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The traditional regulation approach for investment in transmission networks, focusing on the 'golden rule' of maximizing global social welfare. It also explores the determination of transmission network costs, including fixed and operation & maintenance costs, and the dilemma of remunerating according to actual incurred costs or marginal investment costs. The document also touches upon alternative approaches to regulation of transmission investment.
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Investment optimality according to traditional regulation :
“Invest in network assets only while the additional network investment cost is still smaller than the additional saving in system operation costs (generation costs, loss of supply)”
This definition is consistent with the one adequate for a context of competition :
“Invest so that the net aggregated benefits (once network charges are included) of all network users (i.e. generators & consumers) are maximized”
Technical reliability rules have to be met in any case, although it is preferable that they are incorporated into the cost / benefit function
What is a “justified” investment?
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The “golden rule” in both centralized
& competitive frameworks (1)
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The “golden rule” in both centralized
& competitive frameworks (2)
PD: payments by consumers (at wholesale level) IG: revenues of generators (once they have paid their transmission charges) CT = IVT + CCT (optionally) (3) IVT: “variable” transmission revenues (from application of nodal energy prices to consumers & generators) CCT: complementary charge (assuming that transmission is regulated so that its total costs are fully recovered)
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The “golden rule” in both centralized
& competitive frameworks (3)
Rearranging equation (2): PD - IG - CT = 0, which can be introduced in (1): Max {(U(D) - PD) + (IG + CT) - FG - VG - CT} & then Max {(U(D) - PD) + (IG - FG - VG)} = = Max {net benefit of consumers + net benefit of generators} as we wanted to prove
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Overhead lines & underground cables (AC & DC)
Bus bars Transformers Phase-shifters Breakers Disconnect switches Insulators
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Automatic breakers Lightning arresters Protection relays
Voltage & current transformers Telemetering & telecontrol
Capacitors Reactances SVCs (Static voltage compensators) FACTS, in general
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Nature of transmission costs
Actual transmission network costs
Infrastructure costs
investment capital costs operation & maintenance costs
Costs incurred because of the existence of the network
Ohmic losses (generation costs)
Costs of redispatch that are incurred to eliminate violations of transmission constraints (generation costs)
Some of the costs of ancillary services
reactive power / operating reserves / black start capability
System Operation & transmission are different activities (although sometimes they are performed by the same firm)
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Determination of transmission
network costs
If the transmission firm is “active” , then the remuneration must refer to an efficient & well adapted network & economic incentives should depend on the actual contribution to quality of supply, losses & congestion costs, i.e. “performance” If the transmission firm is “passive” , then the remuneration must refer to the actual network & incentives must just depend on the availability of the network equipment (*)
() Some additional “mild” incentives can make sense*
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Investment costs
From the present market value (potential to generate income): it happens to depend on regulated tariffs From the historic (accounting) cost (ignores technological change, but it matches incurred costs with revenues) From some “replacement value” “depreciated replacement cost, DRC”: present cost of the assets that today would provide the same service as the existing assets “optimized depreciated replacement cost, ODRC”: present cost of the assets of an optimal network for the present needs “optimized deprival value, ODV”: minimum loss that a business would suffer if it were deprived of the asset = min{market value, ODRC}
Weighted average of debt and equity, each one according to its rate of return according to its risk
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percentage (after benchmarking with comparable efficient utilities) of the rate base
Preferable: assign by auction pay the winner bid If facility is built by coalition of users just for their own use regulated value is not needed In general use standard costs as guidance
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Alternative approaches to
regulation of transmission
investment
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System Operator + Regulator
after taking into consideration (justified) any proposals made by the network users
pay as bid to winner limited duration of contract; auction for the next period? set availability targets for each facility & penalties (credits) according to the actual performance
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System Operator + Regulator
after taking into consideration (justified) any proposals made by the network users
who can negotiate remuneration & other terms of contract with potential beneficiaries of the line or with regulator
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Option 2: Private firm & global
regulated remuneration
Must follow prescribed design requirements (grid code) Incentives to meet performance targets (warning: separate clearly from incentives to System Operator) Global remuneration (RPI-X) for the complete network, while taking into account actual new investments economic lives & depreciation of existing investments economic health of transmission company expected efficiency improvements
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Users have the initiative (A & B)
pay as bid to winner limited duration of license; auction for the next period set availability targets & penalties (credits) according to performance charge cost to all users with general allocation method
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Electricity transmission:
Access
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Study material
For another excellent, but more advanced text (not required): “Integrating European Electricity Markets”, 2009, go to http://www.iefe.unibocconi.it
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Readings
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Regulation of transmission
services
ACCESS
Part of the material for this module was originally compiled by Alberto Pototschnig (Energy Markets International & advisor to the Florence School of Regulation, FSR) in his courses at the FSR
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Requests of connection to the grid
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Requests of connection to grid
reinforce network if justified whenever possible offer alternative connection points if proposed ones are not feasible
a) same as for consumers b) right to be connected at any point, even if in conflict with existing generators for the use of limited network capacity
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Requests of connection to grid
distance from the existing network capacity of the required connection configuration of the (local) network
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Requests of connection to grid
therefore of socialisation of these costs)
No charges all connection costs are socialised
Shallow charges connection charges cover the cost of dedicated facilities (and possibly the cost of reinforcements in the local area); costs of (other) reinforcements are socialised
Deep charges connection charges cover the cost of dedicated facilities and of all network reinforcements
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Local network constraints
If the conditions exist for competition: the market rules must avoid introducing excessive risks for generators & consumers
More appropriate for those situations where the market does not seem to be possible This requires to transfer the knowledge on costs (at least in general terms) to the regulator & to reach a reasonable agreement
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Management of generalized network
constraints
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Generalized network constraints
allocate firm capacity with market mechanisms set upper limits to the fraction of capacity that can be auctioned do not allow any single agent to control a large fraction of the auctioned capacity unused capacity must be available for any buyer possible ad hoc treatment of existing long term contracts
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Generalized network constraints
America, in the Central American Market, widely used in US ISOs)
(Scandinavia, Italy, ERCOT initially; extensions of this scheme could be used to cover more than one centrally dispatched system)
more internal to a market, or in simple configurations with two markets; less market-oriented)