1 a comparison of transmission pricing methods in electricity markets worldwide (work from past...

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A Comparison of Transmission Pricing Methods in Electricity Markets Worldwide

(Work from Past Group 38)

Dariush [email protected] (+1 626 432 7562)

CIGRE ConferenceBrasilia – September 23, 2003

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These presentation slides were accompanied by an oral discussion; the slides alone do not fully represent the presentation content.

This presentation represents the views of the speaker only. This presentation does not necessarily represent the views of OM.

Disclaimers

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Outline

Fundamental of pricing transmission services

Transmission pricing in restructured electricity markets

Transmission rights

Merchant transmission

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Fundamentals of Pricing Transmission Services

Except in rare cases, transmission services are priced based on cost

Merchant transmission offers “value based pricing”

LMP based transmission pricing rarely covers the entire transmission price or even the bulk of it

Price of transmission service includes multiple components

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Pricing Transmission Services: General Framework

Determine thetransmission revenuerequirement (TRR).

Determine theincremental cost of the

transmission transaction.

Adjust the TRR basedon incremental cost of

the transaction.

Divide the TRR intorate components.

Allocate rate components tothe transaction based onextent-of-use measures.

Sum transmissionprice components

Assign part or all of theincremental system cost to

the transmission transaction.Incr. Comp

Embedded Component

Incremental Componentof the Transmission Price

Step 1

Step 2 Step 3

Step 4

Step 5

Step 6 Step 7

TransactionPrice

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Components of Transmission Services Cost Embedded cost: covering revenue requirements of the

existing transmission facilities (amortization, taxes, hardware maintenance and operations, etc.)

Incremental cost: covers the “specific and new costs” “incurred” in providing the services

Operating costs due to losses and congestion (short-run costs)

Transmission reinforcements due to interconnections and network upgrades (long-run costs)

These costs are converted to prices based on pricing evaluation/allocation method and other pricing attributes

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Principal Attributes of Transmission Price Cost and price allocation/evaluation method

Spatial resolution of the price

Time resolution of the price

Payment responsibility

Ex-ante versus ex-post price evaluation

Transmission rights

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Cost and Price Allocation/Evaluation Method How costs related to embedded & incremental cost

components of transmission service are evaluated and converted into price

Embedded cost

Postage stamp, license-place/zonal, MW-mile, etc.

Incremental costs: short-run & long-run

Marginal, average, average marginal, true incremental

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Spatial Resolution of Price or Price Component System-wide pricing: transmission prices or

components thereof are insensitive to service delivery/receipt location

Zonal pricing: transmission prices or components thereof depend on the transaction’s delivery and receipt nodes

Nodal pricing: transmission prices or components thereof depend on the transaction’s delivery and receipt nodes/buses

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Time Resolution of Price or Price Component Annual pricing: transmission prices or components

thereof remain the same for an entire year

Seasonal/monthly pricing: transmission prices or components thereof vary seasonally or monthly according mainly due to loading changes

“Hourly” pricing: transmission prices or components thereof vary on an hourly (sub-hourly) basis

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Payment Responsibility for Price or Price Component Transmission prices may be charged to either or

both parties involved in a transaction, if that is the case

Supplies or their representatives such as marketers

Demands or their representatives such as load serving entities (LSEs)

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Ex-Ante Vs Ex-Post Price or Price Component evaluation Ex-ante based on simulated operation of the

transmission system

Ex-post based on “actual” operation of the transmission system

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Transmission Reservations and Rights Hedge against congestion charges (and

curtailment) of transmission service

Flowgate Rights (FGR) - Physical Transmission Rights

Point to point Financial/Firm/Fixed Transmission Rights (FTR)

Transmission rights are purchased from market operator (ISO/RTO/ITP) or in secondary markets

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Transmission Pricing Method in the Current California Wholesale Electricity Market Incremental Cost Component Pricing Feature Embedded Cost

Component Losses Congestion Reinforcements

Evaluation method Embedded cost of each transmission owner (TO) is divided by the anticipated load (including export) with delivery nodes on that TO’s transmission system.

Losses are ignored in forward markets. In the real-time market, nodal loss factors (average marginal losses) are evaluated using power flow based network model using a distributed slack.

There are inter-zonal and intra-zonal congestion costs. Inter-zonal congestion fees are calculated as the difference between bid-based marginal costs at the two zones. Intra-zonal charges for a congestion zone are calculated as bid-based cost of redispatch in that zone.

Connection and network upgrade costs are accounted for as they incur. Network upgrade costs are generally rolled into the embedded cost component.

Spatial Resolution Embedded cost rate currently charged on a zonal basis – for embedded costs zone is a TO’s service area.

Losses are calculated on a nodal basis.

These prices are zonal based. These costs have spatial resolution. Rolled in network upgrade costs are treated as embedded cost (zonal). Connection costs are recovered location specific.

Time Resolution Prices are revised annually and remain the same for the year.

Losses are evaluated on an hourly basis.

Both inter-zonal and intra-zonal charges are evaluated on hourly basis.

Network upgrades costs are calculated as incurred but recovered according to embedded costs schedule. Connection costs paid for as incurred.

Payment Responsibility

Loads (including exports) are responsible.

Generators (including imports) directly pay for losses by having their delivery reduced based on nodal loss factor.

Scheduling coordinators (SCs), pay for congestion charges. These charges are assigned to generators and loads using specific arrangement among SCs and these entities – e.g., generators and loads settling based on zonal prices.

Connection costs are covered by the responsible participant. Rolled in network upgrade costs normally are treated as embedded costs.

Ex-Ante/Ex-Post Pricing

Embedded cost rates are evaluated ex-ante.

Losses are calculated ex-ante.

Inter-zonal and inter-zonal congestion costs are evaluated ex-ante.

Connection costs are evaluated and recovered ex-post. Rolled in network upgrade costs treated as embedded costs.

Transmission Reservation

Reservation is made using option based “Firm Transmission Rights.” Firm transmission rights owners receive congestion revenue based on their “ownership right” on the congested path. They also receive “scheduling priority” up to their ownership right level. Hence, Firm Transmission Rights provide hedges against both congestion charges and curtailments.

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Transmission Pricing Method in the England and Wales Wholesale Electricity Market

Incremental Cost Component Pricing Feature Embedded Cost Component

Losses Congestion Reinforcements

Evaluation method Embedded costs are recovered using locational varying charges that are calculated using a “Long Run Marginal Cost” model - which evaluates the marginal effect on investment of incremental changes in locating generation and demand. A flat charge is also levied to ensure the correct overall revenue recovery.

Average losses is calculated as the difference between generation (including imports) and load (including export).

Total charges for each half-hour are calculated by summing the costs for bid-based redispatch in real time. Charges will also include the costs of pre-arranged option contracts to alleviate congestion.


Spatial Resolution Currently 15 zones for generation and 12 zones for demand, subject to periodic review.

System-wide – subject to an ongoing regulatory review.

System-wide charge to all participants (generators and loads) based on MW.

Network upgrades that are included in embedded costs are treated as embedded costs. Connection costs depend on the location site.


Calculated for each half-hour period.

Congestion charges are calculated for each half-hour.

Connections charges are spread over life of assets (typically 40 yrs).


Large (larger than 100MW) Generators (27%) and Demands (73%).

Generators and loads pay by having their metered volumes adjusted based on losses.

Charges are paid equally between generators and loads based on their metered volume during the relevant half-hour.

Connection charges are paid by responsible participants including generators, load serving entities and directly connected customers.


Calculated ex-ante. Any under/over recovery is brought forward to the next year.

Participants' metered volume adjustments are calculated ex-post.

Congestion costs are evaluated ex-post and based on actual costs.

Network upgrades treated as embedded costs. Connection charges can be fixed (ex-ante) or indicative (ex-post) at participant's request.


Given the congestion pricing regime, transmission rights are not very critical. CFDs could be used to hedge against high energy prices. Participants receive firm physical rights agreed at the time of connection. The transmission system is planned to security standards based on all physical rights.

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Transmission Pricing Method in the Australian Wholesale Electricity Market



Evaluation method Transmission service providers’ (NSP’s) annual revenue requirements (embedded cost) are recovered as common transmission grid costs based on relevant forecasted load.

Losses are captured through marginal loss factor which include an inter-regional component related to marginal loss factors on tie lines and an intra-regional component based on annual average marginal loss factors relative to each region’s reference node.

Congestion between regions/zones results in price separation between them. Intra-zonal congestion are cleared by redispatching generators with the resultant increase in the regional price.


Spatial Resolution Embedded costs are charged on a system-wide uniform basis.

Losses are nodal and included in the spot price of energy based on marginal pricing.

Inter-regional congestion charges are zonal as they are the difference between the region prices.

Network upgrades are included in transmission provider’s embedded cost are recovered system-wide. Merchant transmissions recover revenue as the difference between the marginal prices at two nodes.


Spot price is updated half hourly, as are the cost of losses.

As the spot prices of the regions are updated half hourly.

Costs are evaluated at the time incurred. Rolled-in network upgrade costs recovered as embedded costs annually.


Embedded costs of a region are levied to loads (including export) in that region.

Generator and loads settle based on marginal price for energy, which includes losses. The difference is paid to NSPs to offset the embedded costs.

Similar to losses. Network upgrades are normally included in embedded costs and treated accordingly. Connection costs are recovered from responsible participants. Merchant transmission costs recovered from all participants through marginal nodal prices.


Ex-ante. Ex-ante. Ex-ante. Ex-post for evaluation of costs. Ex-ante for recovery of network and merchant costs.


In the NEM arrangement, the surplus amount arising from inter-regional tie lines is auctioned off in part or in full up to twelve months ahead (financial right). This enables the recipient of the surplus to manage his financial risk against abnormal price variations and negative impact caused by congestion.

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Transmission Pricing Method in Norway in Nordic Wholesale Electricity Market



Evaluation method Embedded costs are recovered based on MW value of supply and demand.

Nodal loss factors are calculated six times a year and are divided into daytime, night and weekends.

The Nordic system consists of 6 semi-permanent price zones. When bottlenecks arise between these zones, market splitting (zonal pricing) applies. Transmission use across a congested path is charged using zonal price difference. Real-time energy imbalances are also settled using zonal prices.


Spatial Resolution System-wide pricing. Calculated on a nodal basis.

Zonal prices for congestion – zones are dynamically defined.

Location specific when calculating costs. Rolled-in network upgrade costs are treated as embedded costs. Connection costs are location specific.


Evaluated 6 times a year.

Evaluated at an hourly basis. Rolled-in network upgrade costs are treated as embedded costs (annual). Connection costs are recovered as incurred.


The embedded cost component is divided among generators (including imports) and loads (including exports) based on MW.

Generators (including imports) and loads (including exports).

Generators and loads pay for congestion through their transmission agent or directly through zonal prices.

Connection costs are the paid by responsible participants. Rolled-in network upgrade costs are generally rolled into embedded cost and treated as such.


Ex-ante pricing based on forecasted load.

Ex-post and invoiced weekly in arrears on the basis of the metered energy flow.

Ex-post based on actual zonal prices. Ex-post for evaluating costs. Connection charges are generally levied ex-post. Rolled-in network upgrade costs are treated as embedded costs.


There are no transmission reservations. However, since part of congestion fees are collected through zonal prices, contracts for Difference (CfD) contracts allow market participants to hedge the zonal price risk.

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Transmission Pricing Method in Brazil Wholesale Electricity Market



Evaluation method Embedded costs are recovered using a Long Run Marginal Cost model, which evaluates the marginal effect (on investment) of incremental changes in locational generation and demand. A flat charge is also levied to ensure the correct overall revenue recovery.

Total losses (difference between generation and load) are shared evenly between generators and loads based on MW.

No specific solutions in place yet. Cost of redispatch is evaluated and recovered on an average basis. Locational marginal pricing is being considered.


Spatial Resolution Currently 9 zones for generation and 44 for load – subject to periodic review.

System-wide. System-wide. Location specific when calculating costs. Rolled-in network upgrade costs are treated as embedded costs. Connection costs are location specific.


Evaluated hourly. Evaluated hourly. Rolled-in network upgrade costs treated as embedded costs. Connection costs are recovered as incurred.


Generators and loads. Generators and loads. Generators and loads. Rolled-in network upgrade costs are rolled into embedded costs. Responsible participants normally pay for connection costs.


Ex ante pricing based on forecasted load.

Ex-post. Ex-post. Ex-post for evaluating costs and recovering connection costs. Network upgrade costs treated as embedded costs.


There is no transmission reservation mechanism in place in Brazil.

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Transmission Pricing Method in the Spanish Wholesale Electricity Market Incremental Cost Component Pricing Feature Embedded Cost Component


Evaluation method Transmission owners’ embedded cost is divided into a capacity and an energy component and allocated to anticipated load (including export) based on seasonal time-of-day load.

“Standard losses” are evaluated annually based on simulations. Real losses are also calculated based on the difference between total generation and load.

Congestion costs, due to bid based system redispatch are included in the ancillary services costs, which are a component of the wholesale generation market cost.


Spatial Resolution System-wide pricing. System-wide pricing and according to connection voltage

System-wide pricing Location specific when calculating costs. Rolled-in network upgrade costs are treated as embedded costs. Connection costs are location specific.

Time Resolution Evaluated annually. Tariffs are broken down into 6 periods, which are defined according to the month, day of the week and time of consumption

Losses are evaluated on an hourly basis.

Congestion is evaluated on an hourly basis

Rolled-in network upgrade costs treated as embedded costs. Connection costs are recovered as incurred.


Loads and generators are charged with these costs based on their MW.

Generators and loads pay standard losses and loads assume the difference between real and standard losses based on MW.

Loads pay for congestion costs in proportion to their MW.

Rolled-in network upgrade costs are treated as embedded costs. Responsible participants normally pay for connection costs.


Embedded cost prices are evaluated ex-ante based on forecasted loads.

Standard losses evaluated ex-ante and real losses are evaluated ex-post

Ex-ante in the day-ahead market and ex-post the ones for the real-time operation.

Ex-post for evaluating costs and recovering connection costs. Rolled-in network upgrade costs treated as embedded costs.


No transmission reservation mechanism is applied

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Transmission Pricing Method in the Ontario Wholesale Electricity Market Incremental Cost Component Pricing Feature Embedded Cost Component


Evaluation method Revenue requirement of each transmitter is allocated to three pools – network, line connection, and transformation connection. The associated wholesale pooled transmission rates are determined by dividing by the anticipated load.

Cost of losses is calculated system-wide on a five minute basis using average loss factors which may be updated periodically.

The cost of congestion within Ontario is the total bid-based cost of redispatch and is allocated to loads based on MW use. Congestion costs across ties with neighbouring jurisdictions (zones) are the difference between the price in Ontario and prices in those zones.


Spatial Resolution Embedded cost charged on a system-wide “pooled rate”.

Losses are calculated on a system-wide basis.

Congestion costs within Ontario are calculated on system-wide basis. Hourly congestion charges across a tie with a neighbouring zone are related to that tie.

Location specific when calculating costs. Rolled in network upgrades are treated as embedded costs. Connection costs are location specific.

Time Resolution Updated annually as part of the transmitters’ application to the regulator.

Cost of losses is calculated on a five minute basis.

Intra-Ontario costs evaluated every five minutes. Hourly tie line congestion charges are determined hour ahead and based on market bids and offers.

Rolled in network upgrade costs treated as embedded costs. Connection costs are recovered as incurred.


Only loads within the province are responsible for these components of the transmission price. Exports and wheel-through transactions are charged a fixed cost (CDN$1/MWh).

Loads pay for losses through an hourly uplift charge.

All loads pay for the aggregated cost of congestion within Ontario on a pro-rata basis through an hourly uplift charge. Transactions across ties pay via the difference between the price in Ontario and the price in the associated zone across the tie.

Rolled in network upgrade costs treated as embedded costs. A transmitter may require capital contribution (or load guarantee) from new customers. The balance is included in the rate base. Initial contributor is entitled to a rebate when additional customers connect.



“Real-time” cost of losses is calculated ex-ante.

The cost of congestion within Ontario is calculated ex-post. Prices across ties are calculated ex-ante.



There are no transmission rights within Ontario as a uniform energy price is used throughout the province. Participants can hedge against congestion costs across ties through the purchase of “Financial Transmission Rights”.

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Transmission Pricing Method in the South African Wholesale Electricity Market



Evaluation method Revenue requirement of the national transmission network service provider (TNSP) is allocated at individual nodes as the allocated revenue requirement adjusted by the reserved demand at the node. Nodes are grouped into eight zones based on similar network prices.

Loss factors (average marginal losses) are evaluated at the generator (including import) nodes in each geographical zone.

Congestion charges are ignored in the transmission charges. Energy charges are adjusted to provide for a constrained redispatch.

Network upgrades and connection costs are as incurred. Network upgrade costs are normally rolled into the embedded cost of TNSP.

Spatial Resolution Embedded cost rate currently charged on a zonal basis where zones are defined as a geographic area with similar nodal transmission prices.

Losses are calculated on a zonal basis.

Inter-zonal fees are the difference between prices of the zones. Intra-zonal fees are evaluated on a zonal basis.

Location specific when calculating costs. Rolled-in network upgrade costs are treated as embedded costs. Connection costs are location specific.

Time Resolution Embedded cost prices are revised annually and remain the same for the year.

Losses are evaluated on an annual basis but charged on a TOU (hourly) basis.

Both inter-zonal and intra-zonal charges are evaluated on hourly basis.

Rolled-in network upgrade costs treated as embedded costs. Connection costs are recovered as incurred.


Costs are allocated on a 50/50 basis to generators and loads.

generators directly pay for losses as their metered deliveries are discounted based on loss factors.

These charges are assigned to all participants through an increased energy pool price.

Network upgrade costs are rolled into embedded costs unless a participant agrees to pay for them. Responsible participants normally pay for connection costs.



Losses are calculated ex-ante but allocated ex-post.

Inter-zonal congestion rates are calculated ex-ante and as part of day-ahead forward markets.



No transmission reservation mechanism exists. Transmission capacity is allocated on a first come first served basis.

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Transmission Pricing Method in FERC’s Standard Market Design (July 31, 2002 Version) Incremental Cost Component Pricing Feature Embedded Cost

Component Losses Congestion Reinforcements

Evaluation method Embedded cost of each transmission owner (TO) to be divided by the anticipated load (excluding export) with delivery nodes on that TO’s transmission system regardless of the origination of the transaction.

Losses to be accounted for in the spot markets as part of the locational marginal price or LMP (marginal cost of the node) – see congestion cost component.

Congestion costs to be accounted for as part of the spot markets using nodal LMPs. Congestion (& losses) causes LMP to be different at various nodes. All generation (including imports), whether part of a balanced transaction or otherwise, received LMP for the node energy is delivered. All loads (including exports), whether part of a balanced transaction or otherwise, pay the LMP for the node where energy is received.

Connection and network upgrade costs to be accounted for as they incur. Network upgrade costs are to be generally rolled into the embedded cost component. There is no final policy on connection costs.

Spatial Resolution Embedded cost rate to be charged on a zonal basis – for embedded costs zone is a TO’s service area.

Losses to be calculated on a nodal basis.

Congestion charges to be captured on a nodal basis.

These costs have spatial resolution. Rolled in network upgrade costs would be treated as such (zonal). There is no final policy on connection costs.

Time Resolution Prices would revised annually and remain the same for the year.

Losses would be accounted for on an hourly (or sub-hourly) basis.

Congestion charges would be evaluated on an hourly (or sub-hourly) basis.

Rolled in network upgrade costs would be calculated as incurred but recovered according to embedded costs schedule. There is no final policy on connection costs.


Loads (including exports) are responsible.

Generators and loads would share the cost of losses through loss adjusted LMPs.

Generators and loads would share the cost of congestion through congestion adjusted LMPs.

Rolled in network upgrade costs would be treated as embedded costs. There is no final policy on connection costs.


Embedded cost rates to be evaluated ex-ante.

Losses to be calculated ex-ante.

Inter-zonal and inter-zonal congestion costs to be evaluated ex-ante or ex-post.

Ex-post during evaluation of costs. Rolled in network upgrade costs treated as embedded costs. There is no final policy on connection costs.


Reservation is made using option or obligation based “Congestion Revenue Rights (CRR).” CRR owners receive congestion revenue based on their “ownership right” on the congested path.

1 a comparison of transmission pricing methods in electricity markets worldwide (work from past...

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