Optimal Charging Arrangements for Energy Transmission: Final Report

Four principles underlie our recommendations for Great Britain's (GB) transmission charging arrangements: 1. Charges for the usage of the network should reflect the incremental costs imposed by that usage. 2. Charges to recover historic (sunk) capital costs and other fixed costs should distort usage as little as possible. 3. Environmental objectives are most efficiently pursued through mechanisms that directly address those objectives. 4. Objectives for equitable distribution of costs and risks can be addressed while still preserving incentives for efficient use of the network. Our recommendations are as follows. First, incentives for efficient congestion relief should be provided by energy prices that are differentiated locationally. At a minimum, there should be transparent zonal or nodal pricing of energy in the balancing market in which: • all imbalances at a particular network location are cleared at the same price, • a balanced schedule submitted to a locational market would pay (or receive) the difference in prices between the locations of injections and withdrawals, and • prices are determined by the interaction of offers by incremental supply and bids by incremental demand, submitted schedules, and the physical and security constraints of the network. A price at a location will then reflect the as-offered cost of meeting an incremental MW of demand (or the value of an incremental MW of supply) at that place and time. 5 One possible implementation of a locational pricing scheme that would be minimally disruptive to present trading arrangements would be to extend the current balancing mechanism to report locational prices and use them for settlement. Locational pricing could also be extended to creating a formal day-ahead market in which producers either submit energy-only offers (internalizing start-up and other lumpy costs as well as operating constraints), or, alternatively, producers could submit information about these costs and their operating constraints, in which case the market is cleared using a security-constrained unit commitment. The reason for clearing all imbalances at a particular location and time using the same price stems from the fungibility of electricity. Paying different up-and down-balancing prices to different generation units at the same time and location (or different locations if there is no congestion) ignores the fact that injections from those generation units are perfect substitutes for meeting load and should therefore be paid the same price. Otherwise, the load would purchase more energy from the lower-priced generator and less from the higher-priced generator, and thereby …