natural gas network pricing and its influence on electricity and gas markets

7/30/2019 Natural Gas Network Pricing and Its Influence on Electricity and Gas Markets

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Natural Gas Network Pricing and Its Influenceon Electricity and Gas Markets

M. S. Morais and J. W. Marangon Lima,Member, IEEE1

Abstract-- The introduction of competition at the electricity

generation and commercialization has been the main focus of

many restructuring experiences around the world. The open

access to the transmission network and a fair regulated tariff are

the keystones of the development of the electricity market. The

natural gas business has a great interaction with the electricity

market in terms of fuel consumption and energy conversion.

Given that the transmission and distribution monopolistic

activities are very similar with the natural gas transportation

through pipelines, economic regulation related to the natural gas

network should be coherent with the transmission counterpart.

This paper will show the main wheeling charge methods used at

transmission and their application to the gas network. Linear

stead-state equations are developed to adequate the various

pricing methods. Some examples will clarify the results, in terms

of investments for thermal generation plants and end consumers,

when combined pricing methods are used to transmission and gas

networks. The paper shows the synergies that should be

adequately used, otherwise wrong economic signals are sent to

the market players.

Index TermsEconomic Regulation, Electricity Market,

Natural Gas Network, Transmission Network, Wheeling

Charges.

I. INTRODUCTION

THE international environment has changed dramaticallysince the beginning of the 90s. The introduction ofcompetition at the electricity generation and

commercialization has been the main focus of manyrestructuring experiences for the electrical sector. The main

goal has been to achieve greater economic efficiency than thepast centralized and often-monopolistic environment.

The open access to the transmission network and a fairregulated tariff are the keystones of the development of the

electricity market. Many methodologies have been proposedto price transmission networks in order to give reasonableeconomic signs to the electricity market players [1]. Thesemethods such as the MW-mile, bus marginal cost, and others,

usually incorporate the spatial nature of the transmissionsystems given the opportunity to the generation and consumeragents to place their generation and load units at the mostappropriated sites. To those agents that are already placed,

there is an opportunity to influence on the transmission

expansion plan to minimize the wheeling charges. The marketrules and the flexibility given to each agent vary from countryto country and also depend on the degree of the restructuringdevelopment.

At the generation side, especially for the thermal units,locating the assets where their production will be valued atbest is of uttermost importance for the companies futurereturn on investment. Besides the transmission fare and the

plant investment cost, one important portion of the total cost is

the fuel cost. For the natural gas plants, the fuel cost can besplit into two parts: the production cost and the transportationcost. The gas transportation is usually performed by gas

pipelines, which have similar characteristics with theelectricity transmission network. Therefore, fuel supplyconditions, as well as generation and transmission capacityconstraints, have to be taken simultaneously into account inthe investment decision process. Synergies between electricity

and natural gas systems have to be identified andeconomically quantified so that integrated decisions couldbring in an edge to the investment company. In the long-termphase, the decisions are highly inter-dependent in gas and

electricity sub-systems, which justify an integrated analysis

[8]. Therefore, the economic regulation of electricitytransmission and gas transportation must be performedtogether.

A methodology to charge gas pipeline networks is proposed inthis paper taking into account the transmission pricingmethod. Transmission wheeling charge methods usuallyconsider the load flow equations, i.e., the static behavior of the

electrical systems. Therefore, a coherent method to price gasnetwork should also use steady-state equations of the gas flowthrough the pipelines. Based on the linearization of suchequations, wheeling charge methods are compared for the gasnetwork. The methods need to match with the transmission

pricing methods. Therefore, a set of combined pricingmethods is suggested.

Some examples will demonstrate the importance of the

wheeling charge regulation both at the gas and electricitysystems. This is crucial for the thermal units, which have thegas as the input and the electricity as the output of theproduction process. Both products use physical networkstructures as transportation. Therefore, the influence of the

wheeling method on the decision making process in terms ofsitting the assets will be showed.

1 This work was supported in part by CAPES and CNPq (#450656/02)

M. S. Morais and J. W. Marangon Lima are with Engineering System

Group (GESis) at Federal Universtiy of Itajub (UNIFEI), Av. BPS 1303,

Itajub, MG 37500-903, Brazil (email: [email protected]).

0-7803-7967-5/03/$17.00 2003 IEEE

Paper accepted for presentation at 2003 IEEE Bologna Power Tech Conference, June 23th-26th, Bologna, Italy


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( )[ ] ( 1352

2

2

1 = smfSLTZ

Dpp

p

TCQ

n

nn ) (2)Another important result from the consumer point of view is

that electricity and gas may be interchange in someapplications like, for instance, in the generation of heat. The

electricity market and the gas market will provide thecommodity prices, but the transportation may influence on thedecision about the better fuel to use. In Brazil, where hydroplants provide 92% of the electricity generation, the wheeling

charge method plays an important role.

where: where:64

2

airRC

= = constant

The above general flow equation involves simplifyingassumptions which are:

1) isothermal flow due to insignificant temperature changes;II. GAS STEADY-STATE EQUATIONS

2) negligible kinetic energy change and constantcompressibility across the pipe;

The steady-state flow of gas in a pipeline may be described byequations that change according to the gas working pressure

and friction. These factors govern the gas flows that can varyfrom small values, in low-pressure distribution systems, tovary large values, in high-pressure transportation systems. Theeffects of friction are difficult to quantify and are the mainreason for variations in the flow equations. The friction factor

is not a constant for a given section of a pipeline and it isdependent on the roughness of the internal pipe surface, gas

velocity, gas density, gas viscosity and the internal diameter ofthe pipe.

3) validity of the Darcy friction loss relationship across thepipe;

4) constant friction coefficient along the pipe length.Based on the working pressure of the network and the frictionfactor, Eq. (2) can be simplified. Three categories are

provided in this paper, which can encompass a great variety ofsituations [6]: low-pressure, medium-pressure and high-

pressure networks, with ( ) ( ) ( ).,, 13hmQmLmmD A. Low-pressure (0-75 mBar gauge)

For this pressure range, the Laceys equation may be derived:After defining the gas operating conditions, the problem ofstatic simulation is to estimate the values of pressure at thenodes and the flows in the individual pipes for known valuesof sources pressures and of gas consumption in the nodes. The

pressures at the nodes and the flow in the pipes must satisfythe flow equation, and together with the values of loads andvalues of sources must fulfill the similar Kirchhoffs laws forthe electrical systems.

( )

=

fSL

DppQn

5

2141072.5 (3)

where

+=

Df

276.0

1210044.0

In general, f may be set equal to 0.0065 givin the Polesequation:

The relationship between pressure, volume and temperature of

gas allows the development of an empirical steady-statepipeline flow equation, derived from Bernoullis equation.

The gas flow is given by [6]:nQ

( )SL

DppQn

5

213

101.7

=

(4)

Assuming S=0.589, and the equation (4) can be

rearranged:

(mbarp )

( )

fSLTZ

DTZR

Sghppp

p

TRQ

air

av

n

nairn

=

52

2

2

2

12

2

64

(1)

5

3

2

21

107.11D

LKfor

KQpp n

=

=

(5)

where:

nn pT ,

R

quantities at standard conditions of temperature and

pressure (288 K and 0.1 MPa); B. Medium-pressure (0.75 7.0 Bar gauge)

airconstant of air ( )11 KNmKg ;

S airR

= specific gravity of the gas gasR

tor;

;

f

For this pressure range, the Polyflos equation may be

derived:dimensionless friction facD internal diameter o ;f pipe

;

( )mL

( )

=

fSLT

Dpp

p

TQ

n

nn

522

2141057.7 (6)length of the pipe ( )m

KT temperature do gas ( ) ;Z dimensionless compressibility factor;

where: ( )barp21 ,pp inlet and outlet absolute pressure ( )2Nm ,

h inclination of the pipe,g acceleration of gravity.

Assuming that the pipe is horizontal, ( , the elevationterm is zero and the equation simplifies:

)0=h


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kp pressure drop for pipe ;kThe value of is given by:f

ip absolute pressure at node ;i ( ) ( ) Ef 076.0Re338.51 = pj absolute pressure at node ;jwhere:E is equal to 0.8 For medium and high pressure:Re is the Reynolds number

( )[ ] ( ) kjikm

nkknPPPQKQ === 1 (10)

Assuming T and , the equation (6) canbe rearranged:

K288= 589.0=S where: .22 , jjii pPpP ==

848.42

848.12

2

2

1

24.27:DE

LKwhere

KQpp n

=

=

(7)

The equations for low pressure, and for medium and highpressure can be rearranged:

( ) ( )

( ) ( ) 11

21

m

kkkn

kkkn

KPQ

KpQ

=

=(11)

C. High-pressure (above 7.0 Bar gauge)

For pressures above 7.0 Bar, the Panhandle equation can be

used:F. Network equations

( )fSLTZ

Dpp

p

T

Qn n

n

52

2

2

14

1057.7

=

(8)

Many methods of meshed gas flow simulation may be used,

such as, the Newton-nodal method, Hard-Cross nodal method,Newton-loop method and Hard-Cross loop method. TheNewton-loop method has a good convergence compared withthe other ones [2], [3],[4] and will be used in this paper.

where: .( )barpThe friction factor is given by:f

( ) ( ) Ef 073.0Re872.61 = The Equation (12) represents a set of loop equations thatdescribe the gas network. In this approach, the non-pipeelements are not considered.

Assuming , the

equation (8) can be rearranged:

589.0288,95.0 === SandKTZ

( )[ ] 0. =QB (12)

854.42

854.122

21

43.18:

DE

LKwhere

KQpp

=

=

(9)

where:

B branch-loop incidence matrix;

( )Q vector of flow equation.

This equation is a mathematical representation of Kirchhoffs

second law which states that the sum of pressure-drops aroundany loop is zero. The loop method requires that a set of loops

in the network be defined. An initial approximation made

to the branch flows ensures that a flow balance exists at eachnode. Since the branch flows are approximations to their truevalues, a loop flow q is introduced. The loop flow is the flowcorrection to be added to the branch flow approximations to

yield the true values. A loop error into each loop is alsointroduced because the pressure-drop calculated from theseflows will not summate to zero around each loop. This loop

error is a function of all the loop flows.

0Q

D. General formulae

From above equations, it is possible to derive a general

expression for steady-state gas flow. For any pipe , the pipe

flow equation from node i to node can be expressed as [7]:k

j

( )[ ]k

m

nkknQKQ 1=

where:

( )kn

Q flow function for pipe k;

kK pipe constant for pipe k;

( )knQ flow in pipe k;

1m flow exponent: 2 for low-pressure The loop errorsF(q) are incorporated into equation (12):

( ) ( )[ ]QBqF .=1.848 for medium-pressure1.854 for high-pressure

But, qBQQ T.0 +=For low pressure:

Then, ( ) ( )qBQBqF T.0 += (13)( )[ ] ( ) kjiknkkn pppQKQ ===2

where:


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We now make an initial approximation to the loop flow .

This approximation is then successively corrected until asolution is reached. The Newton-loop method solves the set ofequations (13) iteratively until the loop errors are less than aspecified tolerance. The iterative scheme for correcting the

approximations to the loop flows is [6]:

qT(u) =

kall k

kk

f

ufC

)((16)

where:T(u) transmission tariff for the useruCk cost of circuit kfk(u) k-circuit flow caused by userukkk qqq +=+1

kf k-circuit capacity

TTC = total transmission costkall

kCwhere,

( )[ ]k

k

k

J

qFq

=

The flow fk(u) may be assessed by a DC load flow modelbased on a given set of power injections and power retrievesthat represent the wheeling transaction of useru. In this case,it is important to identify the from and to points of eachtransaction. For instance, if a transaction is defined by an

injection ofx MW at bus i and a retrieve of the same x at bus

j, the vector P has zeros at all positions except at i row withthe value x and at j row with the value x. The circuit flowsare calculated using equations (14) and (15).

Jis the loop Jacobi matrix given by:TBMBJ ..=

where:

miQKmdiagMM

ii ,....,11

1

1 ==

=m number of branches.

The advantage of this method is its good convergence

characteristics and its little sensitivity to the initial conditions. Similar approach may be applied to the gas network. For anagent u represented by an injection of gas at node i and aretrieve at node j, the variation of gas flow, Q, at eachpipeline may be determined by considering the case with and

without the transaction using equation (12). With such aprocedure, we are assessing the sensibilities of the gas flow ofeach pipeline.

III. COMBINED TRANSMISSION AND GASNETWORKPRICING

Many transmission pricing methods have been proposed sincethe popular postage stamp method. The majority of them

starts with the MW-mile method [5], which incorporate thedistance as an important measure to account. This methodallocates the allowed transmission income among the systemusers in proportion to their "extent of use" of the transmission

resources [1]. The DC load flow equations identify how eachuser contributes to the use of circuit capacities.

The IRTC method also uses the DC load flow but it is notnecessary to identify the counterparties of a transaction. Nodalprices are determined independently from the injection andretrieve points. The method uses the sensibility, ki, related tothe variation on the load flow in one circuit, k, due to an

injection of 1 MW at bus i. The nodal tariff at node j, j, isdetermined by: = P (14)

=kall

krkj

k

kkj

f

CC )( (17)where:

susceptance matrix voltage angle vector

The kr is the sensibility ofk-circuit to the reference bus r. In

most of the cases the tariffs cannot provide the total allowedrevenue (AR) for the transmission grid. Thus, an adjustment is needed to match the revenue. Equation (18) shows how thisadjustment can be introduced.

P bus power injection vector

The power flow at circuit k,fk, may be obtained by:

(15)kjikf )( =

+=

iall

i

iall

ii

jjL

LAR

(18)where

i voltage angle of bus i

k susceptance of circuit k

where:Three transmission pricing methods will be proposed for thegas meshed network: the traditional postage stamp, the MW-mile and the Invested Related Transmission Cost (IRTC) [9].

The last one has been applied in Brazil.

j adjusted tariff at busj

Li load at bus i

Rearranging the equation (18) yields:The MW-mile method calculates the flow at each circuitcaused by the generation/load pattern of each agent based on a

power flow model. Costs are then allocated in proportion tothe ratio of power flow and circuit capacity:


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+=

iall

i

iall

iij

iall

i

jL

L

L

AR)(

(19)

Table 1: Gas wheeling charge under MW-mile(million US$/Mm3/h)

R. Janeiro S. Paulo P. Alegre

Bolvia 0.0304 0.0290 0.0299

Argentina 0.0288 0.0199 0.0198

Campos 0.0037 0.0092 0.0335where:

=kall

kikj

k

kij

f

C)()( Table 2 shows the nodal prices for the three cities considering

the IRTP method (injected and consumed gas are in Mm3). Inthis case, both the production and consumption pay thewheeling charge, i.e., 50 % of the total cost is paid by theproduction and 50 % by the consumption.

Note that j does not depend on the reference bus. The firstterm of equation (19) is the postage stamp tariff and thesecond one is the modulation.

A similar procedure is applied to the gas grid. The kjrepresents, for the gas network, the variation in the gas flow atpipeline k caused by one variation in the injection of gas atnode j. A reference node is also chosen to build the matrix Bof all sensibilities . It is important to note that those

sensibilities are related to the base case with all transactionsincorporated.

Table 2: Gas wheeling charge under IRTP methodNode Injected

GasGeneration

TariffConsumed

GasLoadTariff

S Paulo 0 0.0410 253 0.0361

R Janeiro 0 0.0386 85 0.0386

P Alegre 0 0.0.424 167 0.0348

Bolivia 94 0.0153 0 0.0618

Argent 73 0.0061 0 0.0710

Campos 338 0.0483 0 0.0288Based on the B matrix, the same approach related to the

revenue reconciliation can be applied for the gas network.Table 3 shows the transmission charges under MW-mile forthe three points chosen as the candidate points of electricity

injection. In this case, it was assumed that the natural gasgeneration plants will be sited at So Paulo, Rio de Janeiro orPorto Alegre.

IV. BRAZILIAN GAS AND TRANSMISSION GRIDS

The development of the gas grid in Brazil is recent, but some

pipe loops can be visualized in the future. Figure 1 presentsthe planned and the current configuration of the gas networkin the south part of the country. There are basically threesources of gas: two from the neighboring countries Boliviaand Argentina and one from the off-shore oil fields at the

north of Rio de Janeiro city. In this paper, it will be analyzedthree options in terms of sitting a thermal plant: So Paulo,

Rio de Janeiro and Porto Alegre cities.

Table 3: Transmission charges under MW-mile(US$/KWmes)

R. Janeiro S. Paulo P. Alegre

R. Janeiro 0 0.468 1.581

S. Paulo 0.468 0 1.3143

P. Alegre 1.581 1.3143 0

The Table 4 shows the transmission charges under IRTP forthe same points of Table 3. The IRTP method is the current

method used in Brazil where generation pays 50% of the totalcost and load pays the remaining 50%. This is the reason whythere are two different transmission tariffs: one for thegeneration and one for the load.

Table 4: Transmission charges under IRTP (US$/KWms)Generation Load

R. Janeiro -0.291 1.025

S. Paulo 0.0243 0.759

P. Alegre 0.555 0.180

Tables 5, 6 and 7 present the total costs for one combinedcycle thermal plant with capacity of 10 MW being installed at

the three cities respectively. The wheeling charges of bothtransmission and gas network vary according to the method.For instance, at Table 5, if the thermal plant is located at Riode Janeiro and the IRTP is used for the gas and the postagestamp for the electricity, the plant owner will pay US$

249,000.00 per month for the ship-or-pay contracts. The costsat shaded cells derive from the same wheeling method at gasand electricity.

Figure 1: Brazilian Gas Network

Table 1 presents the gas network wheeling charges underMW-mile method considering a transportation of one

thousand m3 (Mm3) from the three sources to theaforementioned cities. Campos is the city at Rio de Janeirostate where oil fields are located.


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Table 5: Thermal plant at Rio de Janeiro (millionUS$)Gas

Gas-mileP. Stamp

Campos Argentina Bolvia

IRTP

P. Stamp 0.3219 0.1746 0.2286 0.2321 0.2497

R Janeiro 0.1552 0.0079 0.0619 0.0654 0.0829

So Paulo 0.1598 0.0126 0.0666 0.0700 0.0823

MWm

P.Alegre 0.1710 0.0238 0.0777 0.0812 0.0906

Electricity

IRCP 0.1523 0.005 0.0643 0.0709 0.0801

Table 6: Thermal plant at So Paulo (millionUS$)Gs

Gas-mileP. Stamp


IRTP

P. Stamp 0.3219 0.1865 0.2095 0.2291 0.2443

R Janeiro 0.1598 0.0245 0.0475 0.0670 0.0835

So Paulo 0.1552 0.0198 0.0428 0.0624 0.0776

MWm

P.Alegre 0.1683 0.0211 0.0559 0.0755 0.0879

Electricity

IRCP 0.1554 0.0227 0.0452 0.0679 0.0779

Table 6: Thermal plant at Porto Alegre (millionUS$)Gs

Gas-mileP. Stamp


IRTP

P. Stamp 0.3219 0.2387 0.2093 0.2310 0.2415R Janeiro 0.1710 0.0878 0.0584 0.0801 0.0988

So Paulo 0.1683 0.0852 0.0557 0.0774 0.0907

MWm

P.Alegre 0.1552 0.0720 0.0426 0.0643 0.0748

Electric

ity

IRCP 0.1608 0.0749 0.0450 0.0698 0.0804

Based on the tables, it is possible to identify problems in terms

of economic signals when postage stamp is chosen to be thewheeling method. The three points, when postage stamp isapplied to both gas and electricity, present high tariffs, whichshows the disadvantage of this method. The tariffs continue tobe high even when only one network is under postage stamp.

The MW-mile and gas-mile method presents better results to

signalize for the agents, that it is better to site the power plantcloser to gas resources and to the electricity load. This is the

case of Rio de Janeiro.

The IRTC method has the advantage of not identifying thebilateral contracts and, therefore, more suited for marketpurposes. However, in terms of location, the mile methods

present a more accurate performance. The IRTC method isalso much better than the PS method.

Comparing the three points, Rio de Janeiro is the better

location to install the thermal plants when gas and electricitynetworks are considered.

V. CONCLUSION

Methodologies to charge gas pipeline networks were proposed

in this paper taking into account the transmission pricingmethods. The combined gas and transmission network pricingis necessary mainly when thermal plants are underconsideration. In Brazil, the development of the gas network

is being justified by the electrical sector that was recentlyexposed to a rationing process, i.e., the electrical sector is theanchor of the natural gas sector. Therefore, finding the best

locations for the thermal plants has become a very importantissue. With the introduction of market mechanisms at theseboth sectors, the establishment of reasonable chargingmethods for the gas and electricity networks is crucial,

especially because the government has no more control overthe new private investments.

This paper focused on three most used methods to show how

they can change the location of new generation. The resultsprove that the influence of gas and transmission grids can notbe neglected by the regulators. Therefore, pricing methodsthat incorporate locacional information are better to introducea more reasonable policy. Particularly, in Brazil, the IRTP and

postage stamp methods are being used at transmission and gasrespectively.

VI. REFERENCES

Periodicals:[1] J. W. Marangon Lima, "Allocation of Transmission Fixed Charges: An

Overview", IEEE Trans. On Power Systems, vol. 11, N 3, pp. 1409-

1418, Aug. 1996.

[2] B. Gay, P. Middleton, The Solution of Gas Network Problems, Chem.Eng. Sci, Vol 28, pp 109-123, 1971.

[3] B. Gay, P. E. Preece, Matrix Methods for the Solution of FluidNetwork Problems, Trans. Inst. Chem. Engers., Vol 53, pp 12-15, 1975.

[4] T. W. Cochrant, Calculate Pipeline Flow of Compressible Fluids,Chem. Eng. Sci., Vol 103, N2, pp 115-122, 1996.

[5] D Shirmohammadi, P R Gribik, E T K Law, J H Malinowski, R EO'Donnel, "Evaluation of Transmission Network Capacity Use for

Wheeling Transactions",IEEE Trans on PWRS, Vol. 4, No. 4, October

1989.

Books:[6] A. J. Osiadacz, Simulation and Analysis of Gas Networks, Gulf

Publishing Company, 1987.

Technical Reports:[7] Gas Enginnering and Operating Practices GEOP. American Gas

Association, 1996.

Papers from Conference Proceedings (Published):[8] S. Hecq, Y. Bouffioulx, P. Doulliez, P. Saintes, "The Integrated

Planning of the Natural Gas and Electricity Systems Under Market

Conditions, in Proc. 2001 IEEE Porto Power Tech Conference, Porto

Portugal, 2001.

[9] M C Calviou, RM Dunnet, P H Plumptre, "Charging for the Use ofTransmission System Using Marginal Cost Methods", Proc. 11th PSCC

Conference, pp. 385-391, Avignon France, Aug 30-Sep 4, 1993.

VII. BIOGRAPHIES

M. S. Morais, has B.Sc., M.Sc. in Electrical Engineering, the last one,from the Federal University at Itajub (UNIFEI), in 1990.From 1987 to 1991

she was with Engenharia Projeto e Consultoriain Belo Horizonte, as engineerof Transmission Line sector. From 1992 to 2001 she was with University of

Alfenas (UNIFENAS) as a professor and coordinator of Electrical

Engineering. She is currently working on her D.Sc. degree at UNIFEI.

J W Marangon Lima (M1994), has B.Sc., M.Sc. and D.Sc. degrees inElectrical Engineering, the last one, from the Federal University of Rio de

Janeiro (COPPE-UFRJ), in 1994. From 1980 to 1993 he was with Eletrobrs,

the former Brazilian holding company of the power sector. Since 1993, he has

been with Federal University of Itajub (UNIFEI) as a Professor of Electrical

Engineering. In 1998, he was also with ANEEL, the Brazilian National

Regulatory Agency, as a director advisor. From 2001 to 2002, he joined the

Energy Policy Council in Brazil, as the coordinator of Energy Prices and

Tariffs Technical Committee.

natural gas network pricing and its influence on electricity and gas markets

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