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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
The “regulatory test”
What is a “justified” investment?
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The “golden rule” in both centralized
& competitive frameworks (1)
Traditional framework: Maximize global social
welfare
Max {U(D) - FG - VG - CT} (1)
U(D): utility for the demand D
FG: generation fixed costs
VG: generation variable costs
CT: transmission total costs
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The “golden rule” in both centralized
& competitive frameworks (2)
Open market framework:
PD = IG + CT (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)
Open market framework (continuation):
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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Physical components for the
transmission function (1)
Transmission lines
Overhead lines & underground cables (AC & DC)
Elements for connexion, voltage transformation &
operation
Bus bars Transformers Phase-shifters Breakers Disconnect switches Insulators
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Physical components for the
transmission function (2)
Protection components
Automatic breakers Lightning arresters Protection relays
Metering & control components
Voltage & current transformers Telemetering & telecontrol
Reactive power control
Capacitors Reactances SVCs (Static voltage compensators) FACTS, in general
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Investment
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
Dilemma: Remunerate according to the actual incurred
costs or trying to reflect the current marginal investment
costs
Answer depends on who is really responsible for the
development of the network
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 (*)
Specific regulation is needed for network assets that are
used for non-electrical activities
() Some additional “mild” incentives can make sense*
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Determination of transmission costs
Investment costs
Alternatives of evaluation of the “rate base”
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}
The rate of return on capital
Weighted average of debt and equity, each one according to its rate of return according to its risk
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Determination of transmission costs
(cont.)
Costs of O&M / management costs
percentage (after benchmarking with comparable efficient utilities) of the rate base
Particular case: The cost of new investments
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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Option 1.A
System Operator + Regulator
Regularly, the System Operator must propose a plan for
reinforcements of the transmission network
after taking into consideration (justified) any proposals made by the network users
Regulatory authorities approve the plan & authorize
construction of individual new facilities
Construction, operation & maintenance of each facility
are allocated in a competitive auction
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
May be complemented by options 3, 4 & 5
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Option 1.B
System Operator + Regulator
Regularly, the System Operator must propose a plan for
reinforcements of the transmission network
after taking into consideration (justified) any proposals made by the network users
Regulatory authorities approve the plan & authorize
construction of individual new facilities
Construction, operation & maintenance as in 1.A except
for some lines that are left to risk investors
who can negotiate remuneration & other terms of contract with potential beneficiaries of the line or with regulator
Concern: “justified” lines may not be built
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Option 2: Private firm & global
regulated remuneration
A private company is awarded the transmission
license and regulated as a monopoly
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
Concern: incentives to under-invest. It is more difficult
to estimate the costs for the period than to approve a
plan & pay for the facilities actually built
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Option 3
Users have the initiative (A & B)
Initiative of proposal of network reinforcements
corresponds to coalitions of network users
OPTION A: coalition builds & pays the reinforcement,
which needs authorization from regulator
OPTION B: after a quasi-judiciary process (coalitions
pro & against, evaluation by system operator)
regulator decides whether reinforcement is justified or
not.
If justified, it is built under competitive bidding
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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Session 15
Module E.
Electricity transmission:
Access
Prof. Ignacio J. Pérez-Arriaga
Engineering, Economics & Regulation of
the Electric Power Sector
ESD.934, 6.
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Study material
Transpower New Zealand, “Financial transmission
rights”, 2001
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
ETSO & Europex, “Development & implementation of
a coordinated model for regional & inter-regional
congestion management”, 2008
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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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Principles of access (1 of 4)
Requests of connection to grid
Access for generators or consumers may only be
restricted because of lack of network capacity
reinforce network if justified whenever possible offer alternative connection points if proposed ones are not feasible
Consumers have the right to be supplied at the
requested point, but cannot displace prior consumers
Different criteria may be applied to generators
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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Principles of access (2 of 4)
Requests of connection to grid
The objectives of connection charges is the recovery of
costs of connection infrastructure (& perhaps
reinforcements)
- to an appropriate extent, considering benefits to other grid users
- in this way providing (some) locational signals
Connection costs depend on
distance from the existing network capacity of the required connection configuration of the (local) network
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Principles of access (3 of 4)
Requests of connection to grid
Alternative charging approaches for connection assume
different degrees of contribution to the cost of
dedicated facilities and of network reinforcement (&
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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How to assign access priorities?
Local network constraints
Market mechanisms versus regulated methods
MARKET
If the conditions exist for competition: the market rules must avoid introducing excessive risks for generators & consumers
- Separated bids for the daily market & to solve network constraints
REGULATED
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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How to assign access priorities? (1 of 4)
Generalized network constraints
Principles for allocation of limited network capacity
Use, whenever possible, market mechanisms that do not
discriminate any network users
Do not allow long-term capacity reservations to result in
market dominance
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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How to assign access priorities? (2 of 4)
Generalized network constraints
A diversity of solution schemes in the short-
term , very dependent on the specific context
Nodal prices (pioneer use in several countries in South
America, in the Central American Market, widely used in US ISOs)
Zonal prices or market splitting or implicit auctions
(Scandinavia, Italy, ERCOT initially; extensions of this scheme could be used to cover more than one centrally dispatched system)
Redispatch &/or counter-trading (these are solutions
more internal to a market, or in simple configurations with two markets; less market-oriented)
