Energy Economics 91 (2020) 104890

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Energy Economics

journal homepage: www.elsevier.com/locate/eneeco

Economic viability and regulation effects of infrastructure investments

for inter-regional electricity transmission and trade in China
Jin-Hua Xu a, Bo-Wen Yi b,⁎, Ying Fan b
a
Center for Energy and Environmental Policy Research, Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China
b
School of Economics & Management, Beihang University, Beijing 100191, China

a r t i c l e i n f o a b s t r a c t

Article history: The transition of energy structure to renewable energy is a social and systematic engineering that requires com-
Received 2 August 2019 plex regional power interconnection as a support. Thus, an assessment of the economic viability of infrastructure
Received in revised form 7 May 2020 investments for supporting such transmission expansion is crucial. This study presents a multi-regional power
Accepted 28 July 2020
system optimization model to evaluate the potential economic benefits of infrastructure investments for the na-
Available online 07 August 2020
tional inter-regional electricity network in China under various scenarios in the context of low-carbon transfor-
Keywords:
mation. Key factors influencing economic benefits are analyzed specifically and regulation barriers associated
Economic benefits with inter-regional electricity trade are given particular attention. The results show that approximately 140
Regulation barriers Giga Watt (GW) of infrastructure construction for the inter-regional electricity trade network is economically vi-
Electricity trade able during the planning horizon. These new interconnections would lead to 250–440 billion RMB of economic
Optimization model benefits. Regional electricity trade barriers caused by imperfect market mechanisms have a negative impact on
the economic benefits of transmission infrastructure investments, although they promote scale and utilization ef-
ficiency in the power sector of electricity-importing regions. Improving the national grid coordination mecha-
nism to break the grid isolation between the State Grid Corporation of China and the China Southern Power
Grid is crucial, because a large number of transmission lines connecting these two national-level power grids
are economically viable.
© 2020 Elsevier B.V. All rights reserved.

1. Introduction
Renewable energy is a key area in achieving low-carbon transforma-
tion. However, China's energy resources and electricity load show re-
verse distribution, along with a regional imbalance between electricity
supply and demand, which has led to serious curtailment issues (Yi
et al., 2019). The interconnection of the regional electricity market is
considered a secure, sustainable, and cost-effective way to resolve
these issues (Ahmed et al., 2017). Electricity is a relatively peculiar com-
modity, as its trade entirely relies on transmission lines. Inter-regional
electricity transmission can facilitate electricity trade and help effi-
ciently integrate energy sources. Thus, the rapid expansion of the
inter-regional electricity network is crucial to China's energy landscape
over the next two decades.
Currently, Chinese government is giving a high priority to inter-
regional electricity transmission by ultra-high voltage (UHV) technol-
ogy in order to promote renewable energy development (Wang et al.,
2014). Until 2017, 16 UHV lines had been built by the State Grid Corpo-
ration of China (SGCC) and the China Southern Power Grid (CSG); the
⁎ Corresponding author.
E-mail address: ybw2018@buaa.edu.cn (B.-W. Yi).
length of the UHV line, both complete and under construction, totals
32,000 km (CSG, 2017; SGCC, 2017). However, the construction of the
inter-regional electricity network is still below expectation due to the
uncertainty of economic viability and obvious institutional barriers be-
tween different provinces, although much literatures revealed positive
results in both economic and environmental aspects (Chen et al.,
2014; Guo et al., 2016, 2017; Li et al., 2016). As demonstrated by the
European electricity system, despite clear benefits, interconnection pro-
jects are difficult to achieve in practice (Dutton and Lockwood, 2017).
One reason for this difficulty is that the economic benefits of inter-
connection depend on changing network architectures and technology
mixes (Rosellon, 2003). The decision of whether to invest in inter-
regional electricity transmission, and to what extent, needs to be con-
sidered in the context of the national power transmission network.
From a systematic perspective, a transmission line investment may be
uneconomical, even if a single line investment assessment shows it to
be economically feasible. Meanwhile, the future spatial distribution of
low-carbon technologies and the fluctuating feature of renewable en-
ergy complicate the assessment of economic benefits.
Regulation barriers also affect the economic benefits of interconnec-
tion, including local government protection, inter-provincial barrier and
isolation of power grid between the SGCC and the CSG. There is no fully

https://doi.org/10.1016/j.eneco.2020.104890
0140-9883/© 2020 Elsevier B.V. All rights reserved.
2 J.-H. Xu et al. / Energy Economics 91 (2020) 104890
competitive national electricity market in China. Inter-provincial elec-
tricity trade is primarily dominated by local governments who have
the authority to determine the trading price and volume. Many prov-
inces have instituted restrictions on external electricity to protect the
local power generation companies. In addition, the isolation of power
grid between the CSG and the SGCC hampers economically viable infra-
structure investments. These two national power grid companies man-
age regional power grid construction and are more concerned with the
planning of their own jurisdictions.1 The lack of a national coordination
mechanism for the power grid means almost no electricity trade hap-
pens between CSG and SGCC, which seriously affects the rationality of
inter-regional electricity transmission patterns.
Generally speaking, grid investment is highly capital-intensive, usually
costing several billion USD, and once built, it creates a “lock-in” effect on
the power grid topology for decades, as highlighted by Huppmann and
Egerer (2015), and Chao and Wilson (2020). With the deepening of
China's electricity market reform, value-based transmission expansion
mechanism will be gradually formed. Thus, an assessment of the potential
economic benefits of the national electricity interconnection under mar-
ket competition is crucial prior to making investment decisions. Such an
assessment can also help us understand the economic feasibility of
China's low-carbon transformation and recognize the coordination be-
tween electricity network expansion and national low-carbon transfor-
mation strategy (Su and Ang, 2017).
Many studies have concentrated on the economic benefits of invest-
ment in electric power industry at both the generation side (Li et al.,
2015; Pan et al., 2019) and the demand side (Hu et al., 2011; Yuan
et al., 2014), while few studies have focused on the transmission side.
Timilsina and Toman (2016) quantified the benefits of cross-border
electricity trade in South Asia through an optimization model. Li et al.
(2016) investigated the impact of inter-regional electricity grid on the
energy transformation in China. Li and Chang (2015) established a sys-
temic approach in evaluating the electricity infrastructure investment in
Association of Southeast Asian Nations (ASEAN) and found that there is
still room for improvement in the current Greater Mekong Sub-region
program.
For methodology, vast literatures used the power generation expan-
sion planning (GEP) model to analyze the power generation and trans-
mission investment planning (Gujba et al., 2010; Yuan et al., 2014;
Chang and Li, 2015; Cheng et al., 2015b; Hanson et al., 2016). However,
they are difficult to incorporate the intermittent and seasonal features
of renewable energy, which are typically addressed by hourly-based
unit commitment (UC) models (Delarue et al., 2009; Weigt et al.,
2013; Davidson et al., 2016; Holladay and LaRiviere, 2017). These fea-
tures of renewable energy will require thermal power units to adapt,
leading to additional costs related to power dispatch, which will further
impact the economic benefits of electricity exchange (Weijde and
Hobbs, 2012). Few studies, generally focusing on the European power
system, have integrated short-term power dispatch decisions into a
long-term GEP framework to evaluate the economic benefits of regional
power interconnections (Koltsaklis and Georgiadis, 2015; Abrell and
Rausch, 2016; Scholz et al., 2017; Allard et al., 2020).
The existing literatures show important findings regarding the en-
ergy and environmental impacts of electricity interconnections in
China; however, an obvious study gap exists in quantitatively estimat-
ing the potential economic benefits of inter-regional electricity inter-
connection under value-based transmission expansion mechanism.
Moreover, the impact of the regulation barriers related to inter-
regional electricity trade on the economy of transmission investment
is often overlooked.
This study first presents a Chinese multi-regional power system op-
timization model to simulate the expansion of both power generation
and transmission. It integrates short-term power dispatch into the
1
CSG includes the Northeast power grid, North power grid, Northwest power grid, East
power grid, and Central power grid, while SGCC includes the Southern power grid.
long-term investment decision framework based on China's re-
source endowment and power grid structure. It allows for examining
the impacts of various investment options for electricity generation
and transmission, as well as the effects of various electricity dispatch
decisions and network topologies. Second, the economic viability of
infrastructure investments for inter-regional electricity transmis-
sion network is specifically evaluated from a systematic perspective.
Two types of regulation effects are added into the model to reflect
the impact of non-economic factors on interconnections. Finally,
several cases are analyzed to evaluate the investment risks and ex-
amine the sensitivity of the model to various assumptions. This
study answers two questions: (1) what is the economically viable
scale of investment in China's inter-regional transmission network
and how will it change with the evolution of network structure?
And (2) what is the impact of regulation barriers due to imperfect
market mechanism on the economic viability of transmission line in-
vestments and inter-regional electricity exchange patterns? Based
on the answers, policy recommendations are provided for govern-
ment to optimize China's mid-term and long-term inter-regional
power grid development.
This paper is organized as follows. Section 2 provides a description of
the detailed modeling. Datasets and scenario designs are presented in
Section 3. Section 4 shows the economic benefits of infrastructure in-
vestments for the inter-regional power network, and discusses the re-
lated regulation effects. Section 5 summarizes the findings and offers
recommendations.
2. Methodology
2.1. Economic viability and regulation effects
A stylized two-node electricity trade system is presented first as a ref-
erence for our empirical analysis (see Fig. 1). Two regions (A and B) are
characterized by long run marginal cost curves (MCA and MCB) and de-
mands (DA and DB). To simplify, we assume that the long run marginal
cost of each region is monotonically increasing, but the cost in region B
is clearly higher than that in region A. The price elasticity of demand is as-
sumed to be zero, and the electricity transmission cost is assumed to be z
$/MW. The horizontal axis represents electricity supply or demand in
MW, while the vertical axis represents marginal cost in $/MW.
If the difference between MCA and MCB is greater than z, this means
that the additional transmission capacity is economically viable. In this
situation, region A will produce more electricity and transfer it to region
B at a lower marginal cost. The optimal transmission capacity is u MW,
which is determined at the point where the difference in marginal
cost between region A and B is equal to the transmission cost. The equi-
librium electricity supply volumes are DA + u in region A and DB−u in
region B, respectively. Electricity trade generates net cost savings,
which are the economic benefits of transmission investment, and are
depicted as the two gray shaded areas in the left part of Fig. 1.
The regulation effects mentioned in Section 1 are mainly reflected in
the constraints on transmission capacity between regions. If the limited
capacity u* is less than the optimal capacity u, the electricity transfer
volumes and the economic benefits brought by this transfer will change.
The new equilibrium electricity supply volumes are DA + u* in region A
and DB−u* in region B, respectively. The economic benefit losses (BL)
are depicted as the two orange shaded areas in the right part of Fig. 1,
which are calculated by Eq. (1).
Z Z
DB −u DA þu
BL ¼ MC B − MC A −z  ðu−uÞ ð1Þ
DB −u DA þu
The purpose of this simple example is to illustrate the economic viabil-
ity and regulation effects of inter-regional electricity transmission invest-
ment. However, there are multiple nodes in reality, which makes the
above assessment more complicated. Inter-regional transmission network
 J.-H. Xu et al. / Energy Economics 91 (2020) 104890
Fig. 1. Economic benefits and optimal capacity of electricity trade.
structure will change regional marginal cost, and further affect the eco-
nomic viability and corresponding benefits of electricity transmission
investment. Therefore, it is necessary to comprehensively evaluate the
economic benefits and regulation effects of inter-regional electricity trans-
mission from a holistic viewpoint.
2.2. Model description
From Section 2.1, we find that the differences between regional long
run marginal cost and corresponding transmission cost are the most
important factors in examining the economic viability of transmission
investments. However, the accounting of these costs is not simply due
to the natural characteristics of electricity generation and transmission.
The short-term features of electricity must be considered, such as real-
time matching, ramping, and renewable energy fluctuations, although
this study focuses more on the long-term investments. In addition, the
structure of inter-regional power network also affects the tradeoff be-
tween each kind of cost.
Therefore, this study uses a multi-regional power system
optimization model to examine the Chinese power sector, integrating
short-term power dispatch into the long-term investment decision
framework. An illustrative structure of this model is presented in
Fig. 2. At the macro level, it simulates the yearly investment decisions
for both power generation and transmission technologies. At the
micro level, it simulates the hourly power dispatch, including ramping
limits and start-up decisions, to reflect the intermittent and seasonal
characteristics of renewable energy.
This model is a large-scale linear programming solved by the CPLEX
algorithm based on GAMS software. The objective function of this opti-
mization problem is to minimize the total system costs during the plan-
ning horizon, as shown in Eq. (2). The decision variables include the
yearly new built capacity, and hourly power output of power generation
technologies, the yearly new built capacity, and hourly power transfer
Fig. 2. An illustrative structure of the model.
3
of power transmission lines, and the hourly start-up and shut-down ca-
pacities of fossil-based technologies. The main outputs consist of the
macro evolution pathway and micro utilization efficiency of both
power generation and transmission technologies. In addition, indirect
economic factors, such as environmental benefits and economy-wide
impacts, are not considered in the cost function.
 
min C X G ; X Tr ; P; PT; SU; SD ð2Þ
More explanations for parameters and variables, and detailed math-
ematical equations, including objective function and constraints, are
presented in Appendix A.
2.3. Model characteristics
Future inter-regional electricity flow patterns depend on many fac-
tors, including regional resource endowments, power demand changes,
renewable energy development, and the evolution of power generation
technologies. These dynamic changes in electricity flows significantly
affect the economic benefits of infrastructure investments for electricity
networks. Our model reflects such factors.
2.3.1. Cross-regional heterogeneity
One of the main advantages of our model is its ability to describe
cross-regional heterogeneity. Unlike the stylized two-node model pre-
sented in Section 2.1, our model divides China into 10 regions as pre-
sented in Table 1, and each region is assumed to be a node. Considering
the power transmission between nodes, the power supply and demand
of each node match in real time on the hourly dimension, as shown in
Eq. (A.17). Kirchhoff's current law is respected, while the voltage law is
not included.
To clearly define which transmission lines are included in the scope
of this study, we must first explain the regional divisions. China's power
4 J.-H. Xu et al. / Energy Economics 91 (2020) 104890

Table 1
Regional division in this study.

Regional symbol Provinces, municipalities and autonomous regions included Regional power grids Jurisdiction

Northeast Liaoning, Jilin, Heilongjiang, East Inner Mongolia Northeast power grid SGCC
North Beijing, Tianjin, Hebei, Shandong North power grid SGCC
Jinmengxi Shanxi, West Inner Mongolia North power grid SGCC
Northwest Gansu, Qinghai, Ningxia, Shaanxi Northwest power grid SGCC
Xinjiang Xinjiang Northwest power grid SGCC
East Zhejiang, Shanghai, Jiangsu, Fujian, Anhui East power grid SGCC
Center Hubei, Hunan, Jiangxi, Chongqing, Henan Central power grid SGCC
Sichuan Sichuan Central power grid SGCC
South Guangxi, Yunnan, Guizhou Southern power grid CSG
Guangdong Guangdong Southern power grid CSG

grid consists of six parts, the North, Northeast, Northwest, East, Central, detailed mathematical equations about the dynamic change of
and Southern power grids. The first five regional power grids are technology capacity are presented in Appendix A.
governed by SGCC, while the last is controlled by CSG. The resource en-
dowments in various provinces within one grid vary widely. Thus, this
study further divides the six power grids into 10 regions according to re- 3. Data and scenarios
source endowment and geographical position (see Table 1).
Electricity transfer needs to be based on transmission lines, includ- 3.1. Data inputs
ing historical lines as well as new lines decided by this model. Inter-
regional network connection is assumed to adopt ultra-high voltage The volume of data needed for this kind of model is substantial.
direct current (UHVDC) technology (Yi et al., 2016). The ultra-high volt- The key datasets include power demand profiles, generation mix of
age alternating current (UHVAC) is excluded because its advantages in technologies, economic parameters for both power generation and
building a larger synchronous power grid are beyond the scope of our transmission technologies, and meteorological data for renewable
model. The investment of UHVDC consists of fixed costs and variable energy. The description of these data categories and their sources
costs, as shown in Eq. (A.7). Heterogeneity and transmission congestion are presented in the Supplementary material (Cheng et al., 2015a,
within one node are also beyond the scope of this study. 2015b; CEPYEB, 2015; IEA, 2018; Kalnay et al., 1996; Koltsaklis
and Georgiadis, 2015; Lai and Hong, 2007; Li et al., 2016; Lv et al.,
2013; Shu et al., 2005; Tang and Dong, 2012; Wei et al., 2010; Yi
2.3.2. Time step and time coverage et al., 2016, 2017; Zhu and Genton, 2012).
Another advantage of our model relates to time step and time Based on the regional division, we collect information on all existing
coverage. 2 Temporal resolution is a key characteristic. Bottom-up inter-regional power transmission lines through 2017 (see Fig. 3). The
models have a relatively high temporal resolution, generally focus- total transmission capacity is 179 GW. The UHV line is the main carrier
ing on hourly equilibrium.3 However, due to computational limita- of inter-regional power due to its low loss rate and long-distance poten-
tions, large-scale electricity system models adopt the typical day tial (Hui et al., 2017). Jinmengxi is the most important electricity-
method to reduce temporal resolution and coverage (Lienert and exporting region, followed by the Northwest, South, and Sichuan. The
Lochner, 2012; Koltsaklis and Georgiadis, 2015; Merrick, 2016). North, East, and Guangdong are the primary electricity-importing re-
Our model considers six typical days of 24 one-hour periods. Thus, gions. The Jinmengxi-North, Sichuan-East, and South-Guangdong trans-
a one-year period consists of 144 temporal steps. The planning hori- mission patterns play a significant role in the transfer of electricity.
zon is 2015–2030.
The connection between the macro temporal level and micro tem-
poral level is reflected in capacity constraints. The power generation ex-
pansion module determines the available capacity for technologies at
the beginning of each year. The power dispatch and transmission for
each temporal step during 1 year are limited by this available capacity.
Specifically, the capacity constraint for power dispatch is shown in
Eq. (A.16). For renewable energy technologies, the available capacity
depends not only on the installed capacity in this year, but also on the
hourly capacity factor. For fossil fuel technologies, the capacity factor
does not need to be considered. The capacity constraint for power trans-
mission at each hour is shown in Eq. (A.18).

2.3.3. Multiple technologies

Multiple power generation technologies are considered in our
model. Conventional technologies include gas-fired power, ultra-
supercritical coal-fired power (USC), combined heat and power
(CHP), and other coal-fired power. Clean technologies include nu-
clear power, hydropower, onshore wind, offshore wind, biomass,
solar photovoltaic (PV), and concentrating solar power (CSP). The

2
Time coverage is the number of time steps covered in each model run (Pfluger, 2014).
3
Bottom-up models are characterized by detailed technology representation. Technol-
ogy adoption is considered a rational decision-making process (Fleiter, 2011). Our model Fig. 3. Existing inter-regional power transmission network until 2017. Sources: Yi et al.
belongs to this category. (2016); CSG (2017); SGCC (2017).
 J.-H. Xu et al. / Energy Economics 91 (2020) 104890
3.2. Scenario design
Four scenarios, namely REF, BAU, ETB, and FRC, are constructed to
assess the regulation effects of infrastructure investments for inter-
regional electricity network (see Table 2). Two types of regulation
effects are considered in this study. The first is the inter-regional elec-
tricity trade barrier caused by the imperfect electricity market mecha-
nism in China. The second is the lack of a national coordination
mechanism for the power grid, leading to grid isolation between CSG
and SGCC.
The REF (Reference) scenario is intended as a benchmark, in which
no new transmission line is developed during the planning horizon.
The capacity of the inter-regional transmission network in this scenario
has been shown in Fig. 3.
In the BAU (Business As Usual) scenario, the future transmission net-
work is determined endogenously by the model, but we assume the
separation of the power grid between CSG and SGCC exists; therefore,
no new transmission line is developed to connect CSG and SGCC during
the planning horizon. Regional electricity trade barriers are not consid-
ered in this scenario. Inter-regional electricity flow is unrestricted as
long as there is sufficient transmission capacity.
Based on the BAU scenario, we further consider regional electricity
trade barriers in the ETB (Electricity Trade Barriers) scenario, aiming
to identify their impact on the economic benefits of electricity intercon-
nections. In this study, trade barriers are modeled as the maximum per-
centage of regional annual power demand that can be met by electricity
trade with other regions (λpip) referring to Li and Chang (2015), as
shown in Eq. (3). More explanations for parameters and variables are
presented in Appendix A. Based on the net imported electricity of the
North region (including Beijing, Tianjin, Hebei, and Shandong) in
2015, the maximum percentage is assumed to be 20%. This region has
a large number of lines that connect with other regions, which reflects
the actual proportion of inter-regional electricity trade (CEPYEB, 2016).
X  TI  X
P i;t;h −P TO
i;t;h ≤ Di;t;h  λpip
h h
The FRC (Full Regional Connections) scenario considers full regional
connections with unrestricted electricity flow. New transmission lines
are developed to link CSG and SGCC during the planning horizon. A
comparison between the FRC and BAU scenarios demonstrates how
the lack of national coordination mechanisms for the power grid affects
future electricity trade patterns.
In addition to economic considerations, inter-regional electricity
trade should promote the consumption of renewable energy. A high
proportion of renewable energy will be integrated into the power sector
over the next decade, which will necessitate significant transmission in-
frastructure expansions and upgrades. In order to simulate these new
flow patterns, two policy targets are assumed in our model under all
scenarios. The first, which incorporates the U.S.-China Joint Announce-
ment on Climate Change, assumes that the share of non-fossil energy
in total primary energy will exceed 20% in 2030 (Duan et al., 2018), as
shown in Eq. (A.20). The second sets the share of non-hydro renewable
energy in power generation above 17% in 2030, relying on the numbers
used by Yi et al. (2017), as shown in Eq. (A.19).
Table 2
Scenarios for inter-regional electricity system.
Scenario Transmission network Connection between CSG Electricity trade
expansion and SGCC barriers
REF N N N
BAU Y N N Center, Sichuan-East, Sichuan-Center, Xinjiang-Center, and Northeast-
ETB Y N Y North. The comparison, shown in Fig. 5, reveals three differences between
FRC Y Y N
Notes: “Y” represents yes, while “N” represents no.
5
Table 3
Total system costs during the planning horizon in different scenarios.
Scenario Total system Total costs in the Net cost Percentage
costs (Billion REF scenario savings of savings
RMB) (Billion RMB) (Billion (%)
RMB)
BAU 29,790.5 30,146.1 355.6 1.18
ETB 29,820.0 30,146.1 326.1 1.08
FRC 29,514.0 30,146.1 632.1 2.10
4. Results and discussion
4.1. Economic efficiency
4.1.1. Total system cost savings
Table 3 presents the total system costs for each scenario over the
planning horizon. The comparisons between each scenario reveal
three key findings. First, infrastructure development of inter-regional
power transmission produces economic benefits, as the net savings to
total system costs are positive. Such development would produce
355.6, 326.1, and 632.1 billion RMB in net savings in the BAU, ETB, and
FRC scenarios, respectively, or approximately 1.18%, 1.08%, and 2.10%
of total electricity supply costs.4 Second, net savings in the ETB scenario
are 8.3% lower than in the BAU scenario, indicating regional electricity
trade barriers do limit the economic benefits of transmission infrastruc-
ture investment. Third, net savings in the BAU scenario are much lower
than the FRC scenario, which shows there is room for improvement to
the current interconnections.
4.1.2. Cost decomposition
The cumulative changes in various types of costs, resulting from
inter-regional electricity cooperation and trade, relative to the REF sce-
nario, are depicted in Fig. 4. The total cost savings are primarily due to
ð3Þ savings in investment, O&M, and fuel costs of power generation,
which fall by 192.0, 247.5, and 153.2 billion RMB, respectively, in the
BAU scenario. At the same time, there is a net increase in investment
and O&M costs for the expansion of power transmission, but the abso-
lute amount is less than the total savings. Regional electricity trade in-
creases electricity generation in resource-rich areas such as the
Northwest and Jinmengxi, resulting in savings. On the one hand, the ca-
pacity factor of renewable energy in these regions is higher, which re-
duces the investment cost to achieve the same renewable energy
target. On the other hand, lower coal prices in resource-rich areas result
in lower fuel costs for the entire power system.
The investment costs for power transmission in the ETB and BAU
scenarios are 104.6 and 84.5 billion RMB lower than the FRC scenario,
indicating that incomplete regional interconnections and electricity
trade barriers hinder investment in the inter-regional electricity net-
work. For this reason, the savings in investment and fuel costs of
power generation produced by inter-regional electricity trade decrease
significantly in the ETB and BAU scenarios.
4.2. Inter-regional electricity trade pattern
4.2.1. Inter-regional transmission capacity
Fig. 5 shows the inter-regional power transmission infrastructure ca-
pacity through 2030 under different scenarios. It reveals that 141.1 GW
of interconnection is economically viable during the planning horizon
under the BAU scenario. This transmission network primarily consists of
the lines connecting Jinmengxi-East, Jinmengxi-Center, Northwest-
4
All costs in this study are 2014 constant price.
6 J.-H. Xu et al. / Energy Economics 91 (2020) 104890

Fig. 4. Changes in cumulative costs compared with the REF scenario.

the historical network and the future pattern of infrastructure construc-
tion. First, there will be few new transmission lines connecting to the
North or Guangdong regions. Second, the interconnections from the
Northwest and Jinmengxi regions to other regions will increase signifi-
cantly. Third, a large number of transmission lines will be connected to
the Center region.
Electricity trade barriers limit the economic benefits of electricity in-
terconnection, leading to a reduction in total inter-regional transmission
capacity. The economically viable capacity in the ETB scenario is 120.8
GW during the planning horizon, which is 20.3 GW less than the BAU sce-
nario. This reduction is primarily due to the lines connecting Jinmengxi-
Center, Northwest-East, Northwest-Center, and Xinjiang-Center.
The economically viable transmission capacity under the FRC sce-
nario is 166.7 GW during the planning horizon, which is 25.6 GW
more than the BAU scenario. The connection between CSG and SGCC
suggests a large number of transmission lines will be built from the
Northwest, Jinmengxi, and Sichuan regions to Guangdong rather than
the East and Center regions. This is because the marginal generation

Fig. 5. Inter-regional connection capacity by 2030 (GW).

 J.-H. Xu et al. / Energy Economics 91 (2020) 104890
Fig. 6. Inter-regional electricity flows in 2030 (TWh). Notes: Red numbers represent the electricity transfer amount of individual transmission line and blue numbers represent the regional
net electricity transfer amount.
cost in Guangdong is higher than other regions. At the same time, no
new transmission line will be built within CSG due to the interconnec-
tion between SGCC and Guangdong.
4.2.2. Inter-regional electricity flow
Fig. 6 shows the inter-regional electricity flows in 2030 under different
scenarios. There is a significant increase in net electricity flows under the
BAU scenario, reaching 1282 TWh in 2030, 1.73 times as much as under
the REF scenario. The significant difference in various regional net electric-
ity transfer amounts reflects the future electricity trade pattern. The
electricity-exporting regions are Jinmengxi, Northwest, Sichuan, South,
and Xinjiang, while the electricity-importing regions are East, Center,
North, and Guangdong. Especially in the Center region, net electricity im-
ports under the BAU scenario are approximately 5.5 times higher than
the REF scenario. Meanwhile, power supply and demand in the Northeast
are almost balanced, with only a small amount of electricity being trans-
ferred to the North region. The direction of electricity flow could change
hourly between certain regions, depending on the difference in marginal
generation costs.
Net inter-regional electricity flows under the ETB scenario reach 1080
TWh in 2030, which is 15.8% less than the BAU scenario. The Center region
is the most heavily affected by electricity trade barriers, followed by the
East region. The reduction in import demand in these two regions causes
a decrease in electricity exports by certain resource-rich areas such as the
7
Northwest, Jinmengxi, and Xinjiang. The transfer of hydropower by the
Sichuan and South regions is not affected. Restricted electricity flows
also lead to a lower utilization rate of existing transmission lines. For ex-
ample, electricity exports from the Northwest and Xinjiang come from
both renewable energy and thermal power, which makes the annual uti-
lization rate of lines connecting Xinjiang-Center and Northwest-Center
relatively high, reaching more than 60% in the BAU scenario, while it
falls to approximately 50% in the ETB scenario.
There is little change in the total amount of electricity trade between
the FRC and BAU scenarios, although the economically viable capacity in
the FRC scenario is higher. However, the pattern of electricity trade does
change. The Northwest, Jinmengxi, and Sichuan grids will export a por-
tion of electricity to the Guangdong region rather than the Center and
East. The net electricity import to Guangdong under full regional con-
nection increases by 206 TWh in 2030. In other words, the connection
between CSG and SGCC has no significant effect on electricity exports
by the resource-rich areas, but affects electricity imports by the
resource-poor areas. The utilization rate of the transmission lines from
SGCC to Guangdong is mostly above 50%, and the utilization rate of in-
ternal lines of CSG has not been reduced. The main affected lines are
Sichuan-East and Sichuan-Center. Due to the high share of hydropower
in Sichuan, the utilization rate of its export lines is relatively low, which
is close to 50% in the BAU scenario, but reduces to approximately 40% in
the FRC scenario.
8 J.-H. Xu et al. / Energy Economics 91 (2020) 104890
Fig. 7. Regional total power generation capacity until 2030.
4.3. Impact on regional power sectors
4.3.1. Scale of regional power sectors
We use the total power generation capacity to represent the scale of
regional power sectors, as shown in Fig. 7. The power sector scale in cer-
tain regions varies significantly in the presence of inter-regional elec-
tricity trade, although nationwide total capacity barely changes. We
find that electricity trade improves the power sector scale in resource-
rich areas such as Jinmengxi, Northwest, and Sichuan, while it depresses
the scale in resource-poor areas like Center and East.
The impact of institutional barriers is most evident where the inter-
connection between CSG and SGCC will depress the power sector scale
in Guangdong significantly. The total installed capacity in Guangdong
decreases by more than 30 GW under full regional connection. Local
governments are generally reluctant to assume such losses, which
may indicate that there will be resistance to connecting the regional
power grids operated by CSG and SGCC.
4.3.2. Utilization efficiency of regional power sectors
Inter-regional electricity trade not only changes the scale of the re-
gional power sector, but also affects utilization efficiency. In Fig. 8, we
use the annual average operation hours of all thermal power plants, in-
cluding gas-fired power, USC, CHP, and other coal-fired power, to repre-
sent utilization efficiency.
Fig. 8. Operation hours of thermal power plant in 2030.
Institutional barriers have a greater effect on the utilization effi-
ciency of regional power sectors than on scale, because utilization effi-
ciency can reflect the profitability of both new and existing thermal
power plants. Electricity trade barriers decrease utilization efficiency
in the Jinmengxi, Northwest, and Xinjiang regions, although they mark-
edly improve efficiency in the Center region. Meanwhile, utilization ef-
ficiency in two regions covered by CSG falls significantly under full
regional interconnection; the operation hours of thermal power plants
in the South and Guangdong regions decrease by 902 h and 1566 h re-
spectively, compared with the BAU scenario.
4.4. Risk analysis
Transmission capacity expansions under the market mechanism is
highly uncertain, which will significantly increase the risk of investment.
It can be seen from Section 2.1 that the scale of transmission expansion is
mainly affected by two factors: cost and benefit. The cost of transmission
investment is closely related to the discount rate. Meanwhile, inter-
regional electricity import restrictions caused by mechanism barriers
may also affect the utilization rate of lines and thus reduce the economy
of investment. The benefit of transmission investment mainly comes
from the difference between regional power generation cost. Among
them, thermal power generation is generally affected by the fluctuation
of coal prices. While the variable cost of renewable energy is very low.
Their generation cost mainly comes from the one-time investment at
the beginning of construction, and the future decline trend of investment
cost is highly uncertain. Therefore, this study evaluates the investment
risk of transmission line from four aspects, namely discount rates, maxi-
mum proportion of imports, coal prices, and renewable energy costs. In
addition, more sensitivity analyses about power demand and discount
rates are presented in the supplementary material.
4.4.1. Discount rates
Discount rates reflect the expected return on investment. A rela-
tively high discount rate is generally chosen to represent risks to trans-
mission line investments, including market risks, technical risks, and
political risks. This study assumes a 10% discount rate for power trans-
mission technologies (Yi et al., 2016). To analyze the change in eco-
nomic benefits under different discount rates, we set it to vary from
5% to 20% (see Table 4).
The economic benefits of electricity interconnections are closely re-
lated to the choice of discount rate. Here, it varies from 252.1 to 439.5
billion RMB, with a discount rate between 5%–20%. When a low dis-
count rate (5%) is offered, the increase in electricity flow is less than ca-
pacity, because more new lines will be built and utilized, leading to a
reduction in the utilization rate of existing lines. When a high discount
rate (20%) is offered, the changes in the optimal electricity flow patterns
are not significant.
4.4.2. Maximum proportion of electricity imports
We assume the maximum percentage of regional power demand
that can be met by electricity trade is 20% in the ETB scenario. Although
this percentage is based on the current numbers, it is still subjective. It
reflects the degree of regulated barriers, which may make the actual uti-
lization rate of transmission lines lower than expected and thus increase
the risk of investment. We set the maximum percentage of electricity
imports to vary from 10% to 25%, so that we might explore the effects
Table 4
Results under different discount rates.
Discount rate 5% 10% (BAU) 15% 20%
New transmission capacity (GW) 185.6 141.1 122.2 109.4
Net electricity flow in 2030 (TWh) 1476 1282 1226 1170
Total system costs (Billion RMB) 29,649.2 29,790.5 29,906.2 30,000.5
Net cost savings (Billion RMB) 439.5 355.6 295.8 252.1
 J.-H. Xu et al. / Energy Economics 91 (2020) 104890 9

Table 5
Results under different electricity import proportion.

Maximum proportion of electricity import 10% 15% 20% (ETB) 25% 100% (BAU)

New transmission capacity (GW) 85.1 100.0 120.8 139.2 141.1

Net electricity flow in 2030 (TWh) 579 829 1080 1257 1282
Total system costs (Billion RMB) 30,077.3 29,894.0 29,820.0 29,796.4 29,790.5
Net cost savings (Billion RMB) 68.8 252.1 326.1 349.7 355.6

Table 6
Results under different coal prices.

Annual growth rate of coal prices 0% 1% 2% (BAU) 3% 4%

New transmission capacity (GW) 128.9 135.0 141.1 151.9 165.1

Net electricity flow in 2030 (TWh) 1197 1223 1282 1338 1446
Total system costs (Billion RMB) 27,503.3 28,590.4 29,790.5 31,113.0 32,565.5
Net cost savings (Billion RMB) 340.3 346.1 355.6 372.8 404.7

Table 7 renewable energy. Changes in regional cost differences are relatively

Results under different renewable energy costs.
Changes in renewable costs in 2030 +10% BAU −10%
New transmission capacity (GW) 142.0 141.1 137.0
Net electricity flow in 2030 (TWh) 1285 1282 1266
Total system costs (Billion RMB) 30,020.7 29,790.5 29,548.4
Net cost savings (Billion RMB) 352.2 355.6 360.4
of different levels of trade barriers on the economic benefits of intercon-
nections (see Table 5).
Electricity trade barriers have a negative impact on the economic
benefits of transmission infrastructure investments, because energy
resources are not sufficiently integrated to meet the total national
power demand. This impact becomes more obvious with the serious-
ness of barriers. The economic benefits under the 25% case are very
similar to the BAU scenario (in which there are no trade barriers), in-
dicating that regional electricity import ratios will be mostly within
25% before 2030. Regulated barriers have a relatively high impact on
the investment risk, which also reflect the value of a clear long-term
mechanism design.
4.4.3. Coal prices
Coal is the most-consumed energy source in China's power sector.
Changes in coal prices affect the cost of coal-fired power units, and fur-
ther affect the benefit of transmission line investment. Here, we exam-
ine the sensitivity of coal prices by setting the annual growth rate to
vary from 0% to 4% over the planning horizon (see Table 6).
Increased coal prices will lead to greater total system costs, but there
is little change in the economic benefits of electricity interconnections.
However, it would increase the price of electricity generation in
resource-poor areas, such as the Center and Guangdong regions, as
coal remains the main source of power there. This would produce a
slight increase in total inter-regional electricity flows. The risk brought
by coal price to power transmission investment is relatively limited,
and high price will be more conducive to transmission capacity
expansion.
4.4.4. Renewable energy costs
There are many uncertainties about the downward trend in the
cost of renewable energy investment, which highly depends on the
level of technological progress. We set the investment cost of various
types of renewable energy in 2030 to change at the BAU level by
+10%, −10%, and −20%. And the cost of investment varies propor-
tionately in other years. From the results of Table 7, it can be seen
that the optimal scale of transmission expansion and interconnec-
tion pattern have little relationship with the investment cost of
small so that the optimal equilibrium point of transmission invest-
−20% ment has not changed significantly.
136.1
1268 5. Conclusions
29,298.3
363.5
This paper assesses the potential economic benefits of infrastructure
investments for the national inter-regional electricity network in China
until 2030, and analyzes the regulation effects associated with these in-
vestments on the economic benefits of interconnections. It presents a
multi-regional power system optimization model, which integrates
short-term power dispatch into the long-term investment decision
framework.
Our results show that approximately 140 GW of infrastructure con-
struction for the inter-regional electricity trade network is economically
viable during 2015–2030. The total transmission capacity increases
by 80% in 2030 compared with the base year. The network would
incorporate lines connecting Jinmengxi-East, Jinmengxi-Center,
Northwest-Center, Sichuan-East, Sichuan-Center, Xinjiang-Center, and
Northeast-North, leading to 250–440 billion RMB of economic benefits.
Our analysis highlights the key regulation effects facing the imple-
mentation of regional electricity interconnections. China's electricity
market is still in its infancy. Regional electricity trade barriers caused
by imperfect market mechanisms have a negative impact on the eco-
nomic benefits of transmission infrastructure investments, although
they promote scale and utilization efficiency in the power sector of
electricity-importing regions. Trade barriers lead to decreased net ex-
ports of electricity from the Jinmengxi, Northwest, and Xinjiang regions
to the Center region. The percentage of local power demand that is
allowed to be met through electricity trade should be higher than 25%
before 2030 to avoid the economic losses caused by the imperfect elec-
tricity market.
By improving the national grid coordination mechanism and elimi-
nating the grid isolation between the State Grid Corporation of China
(SGCC) and the China Southern Power Grid (CSG), several transmission
lines can be built, providing approximately 280 billion RMB of economic
benefits during 2015–2030. The Northwest, Jinmengxi, and Sichuan re-
gions will export a portion of electricity to Guangdong instead of to the
Center and East. However, the establishment of such a coordination
mechanism will encounter certain obstacles. First, large-scale electricity
imports from SGCC will weaken electricity transmission within CSG.
Second, such changes in electricity trade patterns will negatively affect
the scale and utilization efficiency of the regional power sector covered
by CSG, resulting in an uneven distribution of economic benefits among
regions.
The results of this study suggest several topics for further re-
search. First, our model calculates the optimal power generation
10 J.-H. Xu et al. / Energy Economics 91 (2020) 104890
!
and transmission portfolios for all regions from a social planner per- XXX
C CO2
t ¼ pCO2
t  P i;n;t;h  en  θn −At ðA:6Þ
spective, but investment decisions are not made by one individual. It i n h
would also be meaningful to analyze the game between the State
!
Grid Corporation of China and the China Southern Power Grid, or XX X
t   Tr 
to explore the distribution of gains brought by electricity trade be- C TInv
t ¼ cFTInv
t 0 þ c VTInv
t 0  di; j  X i; j;t 0  ∂ ðA:7Þ
i j t 0 ¼t−Tþ1
tween regions. Second, nonlinear constraints resulting from
Kirchhoff's voltage law can be included into the model. Extending XX
the formulation to include alternating current transmission network C tTO&M ¼ Z Tr TO&M
i; j;t  ci; j ðA:8Þ
i j
as well as flowgate constrains enables us to analyze the economy of
UHVDC and UHVAC between different regions.

A.2. Constraints
Author contributions
This model is subject to the following constraints.
All authors conceived the research. Bo-Wen Yi constructed the
model; Jin-Hua Xu provided the data; Ying Fan performed the analysis; X
t
Z Gi;n;t ¼ X Gi;n;t 0 ðA:9Þ
Bo-Wen Yi wrote the paper; All authors contributed to the interpreta-
t 0 ¼t−T n þ1
tion of the findings.
X
t
Z Tr
i; j;t ¼ X Tr
i; j;t 0 ðA:10Þ
Declaration of Competing Interest
t 0 ¼t−Tþ1

The authors declared that we do not have any commercial or asso- X Gi;n;t ≤ X Max ðA:11Þ
i;n
ciative interest that represents a conflict of interest in connection with
the work submitted.
U i;n;t;h ¼ U i;n;t;h−1 þ SU i;n;t;h −SDi;n;t;h ðA:12Þ

Acknowledgements U i;n;t;h  P min max

n ≤P i;n;t;h ≤U i;n;t;h  P n ðA:13Þ
 
This work is supported by the National Key Research and Develop- P i;n;t;hþ1 −P i;n;t;h ≤ U i;n;t;hþ1 −SU i;n;t;hþ1  ΔP up
n þ SU i;n;t;hþ1
min min
ment Program of China under Grant No. 2017YFE0101800, the National  P n −SDi;n;t;hþ1  P n ðA:14Þ
Natural Science Foundation of China under Grant No. 71950008, No.
71690245, and No. 71673266. The authors appreciate the weekly joint  
P i;n;t;h −P i;n;t;hþ1 ≤ U i;n;t;hþ1 −SU i;n;t;hþ1  ΔP down
n þ SDi;n;t;hþ1
seminars at CEEP in Beihang SEM, from where the earlier draft of the pa-  P min min
n −SU i;n;t;hþ1  P n ðA:15Þ
per got improved. The authors are very grateful to Ms. Xiulian Liu, who
always gives them enough help and advices.
U i;n;t;h ≤ Z Gi;n;t  vGn  f i;n;h ðA:16Þ

Appendix A. Model description X X

j≠i
Di;t;h ¼ P TI TO
i;t;h −P i;t;h þ P i;n;t;h ¼ PT j;i;t;h
n j
A.1. Objective function
  X j≠i
 1−l j;i − PT i; j;t;h
The objective function is to minimize the accumulated total system
X j
costs from the perspective of social planner. The total system costs (C) þ P i;n;t;h ðA:17Þ
include the investment cost (CInv t ), O&M cost (Ct
O&M
), fuel cost (CFuel
t ), n
start-up cost (CStartup
t ), CO2 emissions cost (CCO2
t ) of power generation
technologies, and the investment cost (CTInv t ), O&M cost (CTO&M t ) of PT i; j;t;h ≤ Z Tr
i; j;t  v
Tr
ðA:18Þ
power transmission technologies, as shown in Eq. (A.1). The specific XXX XXX
cost calculations are shown in Eqs. (A.2)–(A.8). P i;nhr;2030;h ≥ P i;n;2030;h  λRps ðA:19Þ
X  Inv  i nhr h i n h
min C ¼ C t þ C O&M
t þ C Fuel
t þ C Startup
t þ C CO2
t þ C TInv
t þ C tTO&M XXX
t P i;nff ;2030;h ≥ EPe
2030  λ
Pe
ðA:20Þ
ðA:1Þ i nff h

!
XX X
t
X G ; X Tr ; U; SU; SD; P; PT ≥ 0 ∀i; n; t; h ðA:21Þ
C Inv
t ¼ cInv
n;t 0  X Gi;n;t 0  ∂n ðA:2Þ
i n t 0 ¼t−T n þ1
Eqs. (A.9) and (A.10) show the calculations of the total capacity for
XX each power generation and transmission technology. Eq. (A.11) limits
C O&M
t ¼ Z Gi;n;t  cO&M
n;t ðA:3Þ
i n the annual construction speed of power generation technology.
Eq. (A.12) represents the dynamics of commitment states for fossil
XXX
C Fuel ¼ P i;n;t;h  en  pFuel ðA:4Þ fuel technologies. Eq. (A.13) is the maximum and minimum power out-
t i;n;t
i n h put constraints for the committed capacities. Eqs. (A.14) and (A.15) are
XXX the ramping up and ramping down constraints for fossil fuel technolo-
C Startup
t ¼ SU i;n;t;h  cStartup
n ðA:5Þ gies. Eq. (A.16) limits the available capacity at each hour, which is a con-
i n h nection between the power dispatch module and the power generation
expansion module. Eq. (A.17) shows the real-time matching of power
supply and demand considering inter-regional power interconnections.
Eq. (A.18) limits the available transmission capacity at each hour.
 J.-H. Xu et al. / Energy Economics 91 (2020) 104890 11

Table A.1 A.3. Nomenclatures

The indexes.

Indexes Specifications See Tables A.1–A.3.

i, j Region
t, t’ Year Appendix B. Supplementary data
h Hour
n Power generation technology Supplementary material: Datasets and sensitivity analysis for key
nhr Non-hydro renewable energy generation
parameters are provided in detail in the Supplementary material at-
nff Non-fossil fuel generation
tached to this article. Datasets include power demand, key technical
and economic parameters, existing generation mix, and renewable en-
ergy meteorological data. It also involves the sensitivity analysis of
Table A.2 power demand and discount rates of power generation technologies.
The decision variables.

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