Electricity Transmission Pricing and Technology PDF
Preview Electricity Transmission Pricing and Technology
ELECTRICITY TRANSMISSION PRICING AND TECHNOLOGY ELECTRICITY TRANSMISSION PRICING AND TECHNOLOGY edited by Michael Einhorn US Department of Justice and Riaz Siddiqi CINergy Corporation ~. " Springer Science+Business Media, LLC Library of Congress Cataloging-in-Publication Data Electricity transmission pricing and technology / edited by Michael Einhom and Riaz Siddiqi. p. cm. Includes index ISBN 978-94-010-3831-7 ISBN 978-94-010-0710-8 (eBook) DOI 10.1007/978-94-010-0710-8 1. Electric utilities--Rates. 1. Einhom, Michael A. II. Siddiqi, Riaz. HD9685.A2E563 1996 333.79'3231--dc20 95-20639 CIP Copyright © 1996 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 1996 Softcover reprint of the hardcover 1s t edition 1996 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo copying, recording, or otherwise, without the prior written permis sion of the publisher, Springer Science+Business Media, LLC. Printed on acidlree paper. In honor ofmy mother and in memory ofmyfather. - Michael Einhorn To my parents, my wife Salma, and my children, Asad, Saira and Zeeshan, for their inspiration, patience and support during this lengthyproject. - Riaz Siddiqi CONTENTS Introduction ix 1 Stop Wheeling and Start Dealing: Resolving 1 the Transmission Dilemma Larry E. Ruff 2 Bridging the Gap Between Theory and Practice 25 of Transmission Pricing WilliamR. Hughes and Richard Felak 3 Marginal Pricing of Transmission Services: 59 An Analysis of Cost Recovery 1.1. Perez-Arriaga, F.J. Rubio, J.F. Puerta, J. Arceluz and J. Marin 4 Transmission Accessand Retail Wheeling: 77 The Key Questions Jack A. Casazza 5 Making Bilateral Competition Work 103 Tom Parkinson 6 Electricity Transmission Pricing: How 129 Contracts Must Reflect Costs Graham Shuttleworth viii 7 Markets in Real Electric Networks Require 143 Reactive Prices WilliamW. Hogan 8 A Dispatch Based Pricing Model for the 183 New Zealand Electricity Market Brendan J. Ring and E. Grant Read 9 Incorporating Network Effects in 207 a Competitive Electricity Industry: An Australian Perspective Hugh Outhred and John Kaye 10 Transmission Pricing in Norway 229 Einar Westre 11 Flexible AC Transmission System (FACTS) 239 Narain G. Hingorani 12 The Second Silicon Revolution 259 Karl Stahlkopf Index 277 INTRODUCTION The electric utility industry and its stakeholders in the.United States appear to be at a critical juncture in time. Powerful forces of global proportions are propelling the industry instinctively and in a secular fashion towards restructuring. That the industry willchange is a fait accomplii. The nature and timing of the change is stilla matterof intensedebate, however. Becauseof theevolutionof the industryintoitspresent-dayform, i.e.regulated local monopolies in their designated franchise service territories, the relative roles and expectationsof various institutionswould have tochange to conform to thenew state in the future. In eitherencouraging, or allowingthischange to happen, society isessentiallysaying thatfuture societalwelfarewould be better served by the changed structure contemplated. What that assumptiontranslates into in more direct terms is that creation of future wealth would be better accomplishedthrough redistribution of wealthtoday. Thoughtful individuals recognize the enormous responsibility placed upon the various entitiesempowered withjurisdictionover the timing and nature of the structural change. They are trying hard to bring analyticalrigor to bear on the debate. One very critical element of this debate on restructuring is the issue of the treatment of transmission. The issue has been variously labeled transmission access, or pricing. Volumeshavebeen written and spoken on this topic. We feltthattherewas apressing needtoassemblea volumewhichwouldserve as a one-stop source for varied viewpoints and comprehensive coverage of the subject, both technicaland economic. It is with that objective in mind, and with the support of Dr. Karl Stahlkopf, Vice President of the Power Delivery Group at the Electric Power Research Institute(EPRI), andMr. CharlesClarkJr., Manager,UtilityResourcePlanning and Management BusinessUnit, EPRI, that wehave compiledthis selectionof papers. Ratherthan adoptthe moretraditionalrole ofeditors, we actedmoreas x compilers, in that we looked for a highly-qualified group of individuals with thoughtful and varied views, and then accepted verbatimwhat they had to say. None of the views expressed by the authors are endorsed by either the editors or the sponsors of this volume. We summarize the views expressed by the authors below. Larry Ruff distinguishes the role of a Gridco that owns actual transmission assets from that of a Poolco that must dispatch generation and transmission optimally to meet time- and space-differentiated customer demands. Ruff contends that present wheeling orders that convert high-voltage wires of generationandtransmissioncompaniesinto "openaccess"transmissionproviders while maintainingtheir control ofdispatch are skewed; rather, the Poolco must charge the same prices for comparable transmission services provided to any customer. Transmissionplant mustalwaysbedispatched inaleast-cost fashion; contracts-for-differences enable customers to hedge against extreme price fluctuationsthat may arise. Poolco payments should be made to an independent Gridco as compensation for providing its physical grid; necessary revenues must be recovered from Poolco customers. William Hughes and Richard Felak describe some strategies for pncmg transmission service. Traditionally, wheeling prices have been postage stamp rates based on the level ofmegawatt demand; a related approach would assign grid costs to customers based on their respective shares of overall megawatt-miles. Innovative regulatorshaverecentlyapproved transmissionrates based on opportunity cost of foregone capacity and the incremental costs of additionalcapacity needed to enable delivery. Schweppe, Caramanis, and Bohn (1986) and Hogan (1991) determined prices designed to reflect short-run congestioncosts on the grid. Hughes and Felak assess these pricing approaches and their effects on the distributionofwealth and economic efficiency for both firm and interruptibleservices. Ignacio Perez-Arriaga et al. present an in-depth analysis of network revenues that are computed with marginal pricing, and investigate the reasons why marginal prices in actual power systems fail to recover total incurred network costs. The major causes of the failure are identified and illustrated with numerical examples. The paperanalyzes the regulatory implications ofmarginal network pricing in the context of competitiveelectricity markets and provides suggestions for the meaningful allocationofnetwork costs among users. xi JackCasazzadiscussesthekeyquestionsinvolvingtransmissionaccessandretail wheeling. Casazza distinguishesopposingviewsregardingtheeffecton system costs andtheenvironment, particularlyon optimalplanning involvingmatching capacityand demand, generationuse, demand side management, and economic operations. Also discussed are contrasting views regarding the effect of cost control pressures, regulatory advantages and disadvantages, the impact on systemreliability, andthestrandingofinvestment. Casazza's keyconcernisthe effect of retail wheeling upon optimal planning and operation i.e., will competitors be willing to provide one another with the cost and technical information required for coordination? In the author's worst scenario, retail wheeling may lead to substantialproduction cost increases, lessened reliability, and unfair cost-shifting between customer classes. More optimistically, production costsandreliabilitymaybe unaffectedandthecost-shiftingcouldbe salubrious. Thomas Parkinson compares two alternative arrangements that have been advocatedtoimplementCalifornia'sproposed institutionof retailwheeling. San Diego Gas and Electric and Southern California Edison proposed the developmentofacentralizedpower pool (asintheUnitedKingdom)thatwould actasaspotmarketforbuying andsellingpower. Bycontrast, PacificGasand Electric and Enron Power Marketing support individual contracts between suppliers and customers with centralized operator dispatch. Parkinson reviews the basic functional elements of two transmission systems that could support direct access. Graham Shuttleworth continues in this vein. He also distinguishes two likely basic structures: transmission channels offered through an integrated electric utility and open access offered over an independent network. The first structureallowstheapplicationof "top-downpricing",wheretransmissionprices arederived fromcustomer tariffslessavoidablegenerationcosts. Transmission prices in the second structure mustbe derived from a "bottom-up" analysis of transmissioncosts,includingbuildingcapacity, marginallosses,andcongestion. Extendingearlier seminalwork, WilliamHogan finds thatlocationalspot price differencesinanelectricnetworkprovide thenaturalmeasureoftheappropriate internodal transport charge. However, the problem of loop flow requires different economic intuition for interpreting the implications of spot pricing. The DirectCurrent model,whichistheusual approximationfor estimatingspot prices, ignores reactivepower effects; this approximationis best when thermal constraints create network congestion. However, when voltage constraints are problematic, the DC Loadmodel isinsufficient;a fullAC Model isrequired to determine both real and reactivespot prices.
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