Appendix 3: Summary of Methodologies for Estimating Marginal Cost

Transcription

1 Appendix 3: Summay of Mehodologies fo Esimaing Maginal Cos (i) Long Run Aveage ncemenal Cos Mehod (LRAC) The long un aveage incemenal cos appoach consides he following issues: Assesses he esouce posiion ove a suiable long-em peiod; Foecass unconsained demand ove he same peiod; Opimises he vaious saegies available o geneae he leas cosly soluion o addess supply/demand imbalances; and Esimaes LR as he pesen value (PV) of he expeced exa coss of he opimal saegy divided by he PV of he changes in he supply/demand balance in ems of addiional quaniy supplied and/o saved hough addiional demand managemen opions. The following figue illusaes he LRAC appoach. (ii) Tuvey Appoach This appoach has been associaed wih he wok of Pofesso Ralph Tuvey. 1 Tuvey ecommends ha an appopiae esimae of LR may be deived by consideing he impac on fuue coss of boh an incemen and a decemen on he cenal demand foecas and aking he mean of he wo esuls. This appoach consides he change in foecas fuue sysem coss aising fom a pemanen incemen o decemen in he foecas paen of fuue demand. This appoach is heefoe moe explicily concened wih decision making a he magin. This appoach may also be difficul o use when demand is foecas o be fla. n hese cicumsances, he uni coss of he las block of leakage educion may povide a good indicao of LR. The ohe impoan feaue of his appoach is ha hee is no equiemen o caegoise fuue coss. Unde his appoach, he calculaion is based on consideaion of foecas changes in expeced oal sysem coss (such as including fuue coss associaed wih implemening known legal obligaions, fo example qualiy impovemens o he fee mee opion). Howeve, esimaes may be sensiive o he size of incemens o decemens modelled, and in using his appoach, i is impoan o analyse his degee of sensiiviy. 1 Tuvey, R. (2000), Wha ae maginal coss and how o esimae hem, Technical Pape 13, Cene fo he Sudy of Regulaed ndusies, Univesiy of Bah. 27 ovembe

2 (iii) Ohe calculaion mehodologies A selecion of alenaive maginal cos mehodologies commonly used by uiliy companies is discussed below. Discouned Toal nvesmen Mehod (DTM) The DTM mehod compues a maginal cos fo new capial invesmen by dividing he ne pesen value of he oal invesmen ove he planning peiod unde eview by he pesen value of he load gowh. The esuling uni maginal cos aio is annualised using a Real Economic Caying Cos Faco (RECC) faco. The aionale fo discouning boh he numeao and denominao is o nomalise all invesmens and loads o a single ime peiod. The inuiive eason fo his is ha he discouned load accuaely epesens a consan pice ha, if paid fo he inceased load as i occus, would exacly mach he pesen value of he invesmen seam. DTM The fomula is oulined below: RECC 1 1 L 1 1 = capial invesmen in yea L = addiional load in yea = discoun ae o WACC = numbe of yeas in he planning hoizon RECC = eal economic caying cos RECC Faco A RECC faco, when applied o a capial invesmen, poduces he fis yea evenue equiemen of a seies of annual capial chages ha emains consan in eal ems ove he life of he asse. The RECC faco is a funcion of he auhoised ae of eun (WACC), inflaion, salvage value, book life, and ax aes. The RECC faco could ake ino accoun ax aes hough incopoaing pos-ax WACC aes. Some disibuion businesses develop a sandad se of RECC facos fo vaious invesmen caegoies. Capial Recovey Faco A concep closely ied o he RECC is he capial ecovey faco (CRF). The CRF is anohe mehod of levelising a seam of fuue paymens o an annualised eal cos. CRF = n geneal, he CRF is calculaed by he following fomulae: 1 (1 ) 1 o 1 (1 ) R = he discoun ae (i.e. he WACC) = he useful life of he invesmen The CRF is equal o he sandad annuiy fomulae in finance. Capial invesmen is conveed o a consan annual seam sufficien o ecove he iniial invesmen ove he useful life of he pojec in PV ems. The RECC is appoximaely equal o he CRF in which he eal discoun ae ( i) is subsiued fo he nominal discoun ae of he CRF fomulae. 27 ovembe

3 Whee hee is a seam of capial invesmens ove a peiod of ime in he planning hoizon, i is a easonable appoximaion feasible o apply CRF facos o he cumulaive capial invesmen in each yea in ode o annualise he impac of incemenal capial expendiue. Technically, he fomulae will need o be adjused whee he numbe of peiods in he planning hoizon unde sudy is geae han he assumed asse life of he iniial peiod s invesmen (as he capial coss will have been fully ecoveed in PV ems). Howeve, in eleciciy disibuion maginal cos sudies, he aveage asse lives ae longe han planning infomaion on invesmens. Fuhemoe, whee he planning hoizon is long and he discoun ae is high, ou-yea values have minimal impac on esuls. Toal nvesmen Mehod Anohe vaian of he DTM mehod is he Toal nvesmen mehod (TM), which is compued by he following fomula. DTM RECC 1 1 L is essenially he same as he DTM mehod wihou discouning oal invesmen and load gowh. This mehod is no useful ove a long planning hoizon and should no be used by Ausgid. Pesen Woh Mehod (PW) The PW mehod esimaes maginal coss as he oppouniy coss of planned capial expendiues fom a pemanen incease in load. This cos is efleced in he savings associaed wih he defeal value of shifing he sysem expansion plan cos seam ino he fuue. The PW mehod yields an esimae ha vaies ove ime, eflecing geae maginal coss when invesmen is imminen. The PW fomula is: PW CRF = capial invesmen in yea 1 (1 ) 1 (1 ) 1 L (1 ) 1 L 1 1 = incemenal change in peak load divided by he esimaed annual change in peak load L = incemenal change in peak load = discoun ae = numbe of yeas in he planning hoizon CRF = capial ecovey faco The PW numeao is someimes pesened wih a disibuion cos inflaion index DC and he acual cos of capial o inees ae such ha PW CRF (1 1 DC 1 cc L 1 cc ) 1 27 ovembe

4 The PW mehod eflecs he savings associaed wih an invesmen of defeal, bu assumes ha he exising plan diffes only in iming. Thee ae some concepual advanages o using his mehod as i poduces diffeen maginal cos esimaes ove ime and should signal highe maginal coss duing peiods of inceased newok congesion. The PW mehod yields an avoided cos esimae ha vaies by planning yea, eflecing he geae maginal coss when invesmen is imminen. An alenaive expession of he PW fomula is: [ PW ] * 1 i) y y 1 (1 ) LoadChange y y * AnnualisaionFaco = annual demand-elaed invesmens in capaciy by aea ($); i = escalaion ae fo he invesmens; = discoun ae; y= yea; LoadChange = esimaed aveage change in peak load by aea fo he planning peiod; y = defeal caused by load change (annual peak load gowh divided by LoadChange); and AnnualisaionFaco = eal economic caying chage fo he planning peiod, gossed up by a vaiable expense faco. Regession Mehod The aional Economics Reseach Associaes (ERA) has suggesed he use of a linea egession echnique ha has been adoped by uiliies and juisdicions in he US fo maginal cos sudies. The egession mehodology obains a maginal uni capial cos by egessing he cumulaive changes in invesmen on cumulaive changes in load. The analysis usually uses a combinaion of hisoical and foecas peiod daa. The maginal uni cos is esimaed fom he b coefficien fo he egession. The maginal uni cos is hen annualised by muliplying he coefficien by he RECC faco. This mehod was adoped by he Souhen Califonia Gas Company o esimae maginal capial coss fo is medium pessue and high pessue gas disibuion sysems. L The basic egession equaion is: alpha = cumulaive capial invesmen in yea (he dependen vaiable) bea = cumulaive load in yea (he independen vaiable) and he esuling maginal cos esimae is: RM RECC The egession mehod can povide an accuae hisoical accoun of maginal cos, bu he fowad-looking componen is no so useful. Fuhemoe, in a business such as Ausgid, maginal coss end o display a sawooh appoach, amping up significanly when capaciy consains ae eached and hen falling significanly once a faciliy has been augmened. This is paiculaly ue of individual pojecs. Economeic based maginal coss sudies usually adop polynomial funcional foms in ode o capue he non-linea cuved elaionship beween he dependen and independen vaiables. 27 ovembe

5 Replacemen Cos ew Mehod (RC) RC eflecs he esimaed cos o epoduce he exising faciliies a pevailing pices. The oal RC cos of he sysem is usually esimaed by collecing hisoical asse value daa (diffeeniaed by locaion and componen ype), and hen conveing o cuen values. The RC pe uni of load seved (measued as non-coinciden peak, coinciden peak, divesified peak, o equivalen demand) esimaes he aveage cos of meeing demand - he aionale being ha i eflecs he appopiae oppouniy cos. This pa of he calculaion is based only on hisoical daa. The aveage cos is hen conveed o a maginal cos by muliplying an elasiciy of capial cos wih espec o demand. This elasiciy is usually deived using a fowad-looking load and pojec pojecion. Due o compuaional complexiy, his mehod is no pefeed. 27 ovembe