Foundations of Pricing and Investment in Electricity Transmission

Transmission pricing has become a central issue in the discussions regarding the redesign of deregulated electricity markets. In that frame, open access to the transmission system is one of the fundamental topics to allow competition among agents in the energy market. Although transmission systems costs represent close to 10% of the energy market price, they have a significant impact on relative competitiveness among participants in the energy market as well as on short and long term economic efficiency of the whole electricity industry. This research analyses how to deal with transmission costs, covering short and long term issues in electricity transmission pricing and their link with the energy market. Transmission short run marginal cost (SRMC) schemes are studied and particularly, in relation to financial and physical transmission rights. Variants of those schemes are currently in use in the United States and a similar scheme based on firm access rights (FAR) has been proposed in the New Electricity Trading Arrangements (NETA) for England and Wales. This research concludes that transmission rights schemes work well as a complement of the energy market but they do not and cannot resolve the problem of cost allocation of the existent transmission assets and investments. The reasons are simple: SRMC do not have a direct relationship with transmission investment costs and transmission business is a natural monopoly. Therefore an efficient transmission access pricing methodology is required to allow the recovery of transmission investment costs. For that reason, transmission pricing based on the concept of “economically adapted network” (EAN) is examined and recommended. Prices derived from the EAN have the advantage to be in tune with the maximum revenue allowed to the owner of transmission assets and facilitate the optimal allocation of transmission costs among users. Fundamental features of the EAN scheme have been illustrated on a number of examples including IEEE 24 bus Reliability Test System. Appendix C – Simulations on the IEEE 24-Bus Network vi Table of