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This paper describes the calculations that are required, focusing on the use of nodal power transfer distribution factors at key stages to maximise computational efficiency. It describes the approach to valuing network assets that is adopted in SAPP, and highlights specific issues which were encountered in the practical application of this transmission pricing technique to a large, mul t i -count r y system. Conclusions are then drawn as to the potential benefits of this approach for wider application, as well as possible areas for development of the technique in the future.

Existing transmission pricing arrangements in SAPP

The original methodology for transmission pricing was a postage stamp charge based on the number of countries involved in “wheeling” where “wheeling” is defined as power transfer through one or more third party countries. The tariff was based on 7,5% of the value of the energy transferred. From 1999 onwards a recoverable “rent” on assets actually used for wheeling (MW-km model) was implemented. Each transaction is explicitly analysed and the rent payable is based on historical asset values.

Th i s methodology requi res that the counterparty is known for each trade. With the future implementation of the day-ahead market, counterparties to trades will not be explicitly known and hence a change in methodology was required to break bilateral contract dependence.

International transmission pricing research

Research into international transmission pricing methodologies revealed that a methodology should:

l Promote eff iciency in a way that incentivises economically efficient decisions.

l Recover costs of transmission as an essential criteria to encourage new investment.

l Be transparent, simple and predictable to encourage participation in the markets.

l Be fai r and reasonable to avoid distortion/perverse incentives.

Overview of new SAPP transmission pricing methodologyby GA Chown, A Chikova, JJ Hedgecock, Power Planning Associates

The SAPP is moving from short term energy market (STEM) trading of electricity to a day-ahead market (DAM). The DAM is a centrally cleared auction process which results in the counterparty to each trade being unknown and is currently undergoing market trials. SAPP has had to change its transmission pricing methodology to a method based on separate “entry” and “exit” charges.

The international research showed trends towards increasing locational/flow based pricing. Most markets recover required target revenue from wheelers through some type of scaling or uplift mechanism. Also there is the challenge of achieving harmonisation with national/local charging ar rangements where markets cover more than one country or jurisdiction, although in Europe this is left to subsidiary arrangements within each individual country.

Based on the research, the agreed approach fo r the methodology fo r transmission pricing in SAPP was to recover a defined level of revenue for the TSOs, reflecting proportional use of their assets for wheeling as in the European “transit-key” approach. The revenue was to be recovered from exporters and importers in an equitable way, based on locational pricing. This is similar to the GB nodal/zonal methodology, where the zones align with the energy market definitions (i.e. zones would be equivalent to countries in the SAPP case). This would enable charges to be applied independently of identified trading counterparties, by having defined “entry” and “exit” prices.

The methodology was also required to be flexible, so that more sophisticated pricing would be possible in future.

Overview of network pricing methodology

There are two parts to the methodology:

l Determination of the network costs of wheeling and revenue shares per TSO

l Determination of network wheeling prices to participants

Detai l s of the s teps involved in the determination of the network costs of wheeling and network wheeling prices are illustrated in Fig. 1.

To determine the network costs of wheeling and revenue shares per TSO, the following steps are undertaken:

l A transit horizontal network (THN) is defined, representing the transmission assets that could potentially be used for wheeling.

l The THN is costed for each TSO based on a standard costing methodology incorporating both asset-related and operating costs.

l A transit key (TK) is defined for each TSO as the ratio of energy that is wheeled

Fig. 1: Overview of network pricing methodology.

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to the total energy transported on the network.

l The TSO's network cost of wheeling is then calculated as the product of the TK and the cost of the THN for each TSO.

l Each TSO's share of revenue received f r o m n e t w o r k c h a r g e s i s t h e n determined as the ratio of that TSO's network cost of wheeling to the total network cost of wheeling (across all TSOs).

In order to determine the network prices to participants, the following steps are undertaken:

l The nodal power transfer distribution factor matrix (beta-matrix) is formed, representing the incremental MW flow in each element of the network resulting from incremental injection or extraction at each node. The matrix is formed relat ive to a reference node that is assumed to absorb or supply increments of demand and generation respectively. Note that the reference node is selected so that revenues from loads approximate to revenues f rom generators, i.e. reflecting the electrical “centre of gravity ” of the network.

l Each network element is costed using standard costing factors (as per the costing of the THN described above) to provide a vector of unit network costs ($/MW per year).

l For each generator node, the relevant column of the beta-matrix is multiplied (sum-product) by the vector of network costs and the relevant transit key, where the costs of both network elements inside that node's host country, and network elements outside the THN, are set to zero. This provides a set of nodal prices relative to the reference node price of zero.

l In each country, a single nodal price for all generators, and a single nodal price for all loads, is determined based on the arithmetic average of all nodal prices in the country.

l The resul t ing nodal pr ices ($/MW per year) are converted to energy prices ($/MWh) at an assumed load factor of 100%. The energy prices are then adjusted with an additive component so that the revenue received from network charges (based on the preceding year's wheeling volumes) is equal to the total network cost of wheeling (across all TSOs). The reference node is selected so that approximately 50% of revenue will be received from generators and 50% from loads.

Detailed determination of network cost of wheeling and revenue shares

Definition of the horizontal network

The proposed methodology fo r the calculation of network cost of wheeling

utilises the concept of the transit horizontal network (THN), as adopted by ETSO in Europe. The THN compr ises al l SAPP transmission assets that could potentially be used for wheeling, where these are determined separately for each TSO by a series of 100 MW injections/extractions across pai rs of interconnectors wi th neighbouring TSOs. These 100 MW transits are made on an empty network, i.e. assuming no load on any of the network assets. All elements of the TSO network that have a flow equal to or greater than 1 MW as a result of the transit are then included in the THN. This process is repeated for each TSO to obtain the total THN for SAPP.

It is proposed that the THN should be recalculated annually or more frequently if there is a need, e.g. the additional of major new transmission assets.

Establishment of standardised costs

The present SAPP transmission asset cost database and method of determining the rent on assets used for wheeling is retained for the purposes of establishing network charges under the new transmission pricing model. The standardised cost of each TSO's network is the sum of the standardised cost of each network element in the THN of that TSO. The cost of each network element is calculated using Eqn. 1.

Cost = Depreciation + Interest + O&M (1)

where

Depreciation = Replacement cost of asset / lifetime

Interest = Replacement cost * max (0,5; 1-age/lifetime) * ROA

O&M = Standardised operating and maintenance allowance

For the purposes of calculating the rent on assets used for wheeling, the following assets lives have been adopted by SAPP:

l Transmission lines, 50 years

l Substations, including civil works, 30 years

l Transformers, 30 years

SAPP currently uses a cost of capital (ROA) of 8% and an annual O&M allowance of 2% of the rep lacement cap i ta l cost in determining wheeling charges. Depreciation is calculated on a straight line basis using the above asset lives. Wheel ing charges are based on ful l replacement costs less depreciation, with depreciation limited to a maximum of the half-life value.

Calculation of the transit key

The transit key, TK, is defined for each TSO (t) according to Eqn. 2.

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡 = 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡

(𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 + 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡𝑡𝑡𝑇𝑇𝑇𝑇𝐶𝐶𝐶𝐶𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡) (2)

where

Transitt = The hourly minimum of export and import for TSOt, where export and import are the sums of physical flows (measured values) on all exporting lines and all importing lines respectively.

Consumption t = The volume of energy consumed within the network server by TSOt

Transit is based on volumes accumulated over all hours in the preceding 12 month period to define an annual transit volume. Similarly, consumption is taken as the total electricity consumption over the preceding 12 month period. Transit Keys are calculated for each TSO annually w i th the va lue fo r the cur rent year (year ‘ n ' ) based on the t rans i t and consumption values for year ‘n-1'. This presents less risk to the market players as the TKs are known for the year rather than subject to variation from month to month.

Calculation of the network cost of wheeling

The network cost of wheeling is determined for each SAPP TSO by multiplying the standardised costs of its THN by their transit key (TK). That is, the asset transit cost (ATC) is determined by Eqn. 3:

ATCt = ∑l∈t Costl x TKt (3)

where

Cost l = Standardised cost of network element l (see Eqn. 1)

TKt = Transit Key for TSOt (see Eqn. 2)

It should be noted that not all national transmission assets are included in the calculat ion of wheel ing costs, i.e. i t is only the assets on the THN that are considered.

Calculation of each TSOs share of wheeling revenues

The shar e of the wheeling revenues is determined as the ratio of the ATC for a given TSO to the sum of all ATCs. Each SAPP member uti l i ty/TSO is entit led to compensation equal to the product of its asset transit share and the total revenue collected in the asset transit fund.

The asset transit share for a TSO in year n is based on the asset transit costs from the preceding year, n-1. Each TSO's share of the revenue collected from network wheeling charges is calculated using Eqn. 4:

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑡𝑡𝑡𝑡 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖∑ 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖

(4)

where summation across i represents all of the TSOs within SAPP.

Detailed determination of network prices

Establishment of the beta-matrix

A set of factors is generated that indicate

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the real power flow induced on any line for an injection of power at any node, assuming that the power is absorbed at the identified “reference node”. Similarly, for load nodes, the factors indicate the real power flow for extraction of power at a node, assuming that the power is supplied from the reference node. These nodal sensitivity factors are in the form of the beta-matrix whose columns refer to nodes (busbars or load transformers) and whose rows correspond to the system lines or branches. The initial beta-matrix is adjusted so that the sign of the elements of the matr ix ref lects whether power flow is with (a positive sign) or against (a negative sign) the normal direction of flow.

Calculation of nodal prices

Nodal network prices are determined as follows: First, each element of the network is allocated a unit cost ($/MW) based on the standardised costs, the age of the network element and the capacity of the network element. The standardised cost comprises both asset-related and O&M related costs. Asset-related costs are based on asset replacement costs, w i th depreciat ion determined f rom the standardised lifetime of the asset, and the return based on a standard rate-of- retu rn and the net va lue of the asset, where this net value is, at a minimum, half the gross value. O&M costs are expressed as a percentage of the replacement cost. Hence the unit cost (UC l) of each asset element is expressed using Eqn. 5:

UCl = Costl / Capacityl (5)

where

Cost l = Standardised cost of network element l (see Eqn. 1)

Capacityl = Capacity of network element l

To calculate the nodal prices, the following steps are undertaken for each node in the beta-matrix:

l The column of beta indices for that node in the matrix is multiplied (sum product) by the column of unit network costs (as determined above). In this process, the unit network costs for those network elements in the same country as the node in question are set to zero.

l The resulting variable is multiplied by the transit key for the country in which the node is located.

Nodal prices (NodePb) are calculated using Eqn. 6:

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑏𝑏𝑏𝑏 =

� �𝛽𝛽𝛽𝛽𝑏𝑏𝑏𝑏 ,𝑙𝑙𝑙𝑙 𝑥𝑥𝑥𝑥 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑙𝑙𝑙𝑙 𝑥𝑥𝑥𝑥 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑙𝑙𝑙𝑙,𝑏𝑏𝑏𝑏 𝑥𝑥𝑥𝑥 𝐹𝐹𝐹𝐹𝑙𝑙𝑙𝑙𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 �𝑙𝑙𝑙𝑙

𝑥𝑥𝑥𝑥 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡 (6)

where

ßb,l = Entry in Beta-matrix for nobe b and network element l

UCl = Unit cost of network element l (see Eqn. 5)

SWl,b = 0 if network element l and node b are in the same TSO, otherwise 1

TKt = Transit Key for TSOt in which node b is located

Flsign = +1 if the normal flow direction is from sending to receiving, otherwise -1

The result of this is a set of nodal prices for each generator and load node in the beta-matrix, expressed in $/MWh. The nodal prices generated provide a set of relative prices that is independent of the choice of reference node. That is, the difference between nodal prices will always be the same. Taking account of the normal f low d i rect ion, when calculating the nodal wheeling charges for generation and demand, means that those nodes at which an increment of generation or demand imposes flows on network assets which are counter to the flow direction in the winter peak load flow case are credited for their use of those assets. Conversely, those nodes where the increment of generation or demand increases f lows, i.e. creates f lows in the same direction as those arising in the winter peak load flow case, are charged for their use of those assets. Negative nodal prices imply that injection/extraction delays the need for future infrastructure investment.

Calculation and scaling of national network prices

In each TSO region the nodal prices for generators and the nodal prices for loads are averaged (using simple arithmetic averaging) to determine a set of TSO-wide generator and load prices (NatPt) using Eqn. 7:

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 = ∑ [𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑏𝑏𝑏𝑏 ]𝑏𝑏𝑏𝑏∈𝑁𝑁𝑁𝑁

∑ 𝑛𝑛𝑛𝑛𝑁𝑁𝑁𝑁𝑏𝑏𝑏𝑏∈𝑁𝑁𝑁𝑁 (7)

where

NodePb = Nodal prices (see Eqn. 6)

nt = Number of nodes in country being considered

This results in a set of TSO-specific load and generator prices, which are then scaled so that revenues generated equal the network costs of wheeling. To accomplish this, each national price is adjusted by an additive component so that the revenue generated equals the network cost of wheeling, based on the trade volumes of the preceding year. The use of an additive element as opposed to a multiplication factor preserves the difference between nodal pr ices, thereby preserving the relative price signals between nodes.

The final set of TSO-specific prices (NPt) is calculated using Eqn. 8.

NPt = NatPt + AF (8)

The adjustment factor (AF) is calculated using Eqn 9:

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = ∑ 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑡𝑡𝑡𝑡 − ∑ 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑡𝑡𝑡𝑡𝑁𝑁𝑁𝑁𝑡𝑡𝑡𝑡 𝑥𝑥𝑥𝑥 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡

∑ 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 (9)

where

Vol t = Wheeling trade volumes in TSO t (sale and purchase) (MWh)

ATC t = As se t t ran s i t cos t fo r T SO t (see Eqn. 3)

The resulting set of final national prices provides a set of values which, when app l ied to t rad ing vo lumes o f the preceding year, generates the network cost of wheeling of the previous year.

Impementation issues

One of issues that have been raised with the methodology is the resolving of existing bilateral arrangements which will now be subject to the new pricing methodology. For this it has been suggested that SAPP operating members enter into hedging arrangements to minimise the risk. The financing of independent transmission companies is also an issue.

Firstly, the rate of return on assets was requested to be different and the model has been improved to accommodate this. Secondly, the current methodology will see an independent transmission line as a wheeling asset in its entirety. The recovery of the assets will be in full as the transit key for such lines will be 1. This is regardless of the flow on these lines. Whilst the principle behind this is correct, SAPP members are rightly concerned about wheeling assets that are over designed or in the wrong place in the network. Several proposals to overcome this issue have been recommended for SAPP members to consider when evaluating the wheeling revenue for independent transmission assets.

Conclusion

A methodology for SAPP transmission pr ic ing has been developed that is compatible with the development of a new day ahead market. The transmission pricing methodology demonstrates that appropriate return on investments for assets involved in wheel ing can be assured, without the knowledge of defined counterparties to spot market trades. At the time of writing of this paper, both the day-ahead market and the new transmission pricing policy are undergoing market trials.The authors acknowledge with thanks the significant contribution of Econ Pöyry to the development of the methodology described in this paper.

Acknowledegment

This paper was presented at the Cigré 6th Southern Africa Regional Conference: Somerset West 2009 and is reprinted with permission.

Contact Graeme Chown, Power Planning Associates, Tel 011 894-7806, graeme.chown@ppaenergy.co.uk