Energy 31 (2006) 954966

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Transmission investment and expansion planning in a restructured electricity market

F.F Wua,b, F.L. Zhengb,c, F.S. Wena,b,*
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
a

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 ows 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 justied 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

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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 ows. There exist devices such as phase shifting transformers (PST), high-voltage direct-current (HVDC) lines, and other power-electronics-based exible AC transmission (FACTS) devices to exercise limited control of power ows 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 efciency. For fast developing countries (e.g. China and India), the typical reason is to create a more level playing eld to attract private investment, thereby relieving the government in funding the electric sectors 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 specic 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 papers 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

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issues and methods related to transmission planning [69]. 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 justied 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 sufcient 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 justied. To be sure, the necessity of transmission expansion is often justied simply by reliability considerations. Reliability of meeting load demand is a constraint that must be fullled 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 simplied model of the problem. Conduct detailed nancial and other analyses of these alternatives to guide the nal plan selection.

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Generation planning

957

Generate transmission expansion candidates

Simplified model

Financial analysis

Power system operation simulation

Impact assessment

Final plan for approval

Fig. 1. Traditional transmission expansion planning procedure.

Perform technical impact analysis to ensure the chosen plans feasibility. As will be seen below, these three steps are clearly separated in an integrated utilitys traditional planning practice. Once the rst step is completed, the other two steps are performed more or less independently. Sometimes a few iterations may be necessary to rene 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 simplied model of the system. The classical formulation is linear programming [10], using the DC power ow model of the power system to check the reliability constraint. The simplied 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, articial 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 nancial aspect of the transmission expansion investment. A key consideration is the utilitys ability to nance 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 nancial analysis is carried out by the utilitys nance department, without considering an engineering model of system operation.

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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 ows 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 conicting 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 dene 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 benet? Then there is always the issue of public interests (i.e. social welfare) vs. private interests. How to include reliability whose benet 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

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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 nancial 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 denition 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 conicting 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 difcult issues are still under debate and remain unresolved, transmission expansion planning in many countries follows, by and large, the traditional process with some modications. 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 classied into two interrelated 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 nancial analysis. The tight relationship between costs and revenue is fundamental to investment decisionmaking. 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.

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Generation planning

Generate transmission candidates

Demand-side management

Simplified model Financial analysis Power system operation simulation

Economic assessment

Reliability 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. Specically, 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 exible 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 signicant impact on transmission investment, so it is not a matter of concern here. However, the classications of business models affecting transmission expansion are: (1) (2) (3) (4) Combined vs. separated system operation and grid ownership functions? Public vs. private ownership? If privately owned, for-prot vs. non-prot? and Is it owned by market entities?

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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 inefciency and low operating efciency. There is not much literature on the subject of public transmission investment specically 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 benet-based will likely continue because it is very difcult in practice to calculate the share of usage or benet resulting from a transmission facility, even at a snapshot of the system condition, let alone over the period of the facilitys lifetime. Another issue is the allocation of the benets 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 411% of the average bill. In contrast, some argue that congestion costs are only around 35% 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 nancial. Physical right entitles the holder

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the right to use that portion of the transmission capacity. Financial right, on the other hand, provides the holder a nancial benet equal to the congestion rent. Joskow and Tirole [15] demonstrate the superiority of nancial rights over physical rights in terms of economic efciency. Two types of nancial transmission rights have been proposed and implemented: point-to-point nancial transmission rights (FTR) [16] and nancial owgate rights (FGR) [17]. FTR is dened between any pair of nodes in a transmission network, whereas FGR is dened for a particular transmission line or a group of lines. Allocation of transmission rights is a difcult 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 sufcient 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 efcient investment should yield sufcient 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 protable investments are efcient [1820], undermining the traditional view that transmission networks are natural monopolies [21]. Relaxation of these assumptions, however, casts doubt on the efciency of protable transmission investment [1923]. 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 signicant inefciencies 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 2530% of the investment cost, insufcient 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 efciency and at the same time to ensure fairness. Specic to the transmission investment problem, the regulation must provide proper incentive for investment but avoid over-investment, and must encourage efcient operation but maintain system reliability. An appropriate regulation regime is important but difcult to implement because of conicting objectives of investors, employees, environmentalists and customers of various classes making it impossible to develop a plan that is optimal for everybody [14].

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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 efciency. 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 ination 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 efciently, 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 benet 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 benet of transmission expansion may well lie in enhancing market competition and mitigating market power abuse. For instance, a transmission line connecting two isolated, self-sufcient regions where local

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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 benets 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-benet assessment of transmission investment proposal. Because the benets of a transmission expansion may accrue to different market participants, the total welfare measure and each of its componentsconsumer 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, investors 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 specied 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, dened 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 ow 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 conned to the small research community and outside of which received little attention. More people are now willing to scrutinize the issues given their economic signicance 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 xed, rather than a control variable. In the restructured environment, power ow and stability condition will differ if some load demands are curtailable or interruptible under prior

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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 difcult 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 rst 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 signicantly improved the readability of this paper.

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