Methods for economic analysis of power grids

On behalf of Statnett, Vista Analyse has assessed how economics should be considered in area plans for the power grid.

VA report-2023/22: Economics in area plans for the power grid – Methods and presentation

In the report, we make several recommendations related to the structure and content of the area plans:

• The area plans should be given a zero alternative where the current system solution is reinvested, often with voltage upgrades. A zero alternative will better facilitate assessing and presenting the value of other measures. Accelerating investments is an example of measures that are easier to assess when there is a zero alternative.
• The socially rational alternative should always be investigated up to the same level of maturity as the measure sought for a licence, also in cases where these are different measures due to the obligation to connect.
• The area plans should be more closely aligned with the instructions for investigation and DFØ's cost-benefit analysis guide, with the four parts (1) description of problems, (2) identification of relevant measures, (3) assessment of advantages and disadvantages and (4) recommendation

We note that the value of new consumption must often be assessed in order to determine whether an investment is economically profitable or not, and make specific recommendations as to how this can be done:

• For new point consumption that can only be realised if grid investments are made, business profitability must be estimated in order to weigh this against the costs of grid development. We recommend that profitability assessments are obtained from the players themselves, which are quality assured. This approach is already being used in other areas, such as power production and petroleum investments.
• For new consumption in households and non-power-intensive manufacturing, we outline a valuation method based on elasticities. The method assumes that the demand curve reflects the value of electricity for consumers and uses elasticity to say something about the shape of the demand curve. Through an example, we show that the method has the potential to be applied to specific network measures.

In the report, we systematise various impacts on greenhouse gas emissions and recommend how they should be taken into account in cost-benefit analysis of grid measures. For the direct effects on greenhouse gas emissions, we recommend the following:

• For emissions from construction machinery etc. that are priced through a CO2 tax on fuel, it is sufficient to start from the cost of using these machines, but In some cases, some emphasis may be placed on the use of emission-free solutions that contribute to the maturation of new methods and new technology.
• Emissions from land-use changes should be explicitly taken into account in cost-benefit analysis of grid measures, and valued using the Ministry of Finance's carbon price path for forest and land-use changes.
• Emissions related to the use of SF6 should be priced in line with the tax introduced from 1 January 2023.

For the more indirect effects, we note that the value of reduced greenhouse gas emissions is mainly reflected in the value of the new consumption, and will be included in assessments of the value of new consumption:

• In some cases, grid investments may make it possible to use electricity instead of fossil fuels. The pricing of combustion emissions contributes to increasing the demand for electricity and grid capacity. The value of reduced emissions will therefore be reflected in the value of the new consumption.
• Grid investments can also make it possible to produce products that displace solutions that involve greenhouse gas emissions. Batteries and green hydrogen are two examples. These emission cuts are mainly taken into account through the valuation of new consumption, where carbon pricing will contribute to increased profitability for emission-free solutions. However, the development and testing of new technology should in many cases be taken into account as a positive effect.

Partner Åsmund Sunde Valseth has been in charge of the project, which has been carried out in collaboration with Orvika Rosnes and Haakon Vennemo. Michael Hoel has been a quality assurer.