes a research agenda in transmission planning [4]. Rosellon [5] offers
a comprehensive survey on recent theoretical advances on transmission expansion, mostly in
the economic literature. Several recent papers in the engineering literature have discussed various
956 F.F. Wu et al. / Energy 31 (2006) 954–966

issues and methods related to transmission planning [6–9]. The objective of this survey paper is to bridge
the gap between the two camps, making economic literature more accessible to engineering community
and engineering literature more accessible to economic community interested in the subject.
Section 2 reviews the traditional transmission expansion planning practice and shows why the
traditional practice, which is still used in some restructured markets, is inadequate. Section 3 discusses
major challenges to transmission planning in the changing environment. Section 4 provides a framework
for discussing transmission expansion planning in the new environment, thereby pointing out the
differences in the modeling requirements from those required under conventional planning. It shows that
the transmission expansion planning in the restructured industry is complex, involving many interrelated
analyses addressing different aspects of the problem at different levels. Sections 5 and 6 discuss recent
research advancement in transmission investment analysis and transmission planning analysis. A short
conclusion follows in Section 7.

2. Traditional transmission expansion planning

Under the regulated monopoly environment, a vertically integrated utility has the obligation to serve
the load demand of all existing and future customers. The utility is responsible for all aspects of
generation, transmission, distribution and customer service businesses, with the common goal of reliably
meeting customer demands at stable and reasonable rates. It forecasts future load demand and performs
generation and transmission expansion planning to meet the forecast demand growth. It may earn up to
its allowed rate of return on the authorized rate base that is subject to regulatory approval.
Capital investments are usually justified on the grounds of reliability requirements to serve the
forecasted load demand. Expansion planning focuses on the selection of least-cost alternatives. Since the
cost of generation addition is much more than that of the required transmission, the planning process was
typically conducted in a sequential manner starting with generation planning to select a least-cost
generation addition and followed by transmission planning.
The objective of transmission expansion planning is to ensure that as economically as possible; there
will be sufficient transmission capacity to meet the growing load demand and the necessary generation
addition reliably. In situations where transmission enhancement by itself may meet load demand without
generation addition, the cost analysis can easily be carried out and justified. To be sure, the necessity of
transmission expansion is often justified simply by reliability considerations.
Reliability of meeting load demand is a constraint that must be fulfilled in transmission expansion,
and the selection among those alternative expansion plans that meet reliability requirement is based on
costs. Hence, transmission expansion planning may be formulated formally as an optimization problem,
with cost minimization as its objective function and reliability as a constraint. This is notwithstanding
that both reliability assessment and cost evaluation involve complex analysis over the lifetime of the
proposed expansion.
Fig. 1 shows the transmission expansion planning under the regulated structure. To keep the
optimization problem tractable, the conventional approach to transmission expansion planning is to
decompose the problem into three main steps:

† Generate alternative candidate transmission expansion plans using a simplified model of the problem.
† Conduct detailed financial and other analyses of these alternatives to guide the final plan selection.
 F.F. Wu et al. / Energy 31 (2006) 954–966 957

Generation planning

Generate transmission Simplified model

expansion candidates

Financial analysis Power system operation Impact assessment

simulation

Final plan for approval

Fig. 1. Traditional transmission expansion planning procedure.

† Perform technical impact analysis to ensure the chosen plan’s feasibility.

As will be seen below, these three steps are clearly separated in an integrated utility’s traditional
planning practice. Once the first step is completed, the other two steps are performed more or less
independently. Sometimes a few iterations may be necessary to refine a plan. Nevertheless, only a very
loose coupling among the three steps exists.

2.1. Generation of candidates

The generation of a candidate or a few candidates of transmission expansions for further detailed
analysis may be done heuristic, analytical, or both. Because of many practical constraints, the potential
candidates for transmission expansions often boil down to only a few limited practical alternatives.
Intuition and experience may guide the selection. When no clear candidates are readily available, an
analytical approach may be employed. The analytical approach is to formulate the problem as an
optimization problem using a simplified model of the system. The classical formulation is linear
programming [10], using the DC power flow model of the power system to check the reliability
constraint. The simplified approach only considers a snapshot of a future power system and assumes
linear costs for the transmission capacity. The application of various other optimization methods,
including non-linear programming, integer programming, artificial intelligence methods such as expert
system, neural networks, genetic algorithms, and tabu search, have been proposed [11].

2.2. Financial and other analyses

Classical capital budgeting method is used to evaluate the financial aspect of the transmission
expansion investment. A key consideration is the utility’s ability to finance the costs of the investment
under the regulated rate structure. Under the rate-of-return regulation, the discount rate typically used is
the allowed rate-of-return on capital. As the price of electricity and the revenue to the company are
independent of detailed operation of the system, the financial analysis is carried out by the utility’s
finance department, without considering an engineering model of system operation.
958 F.F. Wu et al. / Energy 31 (2006) 954–966

Moreover, every transmission project is intensely analyzed in terms of its environmental impacts. As
the planning process has been evolving into a very public undertaking the environmental issues have
risen in prominence. The environmental analyses investigate all the issues including siting, right-of-way
impacts, EMF concerns and visual and esthetic effects.

2.3. Technical assessment

The technical impact of the transmission expansion plan is assessed using detailed engineering
models of the transmission system under worst-case scenarios to ensure that the system can perform
reliably. Both steady-state and dynamic responses of the future power system are analyzed, usually
under the assumption of the worst heavy loading conditions. Most serious disturbances on the system,
such as three-phase short circuit faults and loss of generation, are postulated. Stability analysis is
conducted, using detailed models of generators, transmission network and loads. The effect of loss of
any single equipment (the so-called N-1 criterion) on power flows is assessed.

3. Changing environment and new challenges

The unbundling of generation, transmission and distribution has resulted in multiple parties in the
business. To foster competition and pre-empt market power abuse, some jurisdiction required generation
divestiture to create more independent generation owners. The generation enterprises, unlike the
integrated utility of the regulated world, have different and sometimes conflicting objectives. The
presence of new structures and the diversity of the many new players in electricity markets have
fundamentally invalidated some assumptions and relationships of the traditional transmission planning
process, bringing new challenges to the transmission planning problem. These challenges require the
transmission owners and investors to define new planning objectives, re-examine conventional planning
principles, and develop new models and means to meet these objectives. We highlight some of the major
issues below.

3.1. Expansion criteria

What criteria should guide transmission expansion decision-making amid parties with diverse
interests is a critical issue to be addressed because the paradigm of least-cost expansion planning is no
longer viable. Should the criteria be based on benefit? Then there is always the issue of public interests
(i.e. social welfare) vs. private interests. How to include reliability whose benefit is hard to quantify in
the expansion criteria?

3.2. Relationship with generation and load

Traditional transmission planning starts from a given load forecast and a generation expansion
plan, both of which are responsibilities of the same company In the restructured industry, generation
expansion decisions are made by individual generation companies, often not completely known to the
authority responsible for transmission planning. Indeed beyond the 5- or 10-year horizon, generation
scenarios are largely unknown. Compounding the matter is that generation expansion decisions may
 F.F. Wu et al. / Energy 31 (2006) 954–966 959

be affected by decisions on transmission expansion and vice versa. For instance, a transmission
project may take 5 or 10 years, longer than two years or so for building a gas turbine or a combined
cycle power plant. A generation project may be initiated after the transmission project has
commenced, potentially altering the financial assumptions used to justify the transmission project.
There is also the substitution effect of transmission by generation or by load via demand-side
management. Such interactions make the transmission expansion planning no longer a simple
sequential process.

3.3. Institutional issues

There is no a clear definition or delineation of the responsibilities among various stakeholders

involved in transmission expansion planning. For example, who should propose an expansion,
who should review and analyze the expansion proposal, and who should take the role to
approve the plan? How to reconcile conflicting interests among the stakeholders and with what
mechanism to do it? In the US, Regional Transmission Organizations (RTOs) are supposed to be
responsible for transmission planning. But what is the role of merchant transmission in this
arrangement? Should RTOs or private investors overbuild transmission facilities in anticipation of
future need?
While many difficult issues are still under debate and remain unresolved, transmission expansion
planning in many countries follows, by and large, the traditional process with some modifications. The
uncertainty of the market rules and the return on investment in the transition period has discouraged
transmission investment. For example, annual investment on transmission in the US has dropped 50%
since 1975 [3]; and the investment for the Norwegian main grid has fallen from 400 to 40 M NOK from
1991 to 1996 [12].

4. Transmission expansion in the restructured environment

Transmission expansion planning in the restructured environment can be classified into two inter-
related categories, which we term as transmission investment and transmission planning. In most
jurisdictions, there is an entity responsible for transmission planning, for example, ISO in the US, who
will identify the best or the most appropriate expansion plans. The investors then decide who will do it to
make the plan a reality. There are also instances where the investors propose a plan and submit to the
transmission planning authority for approval.

† Transmission investment considers candidates for transmission expansion and the related financial
analysis. The tight relationship between costs and revenue is fundamental to investment decision-
making. The investment problem needs to be addressed by the entity that makes the decision whether
to invest in a particular transmission undertaking.
† Transmission planning includes the traditional technical impact assessment on system reliability and
economic and environmental impact assessment to society (all stakeholders). Transmission planning
is in the realm of the transmission planning authority, e.g. ISO, the single structure in the competitive
environment charged with the central planning function.
960 F.F. Wu et al. / Energy 31 (2006) 954–966

Generation planning Generate transmission Demand-side management

candidates

Simplified model

Financial analysis Power system operation

simulation Economic Reliability
assessment assessment

Final plan for approval

Fig. 2. Transmission expansion planning procedure in the deregulated environment.

In contrast to Fig. 1 portraying a relatively simple planning process in the regulated world, Fig. 2
shows the transmission expansion planning in a restructured environment. A comparison of Figs. 1 and 2
underlines the substantial differences between transmission expansion planning in the two environments.
Specifically, transmission expansion planning in the restructured environment is much more complex.
The possibilities of generation planning and demand-side management as substitutes for transmission
expansion must be considered when candidates for transmission expansions are generated. The process
of generating candidate transmission expansions has to recognize the uncertainty concerning generation
expansion as well as load growth. It has to be flexible and robust.
In this new environment, future revenue from transmission investment depends on how the system is
operated. Financial analysis requires the simulation of future power system operation. The impact
assessment of a new transmission expansion plan has two dimensions: one is the traditional technical
assessment focusing on system reliability, engineering feasibility and environmental impact, the other
one is the economic assessment of the impacts of the new system on society. Both assessments require
the simulation of future power system operation and both require subjective judgment to reach
compromised decisions.
The incentives that drive transmission expansion planning depend on the business models adopted in
different electricity markets. Transmission system business models express the relationship among the
three business functions associated with the provision of transmission services: system operation, market
operation, and grid ownership. A comprehensive evaluation of different transmission system business
models can be found in [13]. Whether the system operation and the market operation are combined does
not have a significant impact on transmission investment, so it is not a matter of concern here. However,
the classifications of business models affecting transmission expansion are:

(1) Combined vs. separated system operation and grid ownership functions?
(2) Public vs. private ownership?
(3) If privately owned, for-profit vs. non-profit? and
(4) Is it owned by market entities?
 F.F. Wu et al. / Energy 31 (2006) 954–966 961

Most of the publications on transmission expansion surveyed herein and discussed below assume that
system operation is separated from grid ownership and transmission systems are privately and
independently owned, as is the case in most US power systems.

5. Transmission investment

There are basically four transmission investment patterns: (1) public investment; (2) regulated private
investment; (3) market-driven transmission investment; and (4) hybrid model of merchant transmission
and regulated transmission.
Public investment includes state- and municipality-investment through public funding. In this pattern,
a transmission administrator will be formed. It puts heavy burden on government responsibilities and has
been criticized by some for inducing economic inefficiency and low operating efficiency. There is not
much literature on the subject of public transmission investment specifically related to electricity
industry restructuring.
Most of the investment recovery mechanisms in transmission expansion being discussed so far are
based on the costs, as opposed to the value, of transmission investment. When considering the
investment mechanisms below, one must pay attention to the issue of cost recovery or cost allocation in
transmission investment that may be based on embedded cost, incremental cost, or both. The debate that
cost allocation should be usage-based or benefit-based will likely continue because it is very difficult in
practice to calculate the share of usage or benefit resulting from a transmission facility, even at a
snapshot of the system condition, let alone over the period of the facility’s lifetime. Another issue is the
allocation of the benefits between the investor of the new addition and those of the existing
infrastructure.
With respect to incentive for transmission expansion, Oren et al. [13] argue that any scheme that
favors investment should be encouraged because the transmission cost is only a small percentage of the
overall cost of delivering electricity to consumers, around 4–11% of the average bill. In contrast, some
argue that congestion costs are only around 3–5% of the total cost of electricity, thus eliminating
congestion with a gold-plated transmission system may not be in the best interest of society [1,14].
However, a large transmission outage in a tight grid can impose large and substantial economic loss, as
evidenced by the 2003 blackout in North America.

5.1. Market-driven transmission investment

The foundation of market-driven investment is the nodal spot pricing or the locational marginal
pricing (LMP) of electricity. The LMP varies according to system operating conditions. Limits on
transmission line loading result in difference in marginal prices not only across the congested line, but,
because of the spreading effect of the transmission network, to other nodes of the network as well. The
LMP difference between two nodes where a generator-and-load pair engages in a transaction is
the additional cost incurred by these two parties and paid to the transmission system operator. Hence, the
LMP price difference is often called the ‘congestion rent’, supposedly providing an economic signal and
incentive to where transmission investment is needed to relieve the congestion.
To manage the risk of congestion charge volatility, a transmission user may buy an instrument called
transmission right. Transmission rights can be physical or financial. Physical right entitles the holder
962 F.F. Wu et al. / Energy 31 (2006) 954–966

the right to use that portion of the transmission capacity. Financial right, on the other hand, provides the
holder a financial benefit equal to the congestion rent. Joskow and Tirole [15] demonstrate the
superiority of financial rights over physical rights in terms of economic efficiency.
Two types of financial transmission rights have been proposed and implemented: point-to-point
financial transmission rights (FTR) [16] and financial flowgate rights (FGR) [17]. FTR is defined
between any pair of nodes in a transmission network, whereas FGR is defined for a particular
transmission line or a group of lines. Allocation of transmission rights is a difficult problem. A
‘simultaneous feasibility’ check of FTRs has to be made to make sure that it is technically feasible to
implement an allocation in a power system where reliability constraints of operation must be observed.
Such feasibility implies a sufficient condition for ‘revenue adequacy’: the revenue collected with
locational prices in the spot market is at least equal to the payment obligations for the FTRs in the same
spot period [16].
The principle of market-based merchant transmission investment is based on the premises that an
efficient investment should yield sufficient revenue from the sale of transmission rights as the rightful
reward to the investor. Theoretical research by Hogan, as well as Bushnell and Stoft, has demonstrated
that under certain assumptions all profitable investments are efficient [18–20], undermining the
traditional view that transmission networks are natural monopolies [21]. Relaxation of these
assumptions, however, casts doubt on the efficiency of profitable transmission investment [19–23]. A
more thorough analysis by Joskow and Tirole [21], with an expanded merchant model that incorporates
some realistic attributes of transmission networks and the behavior of transmission owners and system
operators, shows that several potentially significant inefficiencies could result from the reliance on the
merchant transmission investment framework.
There is also a problem of incremental FTRs created by the new investment. When a new
transmission expansion project is completed, the amount of the incremental FTRs would depend on the
characteristics of the expansion project as well as those of the network prior to the expansion and on the
FTRs that were already allocated. Gribik et al. [24] propose an approach to augment the allocation of
FGRs with a transmission admittance right that depend on the physical effects of the new facility on the
system.
Market-based transmission investment could most easily be implemented for interconnecting
transmission between different regions, using controllable transmission lines such as HVDC and the
ones with FACTS devices, and for radial transmission lines. Indeed, practical examples of market-based
transmission investment are few and they are all of the type of HVDC lines [25]. On general AC
transmission networks, it is reported that congestion revenue can only recover 25–30% of the investment
cost, insufficient to provide incentives for merchant investment [26].

5.2. Regulated transmission investment

Regulation of a monopoly is seldom perfect. The fundamental objective of regulation is to seek

efficiency and at the same time to ensure fairness. Specific to the transmission investment problem, the
regulation must provide proper incentive for investment but avoid over-investment, and must encourage
efficient operation but maintain system reliability. An appropriate regulation regime is important but
difficult to implement because of conflicting objectives of investors, employees, environmentalists and
customers of various classes making it impossible to develop a plan that is optimal for everybody [14].
 F.F. Wu et al. / Energy 31 (2006) 954–966 963

Baumol [27] lays out a theoretical standard for regulation based on perfect contestability, rather than
perfect competition.
Rate-of-return regulation has been widely employed in the traditional power industry, and is still in
use for transmission regulation in many restructured systems. In recent years, various forms of
performance-based regulation have been proposed in some countries for better promoting efficiency. In
the electricity market of England and Wales, the revenue cap regulation is imposed on the transmission
owners, with the cap set by the rate of inflation adjusted with a factor representing technological
progress, and a portion of the difference between the actual congestion cost and a target payment to the
customers [28]. The Norwegian authority has also introduced an incentive-based regulation [12].
In a recent article, Vogelsang [29] provides an extensive survey on latest theoretical developments in
performance-based regulation relevant to the electric transmission. Two recent papers will be mentioned
here.
Leautier [28] proposes a scheme by which the regulator offers a menu of contracts that would induce
the transmission company to operate and expand the transmission system efficiently, while allowing its
cost recovery. Under the proposed scheme, the costs of congestion and expansion are the responsibility
of the transmission company. The contract has two components: (1) a revenue sharing rule that trades off
cost minimization against rent extraction; and (2) an uplift management rule that induces optimal
expansion of the transmission network. The optimal regulation contract will stimulate the transmission
company to choose the transmission capacity that minimizes the sum of the expected congestion cost,
the expected transmission losses, and the expansion cost.
Vogelsang [30] proposes an incentive regulatory scheme based on price. There are two regulatory
dimensions in price: price level and price structure. A two-part tariff framework is proposed and a proper
price-cap structure would provide the right incentives. Vogelsang [29] further suggests a comprehensive
transmission pricing method divided into three time periods.

6. Transmission planning

In addition to technical impact assessment on system reliability, economic impact assessment on all
market participants in the restructured environment becomes necessary. The assessment should yield
information from different perspectives (e.g. regional vs. local) and be able to provide individual benefit
analysis for market participants, oversight bodies, and public interest agencies. The technical impact
assessment remains largely unchanged; but in the new environment, many once-hidden issues are now
beginning to emerge.

6.1. Economic assessment

Joskow and Tirole [15] have shown that transmission congestion contributes to market power in the
electricity market. Issues related to market power in the electricity market can be found in [31].
Reducing congestion in the transmission system may not be the only goal for transmission expansion.
Alvarado et al. [32] show that an ill-conceived transmission expansion may result in loss of consumer
surplus and increase congestion elsewhere in the transmission system. The economic benefit of
transmission expansion may well lie in enhancing market competition and mitigating market power
abuse. For instance, a transmission line connecting two isolated, self-sufficient regions where local
964 F.F. Wu et al. / Energy 31 (2006) 954–966

suppliers have market power will enhance competition and reduce consumer prices, even though the line
may hardly be utilized [13]. Contreras and Gross [33] build a framework to capture such benefits in
terms of changes in social welfare as well as supplier and consumer surpluses.
California ISO and London Economics International [34,35] propose a comprehensive and yet
practical methodology, ‘Transmission Economic Assessment Methodology (TEAM)’, for cost-benefit
assessment of transmission investment proposal. Because the benefits of a transmission expansion may
accrue to different market participants, the total welfare measure and each of its components—consumer
surplus, producer surplus, and transmission congestion rent, and the impact of strategic bidding need to
be evaluated. By assigning different weights on these components, one may obtain different views of the
transmission expansion problem from the societal perspective, investor’s perspective, and participants’
perspectives.
The proposed framework does not assume marginal cost pricing as in the textbook model of perfect
competition. It simulates strategic bidding via a game-theoretic model or an empirical method to analyze
the market power mitigation problem. Uncertainties and risks in transmission expansion are considered
through scenarios analysis with stochastic methods. Sensitivity analysis is used to assess resource
substitution to transmission by generation and demand-side measures.

6.2. Technical assessment

The traditional approach to technical impact assessment of transmission expansion on system

reliability, adopted by the industry and specified by the North American Reliability Council (NERC),
has been developed for the regulated monopoly with an obligation to serve. It has nevertheless remained
the unbending rules for reliability standards. The NERC requires that the transmission system be able to
withstand possible contingencies or disturbances, defined as loss of any single element (e.g. generator,
transformer or transmission line), that may happen on the system. This so-called ‘N-1’ criterion puts a
stringent requirement on the transmission system. First of all, a steady-state assessment of the
transmission system using the power flow analysis is carried out for each contingency. Next, the most
severe disturbances such as a three-phase short circuit fault close to a generator are studied via a transient
stability analysis involving detailed dynamic models of generators and loads, as well as models of
protective relay systems. Other system dynamic performance analysis, including voltage stability,
dynamic stability and long-term dynamics may also be carried out.
Recently, some questions have been raised regarding the methodology used in the technical
assessment of a transmission expansion. These questions are not new; but in the past they were confined
to the small research community and outside of which received little attention. More people are now
willing to scrutinize the issues given their economic significance in the new environment.
One issue is that the N-1 criterion is deterministic in nature, without considering the likelihood of each
contingency. Some argue that a probabilistic approach is more appropriate [36]. Another issue is the
accuracy of input data and output results. As detailed models of technical assessment require large
amounts of input data, most of which are uncertain at best in the new environment, it becomes
questionable on how much faith we should have on the study results.
A more fundamental issue in the traditional reliability evaluation of a power system is that we regard
the load demand as fixed, rather than a control variable. In the restructured environment, power flow and
stability condition will differ if some load demands are curtailable or interruptible under prior
 F.F. Wu et al. / Energy 31 (2006) 954–966 965

agreements that offer price incentives to customers for the right to curtail load by the system operator
during disturbances [37]. This is a fruitful research topic for future systems.

7. Conclusions

Recent blackouts have drawn public attention to the adequacy of transmission system and the need for
its expansion. Transmission expansion planning becomes more difficult in the restructured electricity
market environment because both economic and reliability assessments depend on system operation and
many issues are intricately intertwined. In this paper, we first propose an overall framework to clarify the
models and solutions necessary for transmission expansion planning. We then review recent progress in
economic aspect and engineering aspect of transmission investment and transmission planning. Our
main conclusion is that more research is still needed to improve the methodology for transmission
expansion planning.

Acknowledgements

The research is sponsored by a grant from Research Grant Council, Hong Kong Special
Administrative Region, China. The authors thank George Gross and C. K. Woo for their valuable
suggestions that have significantly improved the readability of this paper.

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