Cost reflectivity of investment proxies

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Cost reflectivity of investment proxies

• CAP131 Working Group (2)
• 27 October 2006

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Action

• Action
• To explore the cost reflectivity of various
  proxies for infrastructure investments, which
  need to be supported bya user commitment
• Aim
• To establish whether there are more
  cost-reflective investment proxies than TNUoS
  tariffs and consider whether these are better
  when assessed against the Applicable CUSC
  Objectives

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Process Map
Identify groups of projects that require similar
system reinforcements
Establish unit capital investment costs (/kW)
for groups
Compare annual investment proxy to capital
investment costs
Express as a number of years of the investment
proxy
Calculate average spread between project groups
as measure of cost reflectivity
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Investment costs for groups

• Several groups of projects considered, where each
  group requires similar transmission investments
• represents a sample of 25GW of generation
• Investments consider a range of scenarios within
  group
• One investment group is illustrated below
• Gradient gives average capital investment cost in
  /kW

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Investment proxies considered

• All proxies been derived from the TNUoS model
• Retained 3/kW p.a. de-minimis for local
  substation works
• Nodal investment proxies
• full tariffs
• locational tariffs
• Zonal investment proxies
• full TNUoS tariffs
• locational TNUoS tariffs
• re-zeroed TNUoS differential tariffs (no
  residual)

Removes the revenue recovery adjustmentsi.e. the
residual
Establishes alternative electrical centre of
system(see next slides)
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Why consider re-zeroing?

• Additional generation triggers reinforcement to
  load centres
• DCLF model establishes a system centre (the
  slack node)
• The slack node is the most interconnected node
  and is arbitrarily assigned an incremental cost
  of zero (0MWkm)
• The real incremental cost at the slack node
  is not zero
• Investment required to transfer the marginal MW
  to the load

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Is Thorpe Marsh an appropriate centre?
Thorpe Marsh isthe slack node (SN)
B7
B8
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Effect of different zero pointsAlternative
zero-points considered

• Investigated the effect of considering different
  zero points
• Have considered
• Peninsula (Zone 21, -5.53 /kW)
• Central London (Zone 16, -1.97 /kW))
• South Yorkshire North Wales (Zone 14, 0.31
  /kW)
• The aim is to identify which zero-point provides
  the best fit to actual investment costs incurred

Contains the slack node, Thorpe Marsh
tariffs presented exclude the residual element
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Effect of different zero pointsInvestment
proxies with different zero points
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Effect of different centres of loadIdentifying
the most appropriate zero point
Zonal TNUoS with no locational component, with
different zero points
Standard deviation is used as a measure of cost
reflectivity
Central London gives best fit to investment costs
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Zonal investment proxies
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Nodal investment proxies

• Where possible, the nodal marginal km at the node
  where generation is expected to connect has been
  converted to a tariff by considering
• re-referencing quantity
• security factor
• expansion constant
• Has not been applied to all projects, as nodes do
  not presently exist within transport model
• analysis covers 19GW of sample pool (25GW)

same parameters used tocalculate zonal tariffs
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Establishing number of years of proxy

• For each group, actual investment costs (/kW)
  are compared with applicable investment proxy
  (/kW)
• where a zonal proxy has been used, the zone that
  best represents projects within a group has been
  used

Range of annual proxies tested
ActualCapitalCost (/kW)
Annual ProxyCost (/kW)
Number of years ofproxy


across all investmentgroups
Average and St. Dev.
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Analysis resultsZonal Nodal investment proxies
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Observations

• Nodal approach does not add extra
  cost-reflectivity
• no smoothing for lumpiness of a nodal cost
• adds complexity to the methodology for little
  return
• Trade-off between number of years of the
  investment proxy and the magnitude of that proxy
• low number of years, high proxy cost
• high number of years, low proxy cost

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Wider assessment of investment proxies

• Cost reflectivity is not an applicable CUSC
  objective, it is part of facilitating competition
• Important, therefore, to consider other criteria
  against which the investment proxies should be
  assessed
• transparency of methodology to derive proxy
• ease for both Users and National Grid to
  determine commitment
• ease of application to new entry points i.e.
  nodes that dont exist
• others?

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Wider assessment a starter for ten
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Conclusions

• TNUoS tariffs provide a reasonable investment
  proxy
• TNUoS tariffs without the residual re-centred
  on Central London provides a more cost reflective
  investment proxy
• However, would require additional arrangements to
  overcome transparency issues and could be
  confusing for new entrants