Transmission pricing in open access system Introduction Spot Pricing Uniform Pricing Zonal Pricing Locational Marginal Pricing

icing Congestion Pricing Ramping and Opportunity Costs. m!edded cost !ased transmission pricing met"ods #Postage stamp$ Contract pat" and M%&mile' Incremental cost !ased transmission pricing met"ods # S"ort run marginal cost$ Long run marginal cost' & Pricing of Losses on Lines and (odes Transmission pricing in open access system Transmission Open Access refers to the regulatory structure which includes rights, obligations, operational procedures and economic conditions which enable two or more parties to use the transmission network belonging to another party for electric power transfer. T"e competiti)e mar*et for electricity "as de)eloped at t+o ends$ t"e generation end and t"e retail supply end$ +"ile t"e transmission sector remains a monopoly !usiness and t"erefore regulated. T"e transco facilitates t"e trading !et+een parties and "as t"erefore played a )ital role in t"e restructuring of t"e po+er industry in all countries. ,s +e also *no+$ po+er transmission is an area +"ere economics of scale are -uite significant and "ence t"ere are tendencies in t"e system to produce monopolies. T"e !asic parameters t"at c"aracteri.e t"e electric po+er transmission sector are/ large sun* and lumped in)estments need for redundancies to meet security re-uirements economics of scale in t"e construction cost in terms of t"e capacity of t"e transmission line economics of scope gi)en !y t"e interconnection of electric systems In order to pre)ent t"e Transco from o)erc"arging for t"e ser)ice$ t"ere is a need for t"e transmission systems to !e regulated. T"e need for regulation is all t"e more important +"en t"e transmission grid is t"e nucleus of competition among geograp"ically dispersed generators. T"e trend of esta!lis"ing ne+ legal and regulatory frame+or*s offering t"ird parties open access to t"e transmission net+or* may !e seen as a logical outcome in t"is conte0t. %"eeling is t"oug"t of as a one&time isolated ser)ice of deli)ering po+er !et+een t+o parties !y a t"ird party. On t"e ot"er "and$ transmission open access and pro)ision of related ser)ices is a separate !usiness in itself$ pro)iding and facilitating electricity mar*et competition and "ence$ re-uires to !e treated separately. ,ccording to t"e I Tas* 1orce on Transmission ,ccess$ t"e term 2transmission access2 refers to t"e re-uirement t"at t"e transmission net+or* o+ners ma*e t"eir systems a)aila!le to t"e ot"er players in t"e system. T"at may include independent generators$ customers$ or ot"er utilities$ t"at may desire to use t"e net+or* for po+er transactions !et+een t"emsel)es. , set of compre"ensi)e sur)eys carried out !y t"e I Tas* 1orce pro)ides t"e large )olume of +or* a)aila!le in t"e literature on issues pertaining to transmission open access& operational$ planning$ relia!ility$ costing$ pricing and regulatory$ T"e !ac*ground to t"is +as t"e #US' nergy Policy ,ct of 3445 t"at laid t"e foundations for t"e pro)ision of open access$ and t"at su!se-uently pro)ed to !e a crucial catalyst in t"e creation of a competiti)e electricity mar*et.

T"e implications of transmission open access could !e )aried and may span o)er a +ide range rig"t from t"ose pertaining to ancillary ser)ices$ suc" as participation of independent generators as ancillary ser)ice pro)iders$ up to t"e opening up of t"e distri!ution net+or*s to competition$ t"e so called retail competition. It also impacts t"e operations planning acti)ities of t"e ISO$ more so in case of t"e pool model in +"ic" all generation sc"eduling is centrali.ed. Types of Transmission Services in Open Access ,s noted in t"e US nergy Policy ,ct of 3445$ t"e transmission utility s"ould reco)er all suc" costs incurred in connections and in pro)iding for transmission and ot"er necessary associated ser)ices. T"is is a some+"at unresol)ed issue$ +it" t"e un!undling of )arious ser)ices +it" deregulation. T"e emergence of pro)isions for ancillary ser)ices and t"e )arious classifications and definitions t"at go +it" it$ tend to ma*e t"e cost reco)ery issue -uite unclear. In a competiti)e mar*et en)ironment$ t"ere are )arious types of transmission transactions and t"e cost of a transaction +ill depend on t"e type of transaction carried out and t"e cost components considered. 6ased on an understanding of t"e costs$ pricing for t"ese ser)ices can !e su!se-uently analy.ed. T"e !asic categories into +"ic" transmission ser)ices can !e classified are #a' point&to& point ser)ices and #!' net+or* ser)ices. %"ile t"e point&to point ser)ices are t"ose +it" specified deli)ery and receipt points$ t"e net+or* ser)ices allo+ t"e transmission user a complete access to t"e system +it" no specification on t"e points of deli)ery or receipt$ nor any additional c"arge for c"ange of sc"edules. Firm transactions& t"ese transactions are not su!7ect to discretionary interruptions and are specified in terms of M% of transmission capacity t"at must !e reser)ed for t"e transaction. T"e transco ma*es arrangements for enoug" capacity on t"e net+or* to meet t"ese transaction needs. T"ese could eit"er !e on a long&term !asis$ in t"e order of years$ in +"ic" case t"e c"arges for suc" transactions can !e designed to incorporate capacity in)estment needs of t"e net+or*$ or on s"ort&term contracts #up to one year'. Non firm transactions& t"ese transactions are not firm and "ence are su!7ect to curtailment from t"e transco in times of net+or* congestion$ outages and o)erloads$ or e)en on t"e !asis of economic opportunities to t"e transmission pro)ider. T"ese a)aila!le transactions are !asically isolated contracts on a s"ort term !asis as per a)aila!ility of transmission capacity +"ile curtaila!le transactions may !e regular transactions +it" a different pricing policy since t"ese +ould not !e c"arged for t"e capacity in)estment components. COST COMPO( (TS I( TR,(SMISSIO( In t"is section +e !riefly discuss t"ose costs t"at a transco incurs in order to fulfill t"e transmission contracts satisfactorily. , compre"ensi)e analysis of t"e costs incurred and met"ods on "o+ to determine suc" costs "a)e !een pro)ided in Operating !ost" T"ese costs are incurred !y a transco in carrying out t"e transactions generally relating to t"e cost of resc"eduling of generation as +ell as t"ose related to maintaining t"e system )oltages$ reacti)e po+er support and line flo+ limits. In t"ose systems +"ere t"e transco is also t"e central aut"ority in dispatc"ing generation$ t"e costs can !e o!tained !y appropriate OP1 simulation +"ere t"e operating cost is t"e

dual of t"e demand&supply constraint. T"is +ould re-uire a series of t+o OP1 simulations$ one +it"out t"e transactions and one +it" t"e transactions and t"e cost difference incurred is t"en calculated. ,not"er approac" is to use t"e !us marginal costs. Opportunity !ost" T"ese costs are associated +it" t"e !enefits$ +"ic" t"e transco "as to for go in order to pro)ide a transmission ser)ice. T"e unreali.ed !enefits can !e !ecause t"e transco could not use c"eaper generation resources due to transmission o)erloads. Or t"e unreali.ed re)enue from t"ose firm transactions$ t"at could not !e supported due to t"e operating constraints !eing !inding. #einforcement cost " T"is is t"e capital cost of ne+ transmission facilities needed to accommodate a transmission transaction. T"is component applies only to firm transactions. $%isting !ost" T"is is t"e cost of e0isting facilities associated +it" t"e in)estment already made in t"e system. T"is cost needs to !e allocated to t"e transmission transactions on a rational !asis. 8enerally t"e total cost of a transmission transaction is t"e sum of t"e a!o)e four components$ t"oug" t"e component t"at actually figures in t"e cost is determined from t"e type of transaction. &#'!'N( OF &O)$# T#ANSA!T'ONS T"e o!7ecti)e of any transmission&pricing sc"eme is to allocate all or part of t"e e0isting and ne+ cost of transmission system to t"e customers. 9o+e)er. tariffs for transmission ser)ices are more often set !y go)ernment regulations. and are !ased on its policy directi)es. In spite of t"is$ any transmission pricing strategy s"ould see* to ac"ie)e t"e follo+ing !asic goals/ Recover costs: T"e tariff c"arged for use of transmission ser)ices must produce enoug" re)enue to co)er all t"e e0penses made in in)estment$ operation and maintenance of t"e transmission net+or*. as +ell as pro)ide a small #regulated' le)el of profit for t"e o+ners. Encourage efficient use: T"e price structure s"ould gi)e incenti)es for using t"e transmission system efficiently. fficient use could mean ensuring !ot". economic efficiency !y ma0imi.ing social !enefits and tec"nical efficiency !y minimi.ing losses. Encourage efficient investment: T"e price structure and t"e +ay money is paid to t"e o+ners s"ould pro)ide an incenti)e for in)estment in ne+ facilities. +"en and +"ere t"ey are needed. Fair: Must !e fair and e-uita!le to all users. Understandable: ,ll users must !e a!le to understand t"e pricing structure. Workable: T"e pricing sc"eme s"ould !e implementa!le in t"e actual system. T"e pricing of po+er transactions "as al+ays !een an important topic and t"e t"eory of marginal cost +as e0ploited to de)elop pricing mec"anisms for +"eeling transactions. It is generally accepted t"at t"e transmission utility s"ould !e paid for use of its net+or* !ased on t"e s"ort&run cost of +"eeling. T"is can !e computed from t"e difference in marginal costs of electricity at t"e !uses +"ere it enters and lea)es t"e transmission utility. T"erefore an ideal +"eeling rate +as defined as $ Ideal +"eeling rate : Marginal cost of +"eeling T"e +"eeling rate recogni.es transmission constraints as +ell as incremental loss components !ecause of t"e detailed net+or* representation +it" t"e inclusion of load flo+ e-uations in t"e model frame+or*. T"e a!o)e means t"at$ if t"e po+er flo+ on a

line is at t"e transmission limit$ t"e +"eeling rate is appropriately modified to include t"e dual of t"e transmission constraint in t"e marginal cost. Similarly$ if a +"eeling transaction results in reduction of system losses )is&a&)is system costs$ t"e marginal cost of +"eeling and t"e +"eeling rate is negati)e. T"e transmission losses in +"eeling transactions can "a)e a significant role and in certain circumstances can e)en negate t"e total earning of t"e +"eeling utility from t"e transactions$ if t"ey are not appropriately accounted for in t"e +"eeling rates. On&line loss associated +it" a +"eeling transaction is calculated and its effect on t"e production cost "as !een e0amined. ,not"er important issue in po+er transactions is t"e reacti)e po+er flo+s associated +it" t"em. T"ese flo+s are important since t"ey directly affect t"e t"ird party2s transmission losses and )oltage le)els. ,s identified$ t"oug" t"e marginal cost of reacti)e po+er generation is smaller compared to real po+er generation$ t"e cost difference !et+een entry and e0it !uses for !ot" are compara!le. T"erefore$ it is important to formulate separate +"eeling rates for suc" reacti)e po+er flo+s. 1or e)aluation of reacti)e po+er +"eeling costs$ an OP1 type frame+or* is needed +"ic" can include t"e reacti)e po+er !alance and "andle t"e reacti)e constraints as +ell as )oltage limits at !us !ars. T"e marginal cost for real and reacti)e po+er can t"en !e simultaneously determined$ using t"e Lagrange multipliers of t"e corresponding load& flo+ e-uations. To t"is effect$ pricing sc"emes for transmission "a)e e)ol)ed around t"ree !asic p"ilosop"ies #a' t"e em!edded&cost !ased paradigms #!' t"ose !ased on incremental costs and #c' sc"emes +"ic" use a com!ination of #a' and #!'. T"ese pricing paradigms "a)e !een !roug"t out succinctly. T"e em!edded cost !ased pricing sc"emes are !ased on t"e total transmission cost allocation to )arious transactions +"ile t"e incremental cost !ased pricing see*s to identify t"e additional !urden on a transmission system from one particular transaction. It "as !een argued t"at none of t"ese paradigms reco)er enoug" re)enue to cater for t"e transmission costs already sun*$ i.e, t"e in)estment costs in infrastructure. T"erefore$ t"e t"ird paradigm com!ines t"e t+o earlier notions to e)ol)e pricing sc"emes t"at reco)er !ot"$ t"e costs em!edded in t"e system and t"ose incurred !y t"e system from one additional transaction. T"e follo+ing discussions on pricing paradigms are !ased on t"e unifying concepts de)eloped. Spot pricing 6efore +e step to t"e mat"ematical models of electricity prices$ +e summari.e t"e most important styli.ed facts t"ey s"ould reproduce. 3. lectricity spot prices are determined around t"e cloc*. In contrast to assets$ t"ey are traded e)ery minute$ "our$ day$ +ee* and mont" of t"e year. 5. ;ue to o!)ious fluctuations in demand and t"e fact t"at electrical po+er cannot !e stored$ po+er spot prices s"o+ repetiti)e !e"a)iour +it" periods )arying from t"e "our& of&t"e&day o)er +ee*ly to seasonal dependencies. <. (e0t to t"ese "ig"ly predicta!le contri!utions$ t"ere is a strong 2random2 component$ reflecting unpredicta!le c"anges in demand and=or transportation pro!lems. >. %"ene)er transportation pro!lems suc" as !ottlenec*s occur$ prices up to ten times t"e a)erage can !e o!ser)ed. T"ese e)ents +ill later !e referred to as price spikes.

*ocational +arginal &rice ,*+&LMP is t"e marginal cost of supplying t"e ne0t increment of electric energy at a specific !us considering t"e generation marginal cost and t"e p"ysical aspects of t"e transmission system. LMP is gi)en as LMP : generation marginal cost ? congestion cost ? cost of marginal losses Mat"ematically$ LMP at any node in t"e system is t"e dual )aria!le #sometimes called a s"ado+ price' for t"e e-uality constraint at t"at node #sum of in7ections and +it"dra+als is e-ual to .ero'. Or$ LMP is t"e additional cost for pro)iding one additional M% at a certain node. Using LMP$ !uyers and sellers e0perience t"e actual price of deli)ering energy to locations on t"e transmission systems. T"e difference in LMPs appears +"en lines are constrained. If t"e line flo+ constraints are not included in t"e optimi.ation pro!lem or if t"e line flo+ limits are assumed to !e )ery large$ LMPs +ill !e t"e same for all !uses$ and t"is is t"e marginal cost of t"e most e0pensi)e dispatc"ed generation unit #marginal unit'. In t"is case$ no congestion c"arges apply. 9o+e)er$ if any line is constrained$ LMPs +ill )ary from !us to !us or from .one to .one$ +"ic" may cause possi!le congestion c"arges. $mbedded !ost .ased Transmission &ricing T"ese met"ods consider t"e em!edded capital costs and a)erage annual operation costs of e0isting facilities +"ile determining t"e transmission costs. 1or eac" transmission line$ t"e net plant cost is calculated for eac" year of t"e transaction period. T"is is calculated using t"e replacement cost$ a)erage ser)ice life and depreciation reser)e of t"e line capital in)estment. Su!se-uently$ t"e annual fi0ed c"arge rate is calculated for eac" year. 6ased on t"ese calculations$ four different cost allocation met"ods are discussed namely$ t"e rolled&in em!edded cost #or postage stamp met"od'$ contract pat"$ !oundary flo+ and line&!y&line #or M%&Mile' met"od. T"e first t+o do not re-uire any po+er flo+ simulation$ and are t"us simple to "andle. 9o+e)er for t"e same reason$ t"e tariffs$ +"ic" e)ol)e in t"ese t+o met"ods$ mig"t !e completely different from po+er flo+s actually ta*ing place. One s"ortcoming of t"e em!edded cost !ased met"ods is t"at$ t"ese do not reco)er t"e cost of ne+ transmission facilities or reinforcements and are "ence not economically efficient. T+o of t"e !roadly used sc"emes +it"in t"is paradigm$ viz., t"e postage stamp method and t"e MW-mile method, are discussed !elo+. &ostage Stamp +ethod T"e name of t"is sc"eme "as understanda!ly$ e)ol)ed from t"e !asis on +"ic" postage stamps are priced$ i.e. t"e customer only pays according to t"e +eig"t of t"e pac*age$ not on t"e !asis of distance of deli)ery point$ or "o+ t"e pac*age +ill contri!ute to t"e postal transport re-uirement$ etc. )idently$ t"is is t"e simplest met"od of transmission pricing and no distinction is made !et+een transactions +it" regard to t"e po+er flo+ pat"$ supply or deli)ery points$ or t"e time +"en it ta*es place. T"erefore$ a transaction of IOM% !et+een t+o ad7acent !uses could end up paying more t"an one !et+een far off locations if t"e pea* load on t"e system$ in t"e later case is more. It also does not ta*e into account t"e increased transmission losses due to a transaction. T"is met"od is simple to "andle$ t"oug" not )ery sound economically. Postage stamp rates are c"arged at a flat rate on per M% !asis. Mat"ematically t"e transaction price in t"is sc"eme can !e +ritten as gi)en /

Rl :TC Pt =Ppea*@ Rt transmission price for transaction t in A TC total transmission c"arges in A #<' PI transaction load at t"e time of system pea* load condition in M% Ppea* is system pea* load in M% +) +ile +ethod T+o s"ortcomings of t"e postage stamp !ased pricing sc"eme$ namely$ not accounting for flo+s on specific lines$ and not accounting for t"e distance of t"e transaction #and implicitly t"e losses'$ are addressed +"ile de)ising t"e M%&Mile met"od. In t"is met"od$ t"e !asic concept is t"at t"e po+er flo+&mile on eac" transmission line due to a transaction is calculated !y multiplying t"e po+er flo+ and distance of t"e line. T"e total transmission system use is t"en t"e sum of all t"e po+er flo+&miles and t"is pro)ides a measure of "o+ muc" eac" transaction uses t"e grid. T"e price is t"en proportionate to t"e transmission usage !y a transaction. T"is may !e e0pressed mat"ematically as follo+s

R Ti is t"e price c"arged for transaction T7 in A=M% PB@Ti@ is t"e loading of line 7 due to transaction T7 $M% L7 is t"e lengt" of t"e line 7. mile 17 is a pre & determined unit cost reflecting t"e cost per unit capacity of t"e line$ A=M% mile ,pparently$ t"is met"od see*s to allocate t"e costs !ased on actual system use as closely as possi!le t"oug" t"ere "a)e !een arguments t"at it suffers from defects arising from t"e lumping of operating and em!edded costs. , transmission&pricing sc"eme "as !een de)eloped t"at accounts for t"e cost reco)ery of !ot" em!edded costs and relia!ility !enefits from transmission system. Incremental Cost 6ased Transmission Pricing Short #un +arginal !ost ,S#+!- .ased &ricing T"e s"ort run marginal cost of a transco is t"e cost incurred in supplying an additional I M% of po+er in a transaction. T"is can !e calculated from t"e difference in marginal costs at t"e supply !us and t"e deli)ery !us. T"is re-uires a complete net+or* representation of t"e system in lines of an OP1 and t"e dual )aria!les associated +it" t"e demand !alance e-uation #load flo+ e-uation' denote t"e marginal costs. T"e transaction price can !e determined !y multiplying t"e po+er transaction +it" t"e marginal cost to e)ol)e t"e SRMC !ased price. *ong #un +arginal !ost ,*#+!- .ased +ethods In t"ese met"ods$ a long&term transmission planning analysis is included +it"in t"e transactions. T"e models simultaneously determine t"e ne+ transmission line additions o)er a period of time #a!out fe+ years' and "o+ and +"ic" po+er transaction !roug"t a!out t"ese additions. T"e Lagrange multipliers from suc" a model +ill pro)ide t"e long-run marginal cost +"ic" is used for pricing to address t"e issue of capital cost reco)ery. 9o+e)er$ it s"ould !e noted t"at t"e computational comple0ity of suc" models

is muc" "ig"er due to t"e presence of integer )aria!les #in ne+ line selection'$ and t"e dynamic planning frame+or* #due to t"e multiple years planning consideration'. In case of multiple po+er transactions ta*ing place$ t"is long&term marginal cost needs to !e allocated fairly to all t"e transactions. 1our met"ods of long run marginal cost allocations "a)e !een suggested namely$ dollar per M%$ dollar per M%&mile$ interface flo+ allocation !y regions and one&!y&one allocations. #evenue #econciliation It is +ell *no+n t"at s"ort run marginal cost !ased pricing does not pro)ide t"e re)enue reconciliation to t"e transco and does not pro)ide for cost reco)ery of capital in)estments made in transmission or capital costs of pro)iding for transmission reinforcements. , detailed analysis of t"is issue ascertains t"e reasons for t"is. It is s"o+n t"at t"is occurs due to t"e discrepancies !et+een planning "ori.ons #i. e., static )is&a&)is dynamic plans'$ plan de)iations$ strongly discrete nature of in)estments$ economics of scale$ relia!ility constraints and ot"er constraints on net+or* in)estments. In t"e conte0t of +"eeling rates$ it +as suggested t"at t"e ideal +"eeling rate o!tained from marginal costs !e modified using a capital reco)ery term as follo+s Re)enue Reconciled %"eeling Rate : Ideal %"eeling Rate ? Re)enue Reconciliation ,d7ustment 9o+e)er$ determining "o+ muc" of capital s"ould !e reco)ered !y t"e +"eeling utility from t"e +"eeling rate$ eit"er to reco)er its net+or* in)estments or to allocate incenti)e for future in)estments$ is )ery difficult. Suc" re)enue reconciliation may also result in large price distortions and gross departures from t"e !asic marginal cost principle. In t"is conte0t$ a load flo+ !ased met"od +or*s out t"e allocation of long run cost of transmission capacity. , distinction is made !et+een incremental and marginal cost !ased met"ods in t"at t"e former identifies ne+ facilities specifically attri!uta!le to specific transmission transactions. ,n optimi.ation model is formulated in !y ta*ing into account t"e capacity costs of t"e transco$ as annuali.ed return on in)ested capital$ and )aria!le operating costs. It is seen to reco)er t"e capital and operational costs fully for all circuit capacities up to t"e optimal )alue.