FOUNDATIONS OF PRICING AND INVESTMENT IN ELECTRICITY TRANSMISSION

Transcription

1 FOUNDATIONS OF PRICING AND INVESTMENT IN ELECTRICITY TRANSMISSION A thess submtted to the Unversty of Manchester Insttute of Scence and Technology for the degree of Master of Phlosophy Juan C. Araneda Manchester Centre for Electrcal Energy Department of Electrcal Engneerng and Electroncs March 2002

2 Appendx C Smulatons on the IEEE 24-Bus Network Declaraton No porton of the work referred to n ths thess has been submtted n support of an applcaton for another degree or qualfcaton of ths or any other unversty, or other nsttuton of learnng. The deas and work developed by the author represent hs own thnkng and not necessary represent the poston of the company he works for.

3 Appendx C Smulatons on the IEEE 24-Bus Network Acknowledgements I wsh to thank frst and foremost to Mr. Gullermo Espnosa, Dens Pelleter and José Antono Valdés from HQI Transelec Chle S.A. for ther support to ths research and sponsorshp. I also want to say thanks to Mr. Claude Tardf from Hydro-Québec. I wsh to thank my supervsor Professor Goran Strbac for hs gudance, valuable dscussons and frendshp throughout ths research. I wsh to say thanks to Dr. Joseph Mutale and Stuart Neld whose prevous works on transmsson optmal nvestments contrbuted to the fulflment of ths research. I also wsh to thank to Juan Carlos Ausn for hs valuable co-operaton durng the fnal smulatons stage. I am very grateful to my wfe Rosa for her love, partnershp and understandng durng all the tme I spent workng on ths research.

4 Appendx C Smulatons on the IEEE 24-Bus Network v The Author Juan C. Araneda receved hs Degree n Electrcal Engneerng from Federco Santa María Techncal Unversty, Valparaíso, Chle, n He was awarded wth the maxmum dstnctons ncludng the Federco Santa María Award and the Chlectra V Regón Medal as the best electrcal engneer graduated n He also awarded the frst prze n the IEEE Student Paper Contest 1983 of the IEEE Chlean Branch. He has 18 years of workng experence n the Chlean deregulated energy market coverng the generaton, transmsson and dstrbuton areas. From 1984 to 1989 he worked for Chlqunta, an electrcty dstrbuton company operatng n the Ffth Regon of Chle, where he was a commercal analyst and a plannng engneer. From 1989 to 1994 he worked for Colbún, a generaton company operatng n the Chlean deregulated energy market, where he was a plannng engneer, Head of the Operatonal Studes Department and Head of the Plannng Department. From 1994 to date he works for HQI Transelec Chle S.A., the man electrcty transmsson company n the Chlean Central Interconnected System, where he has been Head of the Plannng Department and Head of the Commercal Evaluaton Department. Currently he holds a poston as Head of Strategc Plannng n Transelec. He has also partcpated as member of thess commssons for ndustral and electrcal engneerng students at Federco Santa María Techncal Unversty, Catholc Unversty of Chle and Unversty of Santago of Chle.

5 Appendx C Smulatons on the IEEE 24-Bus Network v Abstract Transmsson prcng has become a central ssue n the dscussons regardng the redesgn of deregulated electrcty markets. In that frame, open access to the transmsson system s one of the fundamental topcs to allow competton among agents n the energy market. Although transmsson systems costs represent close to 10% of the energy market prce, they have a sgnfcant mpact on relatve compettveness among partcpants n the energy market as well as on short and long term economc effcency of the whole electrcty ndustry. Ths research analyses how to deal wth transmsson costs, coverng short and long term ssues n electrcty transmsson prcng and ther lnk wth the energy market. Transmsson short run margnal cost (SRMC) schemes are studed and partcularly, n relaton to fnancal and physcal transmsson rghts. Varants of those schemes are currently n use n the Unted States and a smlar scheme based on frm access rghts (FAR) has been proposed n the New Electrcty Tradng Arrangements (NETA) for England and Wales. Ths research concludes that transmsson rghts schemes work well as a complement of the energy market but they do not and cannot resolve the problem of cost allocaton of the exstent transmsson assets and nvestments. The reasons are smple: SRMC do not have a drect relatonshp wth transmsson nvestment costs and transmsson busness s a natural monopoly. Therefore an effcent transmsson access prcng methodology s requred to allow the recovery of transmsson nvestment costs. For that reason, transmsson prcng based on the concept of economcally adapted network (EAN) s examned and recommended. Prces derved from the EAN have the advantage to be n tune wth the maxmum revenue allowed to the owner of transmsson assets and facltate the optmal allocaton of transmsson costs among users. Fundamental features of the EAN scheme have been llustrated on a number of examples ncludng IEEE 24 bus Relablty Test System.

6 Appendx C Smulatons on the IEEE 24-Bus Network v Table of Contents Page Declaraton Acknowledgements The Author Abstract Table of Contents v v v CHAPTER 1 Man ssues n transmsson prcng Overvew Role of transmsson prcng Open access and energy market Scope and objectves of ths research Man contrbutons of ths research Thess structure 10 CHAPTER 2 Methods and experences n transmsson prcng Objectves of transmsson prcng Electrcty transmsson as a busness Short and long run costs of transmsson Methods for transmsson prcng Postage-stamp method LRMC method SRMC method Energy market desgn and transmsson prcng Energy market desgn Pool-based energy markets Blateral energy markets Energy market prcng Energy market and system operaton 28

7 Appendx C Smulatons on the IEEE 24-Bus Network v Page 2.6 Internatonal experences 29 CHAPTER 3 Theoretcal framework for analyss of transmsson Introducton Theoretcal framework Short term and energy market effcency Long term and network development Economcally adapted network (EAN) an example Energy market and transmsson prcng Energy market balance usng nodal SRMC prcng Energy market balance usng SMP Impact of transmsson n the energy market Other transmsson prcng ssues Economes of scale n transmsson Securty of servce requrements 64 CHAPTER 4 Transmsson rghts, SRMC surplus and nvestments Man concepts Applcatons of transmsson rghts n the US Transmsson rghts and NETA Frm Access Rghts ssues Short term ssues n FAR Long term ssues n FAR Transmsson prcng based on SRMC Tests on a 3-bus network Formulaton of the problem Results 80

8 Appendx C Smulatons on the IEEE 24-Bus Network v Page Tests on the IEEE 24-bus network Formulaton of the problem Results 87 CHAPTER 5 Use of the concept of economcally adapted network for transmsson prcng Man ssues Transmsson prcng based on an EAN Allocaton of transmsson costs Formulaton of the method Tests on a 3-bus network Tests on the IEEE 24-bus network Case studes on the IEEE 24-bus network Network cost recovery Robust and weak networks Impact of securty n network desgn Implementaton n a real system: England & Wales and Chle cases Implementaton n England & Wales Implementaton n Chle 111 CHAPTER 6 Concluson Man conclusons Achevements and contrbutons of ths research Recommendatons for future research 117

9 Appendx C Smulatons on the IEEE 24-Bus Network x Page References 119 Appendx A Nodal SRMC on a Transmsson Network 123 Appendx B Smulatons on a 3-Bus Network 131 Appendx C Smulatons on the IEEE 24-Bus Network 143

10 CHAPTER 1 Man ssues n transmsson prcng Summary Ths chapter descrbes the role of the electrcty transmsson network n the new deregulated schemes n practse over the world and the man challenges regardng the search for an effcent method for transmsson prcng. Open and non dscrmnatory access to the transmsson network capacty s analysed as a pllar of competton n the energy market. The objectves, scope and man contrbutons of ths research are addressed. An outlne of the thess structure s also gven. 1.1 Overvew Under the new electrcty deregulated market schemes n practse over the world, transmsson prcng has been a focus of research and dscussons over the past years. Ths has been drven manly by the mportance that open access to the transmsson system capacty has on the overall economc effcency and compettveness n the energy market. Although transmsson costs represent only lke 10% of the energy market costs and no more than 4% of the fnal customers bll, transmsson capacty constrants and transmsson lne outages can have a sgnfcant mpact on the locatonal costs of electrcty. Therefore, transmsson system capacty affects the relatve compettveness of generators and customers connected to the electrcty network. Hence the mportance to develop an effcent prcng scheme for electrcty transmsson n tune wth the energy market prcng scheme and able to provde effcent sgnals n the short and long term.

11 Appendx C Smulatons on the IEEE 24-Bus Network 2 Experences n transmsson prcng over the world are dverse regardng how to front the man ssues. The reasons for that dversty are closely related to the economc prncples and regulatory belefs that drve the desgn of the energy market and the adopton of a prcng scheme as part of the new deregulated electrcty ndustry. 1.2 Role of transmsson prcng Network prcng s one of the most crtcal ssues n assurng the successful operaton of a market based electrcty ndustry (Mutale, J., 2000). Prcng of network servces has become an mportant subject because of the role the networks play n facltatng competton n the generaton and retal segments of the ndustry. Owners of transmsson facltes must provde open and non dscrmnatory access to the avalable transport capacty of the transmsson network and cost reflexve prces should be charged to the users. The economc theory of electrcty transmsson prcng says that the frst-best prce of electrcty at each node on a network equals the margnal cost of provdng electrcty at that node (Green, R., 1998). The electrcty must be generated and delvered to that node consderng transmsson constrants and electrcal losses. If transmsson constrants are bndng, t means the power flow through a lne s at the lmt of ts secure transmsson capacty, then cheap but dstant generaton must be replaced wth more expensve local generaton n order to lmt the power flow. In the constraned area the optmal prce of electrcty rses to the margnal cost of the local generaton. Therefore a set of nodal prces arses n the short term operaton of the electrcty system and sends sgnals regardng the value of electrcty at any tme and locaton on the transmsson network. In the long term nodal prces and the prce dfferentals between nodes arse as powerful sgnals to drve nvestments to upgrade the capacty of the transmsson network. Although the basc economc prncples are well known, the desgn of an effcent prcng scheme for electrcty transmsson s not a straght forward task. Real networks characterstcs and energy market mperfectons mpede that the economc theory of

12 Appendx C Smulatons on the IEEE 24-Bus Network 3 perfect competton works well to prce the use of the network. Nevertheless the applcaton of the man prncples can help to formulate effectve schemes for transmsson prcng. Internatonal experences n electrcty transmsson regulaton show a wde varety of prcng schemes, coverng methods based on short run margnal costs (SRMC) at dfferent locatons on the network, lke transmsson rghts schemes n usage n several systems n the Unted States, long run margnal costs of transmsson (LRMC) and the determnaton of a reference network or economcally adapted network (EAN), and fnally the smple postage stamp methods. From the regulatory perspectve, transmsson prcng has a fundamental role n the desgn of a compettve energy market. The man ssues to consder n the defnton of a transmsson prcng scheme are presented below. Cost allocaton of the exstent network The exstent assets of the transmsson network are sunk costs, therefore these costs must be charged to the users of the network (generators and consumers) n a way that does not dstort the short term sgnals provded n the energy market. In that sense the short term sgnals for the compettve generaton despatch and supply must not be affected by transmsson charges. It means that transmsson prces desgned to recover the costs of the exstent network must be fxed costs that act lke postage stamp charges, for nstance. The applcaton of stamped charges does not mean that those charges must be flat and calculated n a smple dstrbutve way. The allocaton of costs of the exstent transmsson assets s a relevant topc and one of the focus of ths research. On other hand, the allocaton of costs must be performed by the regulator due to the re-dstrbutve nature of the task. Nobody n the energy market would lke to pay a transmsson charge bgger than ts compettor and therefore the payment of those charges must be a regulatory oblgaton for all partcpants n the energy market.

13 Appendx C Smulatons on the IEEE 24-Bus Network 4 Maxmum revenue allowed (prce control) The electrcty transmsson busness s a natural monopoly, then the allowed revenues for transmsson networks must be regulated by means of some knd of prce control. Thus a relevant topc s the regulatory defnton of the total revenue for every transmsson asset owner or the defnton of the maxmum revenue attrbutable to every one of the assets n the transmsson system. Another way to deal wth ths ssue s the determnaton of a reference network or economcally adapted network that allows the calculaton of optmal transmsson capactes for everyone of the elements n the network, and therefore to determne the nvestment cost of such an deal network. One mportant aspect n the regulatory defnton of the maxmum revenues allowed s the perodcty to perform such prce control, for example every four or fve years. Durng the prce control perod some mechansm to approve upgrades n the transmsson network when relevant changes n generaton or demand occur must be mplemented. Addtonally, a way to update the regulated revenues n the prce control perod s the settng of prce ndexes together wth the ntal settng of the maxmum revenues. Those prce ndexes must be cost reflectve of the man cost components affectng every specfc asset and therefore, they can be defned for dfferent knds of transmsson assets (transmsson lnes, power transformers, reactve power compensaton equpment, etc.) and also for operaton and mantenance costs. A far and long term defnton of the prce control by the regulator wll ncentve transmsson owners to perform renforcements and new nvestments n the network. Drvng nvestments A fundamental pece of regulaton s network development when t probes to be economcally convenent from the system pont of vew. In that sense, partcpants n the energy market can perform an ex-ante estmaton of the mpact that a network renforcement wll have for them f the rght prces are n place. Thereby wllngness

14 Appendx C Smulatons on the IEEE 24-Bus Network 5 to pay the nvestment cost of new transmsson assets can be dentfed by partcpants f they have the rght prcng sgnals. Transmsson nvestments are facltated when only one or few users collect the benefts of network development. On the other sde, when many users capture the benefts of addtonal transmsson capacty t s very dffcult to acheve a collectve agreement among users, and then the regulatory hand s requred. Among transmsson nvestments wth many users havng benefts are those renforcements that mprove the qualty and securty of servce of the system. Market drven nvestments can be a realty n a world where co-operaton becomes as mportant as competton. Another mportant aspect s the tmng requred to construct new transmsson facltes. Usually a long duraton perod of at least 2 or 3 years s requred to construct a new transmsson lne or substaton and then all knd of agreements about nvestments costs and allocaton among users must be sgned by the partes before the decson to start constructng s made. Short and long term effcency The nteracton between short and long run costs of the network and the energy market prcng scheme must be consdered. For nstance, transmsson losses can be consdered as part of the energy market and then to defne prces that contans a loss component or they can be ncluded as part of the access market. It means that a consstent and stable scheme of energy and access polces and prcng must be desgned for the long term. Tme of use sgnals A relevant ssue regardng the nteracton between the energy and access market prcng scheme s the consderaton of tme of use sgnals n the calculaton of transmsson prces. Alternatvely, they must be left only as short run sgnals n the energy market. Maxmum demands for transmsson do not follow the same temporal pattern of demand. Moreover, the power flow transported through a transmsson lne depends on the combnaton of generaton njectons and demand

15 Appendx C Smulatons on the IEEE 24-Bus Network 6 wthdraws at both sdes of the lne. Therefore, some knd of tme of use sgnal attrbutable to the maxmum usage of every lne n the network s a valuable pece of an economcally effcent transmsson prcng scheme. Locaton specfc sgnals Another ssue of nteracton among energy and access market prcng s the consderaton of locaton specfc sgnals n the calculaton of transmsson prces. Alternatvely, they must be left only as short run sgnals n the energy market. Locaton specfc transmsson prces take nto account the mpact of an user at dfferent locatons n the network. Ths s another valuable pece of an economcally effcent transmsson prcng scheme. 1.3 Open access and energy market Open and non dscrmnatory access to the transmsson system s one of the pllar to facltate competton n the energy market. Transmsson owners must provde open access to the transmsson network and t means open access to nject power by generators and to wthdraw power by consumers takng nto account transmsson constrants accordng to the co-ordnaton of a system operator. Prces n the energy market can be defned n two ways dependng on the consderaton or not of the transmsson network. One way s a one node prcng system where the transmsson network s gnored but some compensaton mechansms must be n practse to solve transmsson constrants through changes on the orgnal despatch. The other way s a mult-nodal prcng system where a locatonal representaton of the transmsson network s consdered that can be ether zonal or nodal. Energy market prcng schemes are analysed n secton Most of the experences n open access prcng move around two man methodologes: value-based methods or methods drven by generatons costs and cost-based methods or methods drven by transmsson nvestment costs. Those methods are descrbed n more detal n secton 2.4. Bascally value-based methods determne the value of transmsson

16 Appendx C Smulatons on the IEEE 24-Bus Network 7 as the dfference of the energy market prces between two nodes n the network. Prces n a compettve energy market must always reflect short run margnal costs (SRMC) and therefore, the value of transmsson s equal to the SRMC dfference between two nodes. However t s a well known fact that prcng the use of the network wth SRMC produces a revenue surplus that s not necessarly matched wth the transmsson nvestment costs of the network. So dependng on the network transmsson capacty, the SRMC surplus can be lower or hgher than the transmsson nvestment costs, as t s modelled and analysed n depth n Chapter 3. Thus f the energy market prces are defned on a nodal bass, a SRMC revenue surplus wll arse. The queston here s what to do wth the SRMC surplus: to pass t straght to the transmsson owner or to allocate t among the users of the network? On the other hand, f the energy market prces are defned on a one-node bass, then a well founded cost-based method must be used to prce the use of the transmsson network. The use of a value-based prcng scheme n transmsson means that a compettve access market s created to dscover the market value of transmsson. On the other hand, the use of a cost-based prcng scheme n transmsson means the defnton of a regulated framework for access prcng that must be tuned wth the scheme n use for the compettve energy market. Therefore a compatble transmsson prcng scheme must be tuned wth the energy market scheme to work together and send opportune and rght short and long term sgnals to the market agents regardng the use of the transmsson network. 1.4 Scope and objectves of ths research The scope of ths research has been focused on the analyss of the foundatons of transmsson access prcng n deregulated electrcty markets and the study of the lnk between short term effcency and long term development of the transmsson network. Dfferent realtes regardng poltcal, organsatonal, topologcal, envronmental and

17 Appendx C Smulatons on the IEEE 24-Bus Network 8 even cultural ssues have determned dfferent regulatory schemes n applcaton n dfferent countres. However a common rule s the complementary characterstc of both energy market and access prcng scheme. Understandng the foundatons regardng the lnk between short and long term ssues n electrcty transmsson provde valuable nformaton about the scope and lmtatons of dfferent prcng schemes and serve as a gude for future developments n the area and practcal mplementaton n countres where deregulaton s stll under study. The objectves of ths research can be defned as follows: To revew the man nternatonal experences n electrcty transmsson prcng and analyse ts relatonshp wth the organsaton and prcng scheme n deregulated energy markets. To look for a lnk among short term and long term settlements n transmsson prcng, to determne effcent optons to prce the use (present) and development (future) of transmsson networks n a compettve energy market. To develop tools to smulate transmsson prcng schemes, partcularly short run margnal costs (SRMC), long run margnal costs (LRMC) and optmal transmsson prcng derved on an economcally adapted network (EAN). Then smulate, compare and evaluate those transmsson prcng schemes usng the tools developed. To obtan relevant conclusons regardng the advantages and lmtatons of the man prcng schemes for transmsson prcng. 1.5 Man contrbutons of ths research Ths research contrbutes to a better understandng of the man transmsson prcng schemes, revealng ther advantages, dsadvantages and lmtatons. One mportant contrbuton of ths work s the development of three dfferent models that provde a framework to analyse and evaluate dfferent prcng schemes for transmsson and the energy market. These models are as follows:

18 Appendx C Smulatons on the IEEE 24-Bus Network 9 A two bus network wth lnear producton margnal costs and a contnuous duraton demand curve, mplemented from the analytcal formulaton. A three bus meshed network wth three demand perods and four generators, mplemented usng the Solver tool n MS Excel. A mult-node and mult-perod power system model developed n C language, mplemented from a prevous modellng development at UMIST (Neld, S., 2000). The man contrbutons of ths research can be summarsed as follows: Presentaton of a jont analyss of transmsson open access schemes and ts nteracton wth the energy market to facltate the selecton of an approprate method to prce the use of transmsson networks. Development of a unfed methodology to analyse both transmsson access and energy market prcng to facltate the analyss and tests of dfferent prcng strateges. Analyss of the lnk between short and long term ssues n electrcty transmsson, more specfcally, focus on the allocaton of costs of the exstng network and the development of nvestments to ncrease the capacty of the network. Detecton of a relevant lmtaton of short run margnal costs (SRMC) to prce the usage of the transmsson network. Partcularly n meshed transmsson networks SRMC revenues follow Krchhoff Voltage Law (KVL) but nvestments do not. Therefore there s not a perfect match between transmsson SRMC revenues and nvestments n the optmal network, on a lne per lne bass. Of course, the same lmtaton s applcable to LRMC n the long term. Desgn and mplementaton of C-wrtten routnes to calculate SRMC and LRMC n a mult-node and mult-perod computer programme that determnes the economcally adapted network of a power system.

19 Appendx C Smulatons on the IEEE 24-Bus Network Thess structure Ths thess s consttuted by sx chapters and three appendxes whose contents are summarsed below. Chapter 1: Man ssues n transmsson prcng Ths chapter presents an overvew of the role of electrcty transmsson prcng n the new deregulated schemes n practse over the world and the man challenges regardng the search for an effcent method for transmsson prcng. The objectves, scope and man contrbutons of ths research are addressed. Chapter 2: Methods and experences n transmsson prcng Ths chapter descrbes the man objectves of a transmsson prcng scheme and the man methodologes n applcaton n deregulated energy markets. The relatonshp among energy market organsaton, ts prcng schemes, and transmsson prcng are analysed n depth. Dfferent transmsson prcng experences on deregulated energy markets around the world are addressed and analysed. Chapter 3: Theoretcal framework for analyss of transmsson The relatonshp among short term operaton and long term development of the transmsson network s analysed n ths chapter. The man ssues n electrcty transmsson prcng are derved through a two bus example. Energy prcng methods are smulated together wth transmsson prcng to check how revenues and costs are allocated among partcpants n the energy market. Chapter 4: Transmsson rghts, SRMC surplus and nvestments Transmsson rghts experences are dscussed and ther applcaton n England and Wales as frm access rghts s revewed n detal. A prcng method based on the SRMC surplus s tested on a three bus network and on the IEEE 24 bus Relablty Test System.

20 Appendx C Smulatons on the IEEE 24-Bus Network 11 Chapter 5: Use of the concept of economcally adapted network for transmsson prcng A prcng method that derves transmsson charges from the economcally adapted network (EAN) s desgned and tested n ths chapter. Tests are performed on a three bus network and on the IEEE 24 bus Relablty Test System. Chapter 6: Concluson Ths chapter summarses the man conclusons, achevements and contrbutons derved from ths research, and recommends areas for future research. Appendx A: Nodal SRMC on a Transmsson Network The calculaton of nodal short run margnal costs (SRMC) s derved n ths Appendx ncludng two calculaton methods: usng generalsed generaton dstrbuton factors (GGDF) and usng a securty constraned optmal power flow (SCOPF) representaton. Appendx B: Smulatons on a 3-Bus Network Ths Appendx shows the results of the man transmsson prcng methods on a 3-bus network. Appendx C: Smulatons on the IEEE 24-Bus Network Ths Appendx shows the results of the man transmsson prcng methods on the IEEE 24-bus Relablty Test System.

21

22 CHAPTER 2 Methods and experences n transmsson prcng Summary Ths chapter descrbes the objectves of an electrcty transmsson prcng scheme and the man methodologes n use on deregulated energy markets. The relatonshp among the organsaton of the energy market and ts prcng scheme, and transmsson prcng are analysed n depth. An overvew of some relevant nternatonal experences n transmsson prcng are ncluded. 2.1 Objectves of transmsson prcng There have been many dscussons on how to address access prcng and what knd of scheme fts better wth a compettve energy market from both short and long term perspectves (Green, R., 1997). Accordng to those dscussons the objectves of an effcent prcng scheme for electrcty transmsson can be summarsed as follows: To provde short term sgnals regardng the transport costs mposed by partcpants n the energy market. To send locaton sgnals for nvestments n generaton and demand. To sgnal the need for nvestments n the transmsson network. To allow the recovery of the effcent costs of the exstent transmsson assets and the nvestment cost of new transmsson assets. To be smple and transparent n determnng the transmsson prces.

23 Appendx C Smulatons on the IEEE 24-Bus Network 14 From the regulatory perspectve those ssues must be covered by a methodology that allows the use of the transmsson capacty n an open and non dscrmnatory way and avodng any knd of market power by partcpants that dstort the goals of a compettve market. Among short term regulatory objectves one relevant s the way the prcng method s gong to deal wth transmsson losses. Sometmes losses are consdered as part of the energy market ssues but ther short term mpact s closely related wth the transportaton of electrcty usng the transmsson network. From that perspectve losses are better dealt as part of the access market. Among long term regulatory objectves one mportant ssue s the way a decson makng process for transmsson nvestments wll operate. Transmsson nvestments can be market drven or centrally co-ordnated by the regulator (Hogan, W., 1999). It s perfectly possble to rely more on market forces, partly f not completely, to drve transmsson expanson of the network. However, there are transmsson nvestments lke those destned to mprove securty of servce to a large number of consumers that are very dffcult to mplement wthout regulatory support. 2.2 Electrcty transmsson as a busness Electrcty transmsson s a new busness as a result of the electrcty deregulaton process that started n the 1980 decade. From then on several new transmsson companes have been created around the world to focus on the bulk transmsson of electrcty and, n same cases, those companes operate the power system too. In other cases there s an ndependent system operator n charge of the co-ordnaton of generaton despatch and network operaton. Among the man electrcty transmsson companes operatng n deregulated markets are Red Eléctrca de España (Span, 1985), Natonal Grd Company (England and Wales, 1989), Statnett (Norway, 1990), Transener (Argentna, 1992), Transelec (Chle, 1993), Transpower (New Zealand, 1993), ISA (Colomba, 1994) and Etecen and Etesur (Perú, 1995).

24 Appendx C Smulatons on the IEEE 24-Bus Network 15 The man functons of electrcty transmsson are: To lnk generators and consumers Transmsson networks provde electrcty transportaton from generators to consumers both located at dfferent geographcal locatons on the network. Generaton facltes are located close to the prmary sources of energy, for nstance hydroelectrc power plants are located besdes rvers wth apprecable nflows and heght dfferentals, coal-fred thermal plants are located close to coal mnes or harbours wth facltes to dsembark the coal and sea water for coolng, and combned-cycle gas turbnes are located close to gas ppelnes cty-gates. Consumers are geographcally dspersed dependng on the economc actvty they perform, for nstance resdental and commercal customers are located n ctes and towns, and ndustral consumers are located n places where they optmse transportaton costs of the dfferent producton factors. To provde economes of scope The nterconnecton of generatng power plants of dfferent characterstcs (fuel type and margnal cost, capacty, techncal lmts, etc.) va the transmsson network allows the mnmsaton of overall producton costs, co-ordnaton of mantenance schedules and sharng operatonal reserves of capacty, followng the demand curve pattern. Ancllary servces can be provded by power unts located far from the load centres and a market for such servces s feasble to develop thanks to the transmsson network. To provde securty of supply The nterconnecton of several generators through the transmsson network provdes securty of supply to consumers. Generatng unts and transmsson facltes (lnes, transformers, breakers, reactve compensaton equpment, etc.) do not have a 100% avalablty. Generatng unts have forced outages due to falures or problems n the producton process that mean the mmedate dsconnecton of the unt from the

25 Appendx C Smulatons on the IEEE 24-Bus Network 16 network to avod major damages on t. Transmsson facltes are subject to forced outages that mean the mmedate openng of the lne or the equpment that faled. The nterconnecton of generatng unts through transmsson facltes mnmses the mpact of forced outages on consumers, ncreasng the avalablty of the power system. Determnstc securty crtera such as N 1 have been settled n power systems for the provson of securty of supply to consumers. To make possble the tradng of electrcty Today a compettve tradng of electrcty n the energy market s a realty thanks to the exstence of transmsson networks. Interconnectng electrcty producers and consumers mean the perfect way to meet offer and demand to dscover prces n a compettve energy market. In that sense electrcty can be seen lke a commodty of partcular characterstcs. Electrcty cannot be stored and must be consumed at the same tme t s produced, and also, ts way from generators to consumers s not a smple straght path because of the physcal nteractons n the network (Krchhoff laws). Nevertheless the basc mcroeconomc prncples of compettve markets can be appled to create competton n the generaton and retal areas. Therefore, generators and consumers capture the benefts provded by transmsson networks and hence they have to pay for the use of the network to the transmsson assets owners. The man characterstcs of the transmsson busness from the owners pont of vew are: It s captal ntensve Transmsson nvestments are captal ntensve and non contnuous n tme. The constructon of new transmsson lnes, substatons or the addton of new power transformers are not a daly task. They are the result of a relevant growth n demand or the connecton of new power plants. If no one of those facts happen, transmsson nvestments could requre years to occur dependng on the yearly rate of demand growth. Transmsson assets are technologcally complex, hghly dedcated and

26 Appendx C Smulatons on the IEEE 24-Bus Network 17 some of them are rreversble (transmsson lnes and substatons). Therefore only electrcty companes wth bg fnancal shoulders can partcpate n ths busness. It has long lfe assets Most transmsson assets have a long lfe expectancy. Transmsson lnes and substatons typcally have an economc lfe of 30 years or more. On the other sde, capactor banks and some hgh tech assets lke protectve, control and telecommuncaton equpment have a shorter lfe rangng between 5 and 10 years because of technologcal changes. It has lumpness of nvestments Transmsson capacty of lnes (due to standard szes of wres and mnmum wre sectons by voltage lmtatons) and transformaton equpment have standard szes, then t s not possble to dmenson a transmsson asset to match exactly to transmsson demand requrements. It means some natural over-capacty of transmsson assets as a result of the transmsson network plannng and constructon process. Investments requre long tmes of constructon Envronmental and rghts of way permsson add an mportant extra-tme to the schedule for constructng new transmsson assets that mply long tmes of constructon, even longer than tmes nvolved n the constructon of new generaton facltes lke a combned-cycle gas turbne (estmated n two and half years). Constructon schedules are usually longer and more dffcult when the constructon of new transmsson assets nterfere wth the operaton of the exstent network, or n case of upgradng of the exstent transmsson capacty, and some facltes must be dsconnected to make possble the works. It has economes of scale Transmsson networks have mportant economes of scale, meanng that the costs per MW transported are lower as hgher are the MW transported. It mples that the

27 Appendx C Smulatons on the IEEE 24-Bus Network 18 margnal cost of expanson of the transmsson network s decreasng whle hgher s the network capacty. Ths ssue s especally relevant n power systems wth hgh demand growth rates (5 to 8% per year) because of the economes acheved when the transmsson network s dmensoned on a long term bass, for nstance coverng a ten years perod. It has natural monopoly characterstcs The presence of dedcated assets, rreversble nvestments and economes of scale means a perfect ste for a monopolstc behavour. The reason a monopoly exsts s that other frms fnd t unproftable or mpossble to enter the market (Ncholson, W., 1998). Barrers to entry are therefore the source of all monopoly power. The natural monopoly characterstc of the transmsson busness means that t must be regulated to mtgate any knd of market power comng from transmsson asset owners. Hence wres busness lke electrcty transmsson and dstrbuton are regulated and therefore, regulators have to address an economcally effcent prcng method to determne prces for those busness. Regulaton must prevent network companes from overchargng users of the network and must montor the qualty of servce provded. Thus, the regulator acts on behalf of network users to ensure open and nondscrmnatory access to the transmsson network as well as to promote the development of a compettve energy market. 2.3 Short and long run costs of transmsson The total cost functon (TTC) for a certan asset of the transmsson network, lke a transmsson lne or a substaton, can be wrtten on a yearly bass as follows: TTC( P) P b 2 = c a P d (2-1) where c represents the fxed annual admnstraton, operaton and mantenance costs of the transmsson asset.

28 Appendx C Smulatons on the IEEE 24-Bus Network 19 a P b represents the annuty of the asset nvestment cost modelled as a non-lnear functon of the power flow P, where the exponent 0<b<1 ndcates the presence of economes of scale n transmsson nvestments. d P 2 represents the annual cost of the transmsson losses. The average cost of transmsson (TAC) can be determned from equaton (2-1): TTC c b 1 TAC( P) = = a P d P (2-2) P P The margnal cost of transmsson (TMC) can also be determned from equaton (2-1): TTC TMC( P) = P = a b P b 1 2 d P (2-3) Fgure 2-1 shows graphcally the curves of the total cost (TTC), average cost (TAC) and margnal cost (TMC). By defnton TTC(P)= TAC(P) P and on the other sde TMC(P) P s always lower than TTC(P) when P<P 2. It means that the use of the margnal cost of transmsson, as seen from the purely cost pont of vew, as source of network revenues cannot cover the total costs of transmsson and some addtonal charge must be added to cover the total costs. As we wll see further ths stuaton changes when the margnal revenues are calculated based on the value of transmsson for the dfferent agents n the energy market. Fgure 2-1 Transmsson total, average and margnal costs

29 Appendx C Smulatons on the IEEE 24-Bus Network 20 It s customary n economcs to make a dstncton between the short run and the long run. Although no very precse temporal defnton can be provded for those terms, the general purpose of the dstncton s to dfferentate between a short perod durng whch economc agents have only lmted flexblty n ther actons and a longer perod that provdes greater freedom (Ncholson, W., 1998). Partcularly n the short run the capacty s consdered fxed. Therefore, short run average and margnal costs of transmsson can be defned based on equatons (2-1) and (2-2), consderng a fxed transmsson capacty P max. Thus n the short run, the margnal cost of transmsson s equal to the margnal cost of losses. In the long run capacty can be consdered a varable and the long run average and margnal costs of transmsson can be defned based on equatons (2-1) and (2-2), consderng a varable transmsson capacty P. Techncally, the long run total cost curve are sad to be an envelope of ther respectve short run curves, as shown n Fgure Methods for transmsson prcng A revew of the man methods to prce transmsson network servces around the world reveals that they can be classfed n two categores: cost-based methods or methods drven by transmsson nvestment costs and value-based methods or methods drven by generatons costs. Among cost-based methods we can fnd the followng methods: Contract-path MW-mle Postage-stamp Investment cost related network prcng (ICRP) Area of Influence Tracng methods

30 Appendx C Smulatons on the IEEE 24-Bus Network 21 Among value-based methods we fnd the well known short-run margnal cost (SRMC) method and the theoretcal long-run margnal cost (LRMC) method. Contract-path and MW-mle methods were developed at the end of the 80 s and used extensvely manly n the US for calculaton of wheelng charges. They have been wdely descrbed n lterature (Green, R., 1997). ICRP method was developed by the Natonal Grd Company (NGC) and t s currently used for calculaton of the Transmsson Network Use of System Charges (TNUoS) n England and Wales. The method s based on a transportaton model to determne the optmal capacty of the network (Mutale, J., 2000). The Area of Influence method was developed n Chle at the begnnng of the 90 s and t s currently n use n Chle and Bolva. It requres the calculaton of a pro-rata to allocate the cost of the transmsson assets ncluded n the area of nfluence among the users that share the same common area (Rudnck, H. et al 1999). Tracng methods to allocate transmsson system costs over generators and demand have been extensvely studed from the academc pont of vew but they are not n practcal use (Krschen, D. et al 1997, Strbac, G. et al 1998, Balek, J., 1998). Nevertheless, an optonal tracng method usng generalsed generaton dstrbuton factors (GGDF) has been used n Chle to calculate the pro-rata among users that share the same common Area of Influence (Rudnck, H., et al 1999). The most wdely used methods for transmsson prcng n deregulated markets are the postage stamp and the SRMC methods. Addtonally some prcng methods can be derved departng from the LRMC method. Therefore they are revewed n more detal below.

31 Appendx C Smulatons on the IEEE 24-Bus Network Postage-stamp methods Ths method bascally allocate the total transmsson network cost among users based on the peak demand (MW) or the yearly energy consumpton (MWh). Transmsson network costs can be postage stamped to generaton or demand or both. Postage stamp methods can be locatonal or not locatonal. Typcally the sub-transmsson and dstrbuton prcng methods are a locatonal postage stamp prcng, where network costs are allocated to every locatonal demand user dependng on the transmsson facltes that are used to supply electrcty towards a specfc geographc area. On the trunk transmsson system the allocaton of costs s typcally postage stamped n meshed networks where t s very dffcult to forecast the behavour of transmsson flows LRMC method Transmsson long-run margnal cost (LRMC) s the nvestment and operaton cost of transportng one addtonal MW across the network when transmsson capacty can be altered. Transmsson costs are usually determned usng a reference network or economcally adapted network (EAN). The determnaton of the EAN on a power system requres a complete set of data regardng producton costs of generaton and nvestment costs of transmsson, plus long term assessments about future generaton costs, locaton of new plants, demand forecastng and ts geographcal dstrbuton. Therefore the use of LRMC can be performed n systems where the regulatory authorty carres out a close followng up of the energy market behavour. Addtonally the regulator needs some consultaton mechansms to obtan the co-operaton from the agents n the energy market regardng the defnton of future scenaros and realstc nvestment optons SRMC method Transmsson short-run margnal cost (SRMC) s the generaton cost of transportng one addtonal MW across the network when transmsson capacty s fxed. The SRMC

32 Appendx C Smulatons on the IEEE 24-Bus Network 23 methods are based on locaton specfc generaton costs and therefore transmsson nvestment costs are not consdered. The SRMC methods are also referred as locatonal margnal prcng (LMP) or spot prcng. The reason derves from the fact that n deregulated energy markets the agents bd for prces that not necessarly correspond to generaton producton costs. However f the energy market behaves n a compettve way fnally the prces wll correspond to SRMC. Typcal approaches to determne LMP n real networks nclude: Use of centrally admnstered securty constraned optmal power flows (SCOPF) algorthms to derve LMP from bds n the energy market. Let the market to dscover the locatonal value of electrcty va auctons where transmsson access rghts are sold. One of the best known transmsson SRMC-based method s transmsson rghts whch have been developed as Fxed Transmsson Rghts (FTR) or Transmsson Congeston Contracts (TCC) n the US. In England and Wales, Frm Access Rghts (FAR) are currently under development as part of the New Electrcty Tradng Arrangements (NETA). These methods are descrbed n more detal n secton 3.4. Another transmsson SRMC-based method to work as an opton to transmsson rghts are the flowgate rghts, recently developed to deal wth the externaltes due to loop flows n a network (Chao, H.P. et al 2000). 2.5 Energy market desgn and transmsson prcng Competton among supplers of any commodty requres easy access to customers. In case of electrcty competton t requres that access to the transmsson system by generators and consumers be managed n a non-dscrmnatory and equtable manner (Sngh, H. et al 1998). Ths concept s well known as transmsson open access. However, two basc characterstcs of transmsson networks must be properly handed to acheve an effectve transmsson open access: transmsson congeston and losses.

33 Appendx C Smulatons on the IEEE 24-Bus Network 24 Congeston s a consequence of network constrants charactersng a fnte network capacty that lmts the smultaneous delvery of power from an assocated set of power transactons. Losses n transmsson networks corresponds to Ohmc and Corona losses that produce a dfference between the total supply and demand for power n the system. Both transmsson congeston and transmsson losses can result n an overall ncrease n the total power cost delvery. These ncrease n cost can be much greater n case of congeston than n case of losses. Relable operaton s a central requrement and constrant for any electrcty system. Gven the strong and complex nteractons n electrc networks, current technology wth a free-flowng transmsson network dctates the need for a system operator that coordnates use of the transmsson system (Hogan, W., 1998). Control of transmsson usage means control of despatch, whch s the prncpal or only means of adjustng the use of the network. Hence, open access to the transmsson network means open access to the despatch as well. Ths s the essental co-ordnaton functon provded by the system operator. In the analyss of electrcty markets, therefore, a key focus s the desgn of the nteracton between transmsson and despatch, both procedures and prcng, to support a compettve energy market Energy market desgn There are two approaches to deal wth energy market costs and constrants (.e. transmsson congeston costs). The frst approach s based on a nodal prcng framework and forms the bass of the pool model. The second approach s based on free market competton and t s called blateral model Pool-based energy markets The pool model s motvated by the need to accommodate the specal characterstcs of electrc power transmsson networks wthn the electrcty tradng process (Sngh, H. et al 1998). The locatonal aspects of the pool model are based on the theory of nodal spot

34 Appendx C Smulatons on the IEEE 24-Bus Network 25 prcng (Schweppe, F. et al 1988). Ths model reles on the actons of a central pool operator for recevng prce and quantty offers from generators, selectng the most effcent sources of supply to satsfy prevalng constrants and makng fnancal transactons that nvolve payments from consumers and payments to supplers. The prces that govern these payments are based on the bds submtted by despatched generators and an adjustment made by the pool operator to reflect the locatonal value of supplers n terms of ther contrbuton to system losses and constrants. In general, these adjusted prces called nodal spot prces or locatonal margnal prces, are hgher at consumers locatons than at generaton sources locatons. These locatonal prce dfferentals result n a net ncome or surplus for the pool operator. In some mplementatons of ths model, the surplus s used to pay-off holders of fnancal nstruments called frm transmsson rghts (FTR) or transmsson congeston contracts (TCC), already descrbed n secton In other mplementatons, the surplus s used to reduce the access charges used to recover the fxed costs of the transmsson network (.e. Chle). Another essental feature of the pool model s that all transactons made by partcpants n the energy market must be wth the pool operator and not blaterally arranged among partcpants Blateral energy markets The blateral model s motvated by the concept that free market competton s the best way to acheve competton n an electrcty market. Ths model has also been charactersed as one of that best acheves the goal of provdng customers drect access to a suppler of choce (Sngh, H. et al 1998). In ths model supplers and customers ndependently arrange power transactons wth each other accordng to ther own fnancal terms. Economc effcency s promoted by customers choosng the least expensve generaton optons. Ths model mght be an obvous choce f a commodty other than electrcty were beng traded. The specal characterstcs of electrc power networks ntroduce two problems that must be addressed n ths model. The frst problem relates to the presence of transmsson constrants whch requres that there exst some form of co-ordnaton to mantan system securty and make the most

35 Appendx C Smulatons on the IEEE 24-Bus Network 26 effcent use of the constraned transmsson system s capacty. The second problem relates to the treatment of transmsson system losses. In addton, other ancllary servces must be provded to secure the transfer of power from supplers to consumers wth the securty and qualty standards requred Energy market prcng The man aspect to consder when a scheme of energy market prces are defned s the ncluson or not of the mpact of the transmsson network characterstcs and ther constrants over the energy prces at every locaton n the system or, so called, locatonspecfc energy prces. Typcal optons to defne electrcty prces n deregulated energy markets are presented below. One node prcng It conssts n the calculaton of a unque energy prce or system margnal prce (SMP) for the whole system at every tme perod (.e. t was the prcng system used n England and Wales before NETA). The calculatons do not take nto account the transmsson network topology and constrants, thus a one-node power system s consdered to match the total supply and demand on every tme perod (.e. half hour). System operators have to manage transmsson congeston mechansms to deal wth transmsson constrants durng the day-ahead bddng process and also n real tme to determne the changes on the despatch. Zonal prcng A way to ncorporate a basc representaton of the transmsson network conssts n the defnton of zones that cover sets of nodes where congeston s nfrequent and possbly dffcult to predct, and then every zone can be prced nternally on an SMP bass (.e. Calforna, Norway). Congeston between zones s defned to be frequent wth large mpacts. Congeston management and prcng schemes between zones (nter-zonal) and wthn a zone (ntra-zonal) are requred n ths case.