ELECTRICITY TRANSMISSION PRICING AND TECHNOLOGY

Transcription

1 ELECTRICITY TRANSMISSION PRICING AND TECHNOLOGY

2 ELECTRICITY TRANSMISSION PRICING AND TECHNOLOGY edited by Michael Einhorn US Department of Justice and Riaz Siddiqi CIN ergy Corporation... " K1uwer Academic Publishers BostonlDordrecht/London

3 Distributors for North America: Kluwer Academic Publishers 101 Philip Drive Assinippi Park Norwell, Massachusetts USA Distributors for all other countries: Kluwer Academic Publishers Group Distribution Centre Post Office Box AH Dordrecht, THE NETHERLANDS Library of Congress Cataloging-in-Publication Data Electricity transmission pricing and technology / edited by Michael Einhorn and Riaz Siddiqi. p. cm. Includes index ISBN-13: e-isbn-13: DOl: / Electric utilities--rates. I. Einhorn, Michael A. II. Siddiqi, Riaz. HD9685.A2E '3231--dc CIP Copyright 1996 by Kluwer Academic Publishers Softcover reprint of the hardcover 1 st 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 permission of the publisher, Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, Massachusetts Printed on acid-free paper.

4 In honor of my mother and in memory of my father. - Michael Einhorn To my parents, my wife Salma, and my children, Asad, Saira and Zeeshan, for their inspiration, patience and support during this lengthy project. - Riaz Siddiqi

5 CONTENTS Introduction 1 Stop Wheeling and Start Dealing: Resolving the Transmission Dilemma Larry E. Ruff 2 Bridging the Gap Between Theory and Practice of Transmission Pricing William R. Hughes and Richard Felak 3 Marginal Pricing of Transmission Services: An Analysis of Cost Recovery 1.1. Perez-Arriaga, F.J. Rubio, J.F. Puerta, J. Arceluz and J. Marin 4 Transmission Access and Retail Wheeling: The Key Questions Jack A. Casazza 5 Making Bilateral Competition Work Tom Parkinson 6 Electricity Transmission Pricing: How Contracts Must Reflect Costs Graham Shuttleworth ix

6 viii 7 Markets in Real Electric Networks Require Reactive Prices William W. Hogan A Dispatch Based Pricing Model for the New Zealand Electricity Market Brendan J. Ring and E. Grant Read 9 Incorporating Network Effects in a Competitive Electricity Industry: An Australian Perspective Hugh Outhred and John Kaye 10 Transmission Pricing in Norway Einar Westre 11 Flexible AC Transmission System (FACTS) Narain G. Hingorani 12 The Second Silicon Revolution Karl Stahlkopf Index

7 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 will change is a fait accomplii. The nature and timing of the change is still a matter of intense debate, however. Because of the evolution of the industry into its present-day form, i.e. regulated local monopolies in their designated franchise service territories, the relative roles and expectations of various institutions would have to change to conform to the new state in the future. In either encouraging, or allowing this change to happen, society is essentially saying that future societal welfare would be better served by the changed structure contemplated. What that assumption translates into in more direct terms is that creation of future wealth would be better accomplished through redistribution of wealth today. Thoughtful individuals recognize the enormous responsibility placed upon the various entities empowered with jurisdiction over the timing and nature of the structural change. They are trying hard to bring analytical rigor 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. Volumes have been written and spoken on this topic. We felt that there was a pressing need to assemble a volume which would serve as a one-stop source for varied viewpoints and comprehensive coverage of the subject, both technical and 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), and Mr. Charles Clark Jr., Manager, Utility Resource Planning and Management Business Unit, EPRI, that we have compiled this selection of papers. Rather than adopt the more traditional role of editors, we acted more as

8 x compilers, in that we looked for a highly-qualified group of individuals with thoughtful and varied views, and then accepted verbatim what 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 generation and transmission companies into "open access" transmission providers while maintaining their control of dispatch are skewed; rather, the Poolco must charge the same prices for comparable transmission services provided to any customer. Transmission plant must always be dispatched in a least-cost fashion; contracts-for-differences enable customers to hedge against extreme price fluctuations that 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 of megawatt demand; a related approach would assign grid costs to customers based on their respective shares of overall megawatt-miles. Innovative regulators have recently approved transmission rates based on opportunity cost of foregone capacity and the incremental costs of additional capacity needed to enable delivery. Schweppe, Caramanis, and Bohn (1986) and Hogan (1991) determined prices designed to reflect short-run congestion costs on the grid. Hughes and Felak assess these pricing approaches and their effects on the distribution of wealth and economic efficiency for both firm and interruptible services. 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 paper analyzes the regulatory implications of marginal network pricing in the context of competitive electricity markets and provides suggestions for the meaningful allocation of network costs among users.

9 xi Jack Casazza discusses the key questions involving transmission access and retail wheeling. Casazza distinguishes opposing views regarding the effect on system costs and the environment, particularly on optimal planning involving matching capacity and demand, generation use, 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 system reliability, and the stranding of investment. Casazza's key concern is the 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 substantial production cost increases, lessened reliability, and unfair cost-shifting between customer classes. More optimistically, production costs and reliability may be unaffected and the cost-shifting could be salubrious. Thomas Parkinson compares two alternative arrangements that have been advocated to implement California's proposed institution of retail wheeling. San Diego Gas and Electric and Southern California Edison proposed the development of a centralized power pool (as in the United Kingdom) that would act as a spot market for buying and selling power. By contrast, Pacific Gas and 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 structure allows the application of "top-down pricing", where transmission prices are derived from customer tariffs less avoidable generation costs. Transmission prices in the second structure must be derived from a "bottom-up" analysis of transmission costs, including building capacity, marginal losses, and congestion. Extending earlier seminal work, William Hogan finds that locational spot price differences in an electric network provide the natural measure of the appropriate internodal transport charge. However, the problem of loop flow requires different economic intuition for interpreting the implications of spot pricing. The Direct Current model, which is the usual approximation for estimating spot prices, ignores reactive power effects; this approximation is best when thermal constraints create network congestion. However, when voltage constraints are problematic, the DC Load model is insufficient; a full AC Model is required to determine both real and reactive spot prices.

10 xii Turning to some international experience,. Brendan Ring and Grant Read describe work undertaken for the New Zealand transmission grid. Prices derived from an observed system dispatch can be used in the short-run coordination of a competitive wholesale electricity market. These prices vary across space and time, reflecting differences in marginal costs and changing demand. Markets for emergency reserve generating capacity can be integrated with a market for power. Used in conjunction with longer term contracts, such short-run prices have the potential to allow competitive power system operation without significant loss of coordination efficiencies. Hugh Outhred and John Kaye of Australia review the role of an electricity network in a competitive electricity industry, discuss that nation's experience with transmission pricing, and propose a 'Nodal Auction Model' for incorporating network effects in a competitive electricity industry. The model uses a computer-based auction procedure to address both the spatial issues associated with an electricity network and the temporal issues associated with operation scheduling. The objective is to provide a market framework that addresses both network effects and operation scheduling in a coordinated implementation of spot pricing theory. Einar Westre focuses attention on transmission pricing in Norway, primarily in the country's Main Grid but also in lower network levels. The Main Grid tariff consists of a variable element that covers resulting revenue shortfall. The variable element comprises an energy element that is related to marginal line losses and a bottleneck fee for capacity shortfalls; the fixed element incorporates a per kilowatt connection fee and a residual power element designed to recover remaining grid costs. Narain Hingorani and Karl Stahlkopf conclude the volume with two related papers concerning a major wave of the future: the Flexible Alternative Current Transmission System (or FACTS). FACTS involves the use of high-power microelectronics to enhance the controllability and capacity of utility transmission systems, secure loading of conductors to thermal limits, reduce necessary generation margins through increased usable capacity, and prevent cascading outages by limiting the effects of faults and equipment failures. These opportunities arise from the ability of FACTS to control the inter-related parameters that constrain today's transmission systems including series and shunt impedance, phase angle, and the occurrence of frequency oscillations below the rated frequency. The papers discuss the nature of the constraints, the power electronic controllers that can overcome these constraints, and the scope of applications.

11 xiii We feel that this compilation of papers should be very useful to everyone with interest in a rational disposition of the transmission issue in the context of the current restructuring debate. The list of interested parties would include electric utility staff, regulators, policy makers, academicians and consultants. Weare very grateful to Dr. Karl Stahlkopf and Mr. Charles Clark for their support and extremely useful guidance throughout this project. We would also like to thank the authors for their cooperation and patience. The list of acknowledgments would not be complete without mention of Zachary Rolnik from Kluwer Publishing, and Dr. Juliet Mak of Christensen Associates who were extremely critical in getting this volume assembled, published and distributed in a timely fashion. The editors. Michael Einhorn - United States Department of Justice, Washington D.C. Riaz Siddiqi - CINergy Corporation, Cincinnati, Ohio.