transmission tariff methodology

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TRANSMISSION TARIFF METHODOLOGY

WORKSHOP ON CROSS-BORDER

ELECTRICITY TRADING.

SESSION 1

WEBINAR

JANUARY 19-20, 20211/22/2021 1

2

OUTLINE

• INTRODUCTION TO TRANSMISSION TARIFFS;

• REVENUE REQUIREMENTS;

• PRINCIPLES FOR REVENUE ALLOCATION;

• REVENUE ALLOCATION METHODS.

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3

OUTLINE





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SOME PRELIMINARY NOTES

• “Transmission Tariffs” as a general concept, are payments made by users of a

transmission system to deliver or withdraw energy to/from such system;

• Other common terms are “Transmission Use of System Charges”, or “TUOS”;

• Wheeling Tariffs (WTs) or Wheeling Charges (WCs) may be considered as a particular

case of TUOS, when a transmission owner (TSO) provides transit for transactions

between participants of third countries. This represents the case of interest in

regional markets, and particularly with CAREM;

• There is not a uniform terminology in this subject, so you can find other names, and also

some different use of some of these definitions.

4

TRANSMISSION TARIFFS

• Due to the cost of the required investments, strong economies of scale and most

importantly due to the “use of land” constraints the electric power transmission

service is, given today’s technology, recognized as a natural monopoly;

• The solution adopted by most governments to this situation is to make the

transmission service a regulated monopoly, subject to concession and regulated tariffs;

• The same concept can be applied to cross border transmission systems;

• The regulated tariff system is normally designed to allow the TSOs to collect an

“Authorized Income” (the “Revenue Requirement”), designed to cover the company’s

authorized fixed and variable costs plus economically reasonable or a politically

determined profit (rate of return);

• This Authorized Income can be based on actual costs, as in Rate of Return

Regulation, or on a pre-defined efficient operation, maintenance, administrative and

investment costs (Price Cap Regulation), or be the outcome of a competitive bid.

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These issues lead to special difficulties for setting efficient transmission tariffs

TRANSMISSION NETWORKS

SOME DISTINCTIVE CHARACTERISTICS OF ELECTRICITY

• Flows in AC circuits follow physical laws, cannot be directed through a particular path (like in almost

all the transportation cases, phase shifting transformers allow some level of control);

• Network does not grow continuously (as it can be assumed for Distribution);

• Lumpy Investments:

− More discontinuous than in distribution;

− Lines initially (but in some cases permanently) operate below capacity, because of security

conditions like N-1 criterion;

− Strong scale economies;

• Security criteria (like N-1) leads to (apparent) oversizing;

• Dilemma: who should pay the “extra size”, as beneficiaries of security may be different of those

using the system for trading,

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• Tariff Stability: this objective favors transmission tariffs that are stable and predictable:

− Stable Tariffs allow agents to make better investment decisions as it reduces the

uncertainty on the projects’ competitive position and likely operation costs;

• Non-Discrimination:

− New users should not face larger charges than existing users or vice-versa;

− New users should not face undue barriers to entry.

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DESIRABLE OBJECTIVES OF TRANSMISSION TARIFFS

DESIRABLE OBJECTIVES OF TRANSMISSION TARIFFS -

CONTINUED

• Appropriate Remuneration for the TSO: tariffs should allow recovery of the

TSO’s Authorized Income (RR);

• Efficiency Incentive: tariffs should provide appropriate signals to promote the most

economical location of generation and large industrial loads. However, given the

mentioned characteristics of electricity this is seldom possible;

• Simplicity of Rates (Ease to Apply): charges should be conceptually simple and

transparent and must allow all users to estimate the expected payments;

• Every user should understand the rationality of the methodology. But “as simple as

possible, as complex as necessary” must prevail.

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DESIRABLE CHARACTERISTICS OF TRANSMISSION

TARIFFS - CONTINUED

• Efficient transmission charges should be based on “cost causation”;

• This translates into allocation of WCs to the economic beneficiaries of the network

or, alternatively, to those users who could be considered responsible for the network

investment (which are really almost equivalent criteria, but both are difficult to apply in

practice);

• As this criterion is difficult to apply in practice, other criteria are used, including

allocation to users whose consumption is less sensitive to tariffs (i.e., “Ramsey”

criterion) or to “Physical Utilization”;

• A proxy: some measure of “physical network utilization” or “use” could be used

instead (where, when & how much energy is injected or withdrawn, whether actual,

potential or estimated):

− Unfortunately, there is no indisputable procedure to measure “physical utilization”.9

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OUTLINE





COSTS IN A TRANSMISSION SYSTEM

11

Sunk: investments

Non avoidable: Operation,

maintenance,

administration, taxes.

Variables:

Losses;

Congestion;

Ancillary services.

Cost incurred by the

TSO

Recovered through

TUOS

Cost linked to system

operation, in CA

managed by the TSOs

COSTS IN A TRANSMISSION SYSTEM

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Sunk: investments

Non avoidable: Operation,

maintenance,

administration, taxes

Variables:

Losses;

Congestion;

Ancillary services.

Described in this

training as TUOS or

WCs

Analyzed as separate

components of

transmission charges

Transmission

Tariffs

Revenue Requirements

for the owner

Pricing of transmission:

to whom and how much

should pay each agent

(Revenues Allocation)

Fixed costs:

• Investments

• O&M

Complex process:

• Electricity is not traceable (as

almost all products to freight)

• “Transmission user”

cannot be identified

ISSUES IN TRANSMISSION PRICING

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REVENUE REQUIREMENTS (RR)

INVESTMENT AND O&M COST RECOVERY

• Investment: costs are specific for each Project (type of terrain, design criteria,

obstructions..), but some unit costs may be similar;

• Criterion to define:

− Historical Costs (eventually reduced by political criterion);

− Competitive prices resulting from tendering;

− Standard prices (e.g., €/km);

• O&M:

− Actual costs;

− Benchmarks;

− Bottom up.14

CONVENIENCE OF STANDARD COSTS IN CROSS

BORDER WCs

THE USE OF STANDARD COSTS

• It is unreasonable (and inconvenient) that the costs to be compensated in the different

countries through the WCs depend on widely different regulatory practices because it may

result in different unitary costs for otherwise similar facilities;

• WCs require that costs of the networks of different countries be shared by other countries;

• It is expected reluctance of a country to pay a fraction of the cost of the network of another

country, where such a cost has been determined following practices or values that are not

acceptable to the first country:

− The reluctance increases if the per unit cost of a facility in a country is higher than the

unit cost of the same item in the first country.

• The acceptable and transparent way to share costs of existing networks is to establish a

common standard of costs for each transmission component.

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EXAMPLE: STANDARD UNIT COST OF LINES

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EXAMPLE: STANDARD UNIT COST OF TRANSFORMERS

Ref. No. HV SIDE LV SIDE MVA REPLACEMENT

VOLTAGE VOLTAGE RATING COSTS - 2012

(KV) (KV) (US$X1000)

T1 765 400 2000 15,979

T2 765 400 1000 7,333

-

T3 400 330 900 5,338

T4 400 330 750 7,584

T5 400 330 500 4,239

T33 400 275 1000 4,395

T6 400 275 800 3,857

T34 400 275 720 3,733

T39 400 275 750 3,857

T72 400 275 150 NA

T7 400 275 400 2,859

T8 400 220 630 2,642

T9 400 220 500 3,908

T10 400 220 315 3,841

T11 400 132 500 2,051

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NEW INVESTMENTS IN TRANSMISSION

NOT FOR INITIAL YEARS OF CAREM, BUT TO THINK

ABOUT• Usual Approach: The most common methodology is to allocate to a TSO the obligation to

build and finance the facilities, who then recovers the investments, the O&M expenses and a

regulated return through the TUOS. This approach is used in systems with or without markets;

• Auctions: some government entity organizes auctions (or open seasons) oriented to

Independent Transmission Companies to build and operate the facilities, receiving an annual fee

that covers all the costs;

−These auctions can be oriented to users of the system, that pay the annual fee.

• Coalitions: A set of agents voluntarily finance the expansion, which once in service may be

operated by an independent company (ITC), or by the incumbent TSO;

• In the last two cases, the line sponsors may receive some sort of transmission rights as

compensation for financing the expansion;

• Merchant expansions: risk investment paid by users or congestion rents.18

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OUTLINE





TUOS DEALS WITH TWO MAIN ISSUES: REVENUE

REQUIREMENTS AND REVENUE ALLOCATION

Revenue Allocation: how to allocate RR to users of the transmission facilities;

Basic principle: there is no perfect revenue allocation method. It should be

selected based on local characteristics, targets and needs.

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Therefore, in electricity, “use” to some extent requires arbitrary definitions

WCs BASED ON USE

THE CONCEPT OF “USE”

• A common alternative is to allocate RR is based on use;

• This is the approach in other transportation activities:

− It is simple to identify users in highways, Internet, even gas, where the shortest (or least

cost) path actually dictates the movement of the commodity, or when the flow can be

controlled (valves in gas transportation);

• Electric power moves along all the available paths between the supplier and the customer. An

injection of current in one node to serve a consumer in another node may impact several

transmission lines, depending on the load situation in each one;

• It may be possible to trace the electricity from an injection node to a withdrawal node (e.g., a

bilateral contract), identifying the changes in flows produced by the transaction;

• But in spot markets there is no direct relationship between injections and withdrawals.

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CROSS BORDER TRANSMISSION PRICING

APPROACHES

Mechanism to be proposed should be flexible enough to allow each country to adopt

internally a mechanism different from the one adopted at inter-country level:

• Possible approaches. A single tariff for all the countries: difficult to implement,

requires changes in internal regulations, to accept asymmetries, etc.;

• A single tariff for a “regional network”: a part of the total network is defined as

“regional”;

• Compensation for transit: TSOs are compensated for costs incurred as a result of

hosting cross-border flows of electricity on their networks by the participants from

the systems where cross-border flows originate and the systems where those flows

end.

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NON-TRANSACTIONAL WCS

CONCEPT OF AN “ACCESS CHARGE”

• It is highly desirable that compensations not be “transaction-based”, i.e., not linked to

each transaction;

• This is inefficient as fixed costs are converted into variables. Therefore, users need to

increase their offers (either in bilateral contract or at the day-ahead market) in the

magnitude of the tariff; therefore, some transactions that are socially desirable may not

take place because of this increase in price;

• It seems desirable that WCs be defined as “access charges”, paid by users as a function

of other variables like maximum capacity to be injected;

• The basic principle of the access charges is that payment made by participants gives

them access to the whole system network, and thus allows to trade with any other

participant of the system as well as to participate in the day-ahead market.

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NON-TRANSACTIONAL WCS

EXAMPLE OF “ACCESS CHARGE”

• Usually, the user of a highway pays a toll each time it is used, this is a transactional

toll;

• In some cases, due to the toll, some drivers would avoid using it, although it would

be convenient if the toll does not exist;

• In Switzerland, Slovenia (and other few EU countries) the users buy each year a

sticker that gives the right to use all the highways all the time. This is a non-

transactional toll, equivalent to an access charge.

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OUTLINE





REVENUES ALLOCATION

METHODS

• Postage Stamp;

• Distance;

• Contractual Path;

• With and Without;

• Horizontal Network;

• Average Participation;

• Marginal Participation;

• Hybrids;

• Beneficiaries.

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POSTAGE STAMP

• Postage Stamp method is traditionally used by electric utilities to allocate the fixed

transmission cost among the users of the transmission service;

• This method does not require power flow calculations and is independent of the

transmission distance and network configuration. In the other words, the charges

associated with the use of transmission system determined by postage stamp

method are independent of the transmission distance, supply and delivery points

or the loading on the different transmission facilities caused by the power

transactions;

• The method is based on the assumption that the entire transmission system used,

regardless of the actual facilities that carry the transmission service;

• The method allocates charges to a transmission user based on an average

embedded cost and magnitude of the user’s transacted power.

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POSTAGE STAMP

• Is the implementation of the Ramsey principle:

• May be paid by:

• Generation;

• Demand;

• Both.

• Allocation based on some simple measure of the “use” of the transmission system:

• Energy injected/withdrawn/;

• Peak demand/injection;

• Mix of the above.

• Example.

𝑇𝑈𝑂𝑆𝑖 =𝑅𝑅

𝐸𝐷𝐸𝐷𝑖

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TUOSi: charges of agent i

RR: total revenues requirements

ED: total energy demand in the system

EDi: energy demand of agent i

DISTANCE (MW-MILE)

• MW-Mile method, existing network costs of transmission system are allocated

proportionally to the incremental power flows caused by a customer

transaction (bilateral contract) in a transmission network;

• The method MW-Mile evaluate charges associated with each wheeling

transaction based on transmission capacity use as a function of the transact

power, the length of the path followed by transacted power.

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CONTRACTUAL PATH

• It is assumed that each “user” of the grid uses the most direct physical transmission tie

between two interconnected nodes. When two participants interchange power, the

transfer is presumed to take place across the "contract path," notwithstanding the fact

that power flow in the network will be distributed in accordance with network flow

conditions and that congestion may mean that it is infeasible to use the path;

• Once the “contract path” is established, the TSO charges users a proportion of the

sum of the RRij of the path;

• Rather than establishing transmission tariffs, this method makes sense when a third

party agrees to a toll with the TSO.

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WITH AND WITHOUT

• This method is only applicable to markets with transactions based on physical bilateral contracts;

• Based on load flows calculation (better with PTDF matrix) with and without the contract;

• For each facility (line, transformer) the change in the load flow created by the contract using the load flow dFci is calculated;

• The cost allocated to the contract “c” of the RRi of facility “i” is:

– Caci = (dFci * RRI) / CAPi … where CAPi is the capacity of facility “i”;

– Alternative, instead of CAPi, flows in facility “i” in a load flow.

• Distance and Contractual Path methods are simplifications of the With and Without method.

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CONCEPT OF TRANSIT HORIZONTAL NETWORKS

• Transit Horizontal Networks (THN) identifies the potential transmission assets used

for wheeling; determined for each service provider by a series of

injections/extractions across pairs of inter connectors or the transactions with

neighboring TSO. The charges are based on the amount of power being transited

through a country;

• Using a market simulation model, the DAM clearing is simulated, with and without

regional transactions. These simulations should include different system conditions

(load states), like peak and off peak, summer and winter, dry, wet and average

hydrology, etc.;

• Alternatively, historical load flows can be used;

• The TSOs/RSMO will agree on a set of “k” typical load flows, which will be used for

WCs calculations. A probability Pk is assigned to each load flow “k”.

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CONCEPT OF TRANSIT HORIZONTAL NETWORKS

• Incremental flows created by cross border transactions are calculated as the

difference of flows with and without the regional DAM transactions (Using PSS/E or

DigSilent, or a simpler approach using the PTDF matrix);

• The HN will be formed by the set of lines whose average flow changes in absolute

value more than a given percentage of the line capacity (e.g., 3%);

– The average flow is the sum of the absolute value of flow changes in each load

state k weighted by the probability Pk given to each load state.

• RR is allocated to WCs paid by transaction “t”, based on the proportion of flows

created by the cross-border transaction “t” relative to the total internal flows (or lines

capacities):

– And WCs are paid proportionally for countries that export or import electricity

in the selected load flows.

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AVERAGE PARTICIPATION METHOD

• Accepting the technical impossibility to assign line flows unambiguously to sinks or

sources, it is assumed that this responsibility can be simply obtained by tracking each

flow upstream & downstream following the same paths & branching proportions that

exist in the actual flows provided by one or several typical load flows;

• Based on the intuitive idea that participants located in node a should pay lines located

“near” the node;

• Elements costs are allocated to flow originated in each node based on the participation

factors in each of these elements;

• Same procedure for loads;

• This method leads to 50/50% allocation between loads and generation, which is not

necessarily fair or efficient or cost reflective;

• A different proportion can be arbitrarily defined;

• In case of radially connected generators allocates 50% of the cost to loads, which is

neither fair nor efficient. 34

AVERAGE PARTICIPATION METHOD - CONTINUED

EXAMPLE: NODES ARE “PERFECT MIXERS”

35

30 MW

70 MW

MARGINAL PARTICIPATION METHOD

• Use of a transmission facility “j” by generation

(load) connected to a node “n” is defined

based on the marginal change in flow in the

facility when injection (withdrawal) in “n”

increases by 1MW;

• Injection (withdrawal) is compensated for

all the nodes “n” in a “slack node”;

• Generators (loads) of node “n” pay for all

the facilities “used”.

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“d” is the Slack Node

MARGINAL PARTICIPATION METHOD - CONTINUED

DEPENDANCE ON SLACK NODE

• In MP, changes in line flows are fully sensitive to selection of slack bus;

• Therefore, costs allocation is heavily conditioned by an assumption that it needs as an

input. Different choices are possible for this “slack bus”. Usually is near the major load

center;

• Generators/loads located near the slack bus will have a low contribution to RR, and

those far away great payments;

• Selection of the slack bus becomes a problem; the choice has much practical

importance, but there are no clear criteria to decide;

• An un-fair allocation is not acceptable in a cross-border system.

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MARGINAL PARTICIPATION METHOD - CONTINUED

ADDRESSING THE SLACK NODE ISSUE

• Instead of defining only one slack node, it is possible to adapt the marginal

participation method to deal with several slack nodes. In this case one MW of

injection (withdrawals) in node “n” is balanced with withdrawals (injections) in several

or all the nodes;

• A criterion is necessary to allocate generation (loads) in one node to the nodes

where load (generation) is located:

− Generation pro-rata to loads in each node, load proportional to generation (in

typical load flows), and inversely for loads;

− Inversely to electric distance (impedance);

− Using average participation to identify nodes close to the injection / withdrawal

node (hybrid).

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BENEFICIARIES

• Allocation based on benefits, aim to charge the network cost in proportion to the

benefits that the transmission network (either globally or line by line) provide to each

agent;

• The resulting tariffs have no purpose within the operation (i.e., short-term) timeframe;

they are only meant to recover the RR providing locational signals to new generators

and loads (i.e., to inform them about the transmission network costs that are incurred

because they are located in one part of the world instead of another);

• Whilst these methods have been discarded for a long time because they were

considered to be too complex, today there is a trend (mainly in the US) to review this

position, and to base the allocation of expansion costs to beneficiaries;

• In the opposite way of Postage Stamp, this method seems to be suitable for expansions,

but its application to existing facilities is doubtful;

• Because application to expansions is not considered as a suitable alternative for

CAREM.39

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CENTRAL ASIA REGIONAL ELECTRICITY

MARKET

CHIEF OF PARTY ARMEN ARZUMANYAN

[email protected]

WWW.PTFCAR.ORG/CAREM

mailto:[email protected]

transmission tariff methodology

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