The Simple Economics of Optimal Generation, Transmission, and Electricity Use

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This chapter provides a framework for determining optimal investments in electricity generation. Optimal investments for the Philippines in 2025 depend on the future profile of demand and on factors that affect annual cost as it relates to capacity utilization. If there were no generation assets in place, most of the residual demand after deducting projected renewable supplies should be satisfied by coal generation, and the rest by natural gas. Taking existing generation into account, however, we find that there is already enough coal to satisfy baseload demand, and that the rather small excess demand projected for the Luzon and Visayas grids should be satisfied by new investments in Combined-Cycle Gas Turbines (CCGT), both because of the load profile of excess demand and of lower pollution costs from using natural gas. Only in the case of the Visayas grid considered unconnected to Luzon is there a need for additional coal investments, and these are very small. We also find that the gains from expanding transmission capacity to facilitate a complete integration of the Luzon and Visayas grids would be quite small, primarily because the grids have similar load profiles.