Access and Pricing Policies for Firm Transmission Service

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Access and Pricing Policies for Firm Transmission
Service
Dept. of IME, IIT Kanpur Short-term
Course Challenges and Implementation Issues post
Electricity Act 2003 Regulatory, Policy
Technical Solutions April 10-14,
2004 This document can be downloaded
from www.iitk.ac.in/ime/anoops

• Puneet Chitkara

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Firm and Non-Firm Services

• Firm service has the following attributes
• Service is provided at high level of priority
• Cannot be interrupted for an economic reason
• Interruption is only due to an unavoidable
  engineering constraint
• Non-Firm means
• Lower priority service
• Usually because lower cost generation is
  available to replace available higher cost
  generation
• Often called economy power, coordination
  service, interruptible service or as-available
  service

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Access and Pricing Policies

• In this presentation, we shall analyze the impact
  of the following policies on efficiency and
  fairness of pricing
• Model A Voluntary Access to firm power and
  wheeling charges are cost based
• Model B Mandatory Access with cost based pricing
  (not necessarily embedded costs) for firm
  transactions

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Good and Bad Wheeling

• Good wheeling occurs if the least expensive
  pattern of production results in the long run.
• Bad wheeling occurs if power flows from S to W
  to B and any one of the following is true
• Cost of S Transmission Cost from S to B gt Cost
  of B
• Cost of W Transmission Cost from W to B gt Cost
  of B and Ws demand for Ss power is not filled
• Ss delivered cost to W gt Ws own cost and Ws
  potential for selling power to B is not utilized

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Model A Strategies Available

• Seller, S
• Expand generating capacity and sell to accessible
  buyer who offers the highest price
• Do not expand and sell
• Buyer, B
• Buy from accessible seller who offers the lowest
  price
• Construct own generating capacity and self
  generate

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Model A Strategies Available

• Wheeling Utility
• Wheel, build sufficient transmission capacity to
  meet Bs demand for Ss power
• Wheel, but build only enough transmission
  capacity to convey power form S that is in access
  of Ws own needs
• Buy from S do not cooperate with B and form sub
  coalition SW
• Expand generating capacity and sell to B do not
  cooperate with S
• Do nothing

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Does all good firm wheeling take place under
Model A?

• Scenario 1
• Generation sales are cost based and wheeling
  charges equal long run marginal cost of
  transmission
• We study three cases under this scenario

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Scenario 1, Case 1

• S has enough capacity to supply either W or B and
  still has some left over
• All good wheeling takes place if W is willing to
  build transmission between WB at the P LRMC
• W first buys all the power it can from S, and any
  excess firm power that S has left is wheeled to B
• Wheeling Revenues recover incremental costs and
  the price S receives is the same as its
  generation cost, S gains nothing and W gains
  exactly what it would under SW coalition
• This is least favorable to S and most favorable
  to B.

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Scenario 1, Case 2

• Ws power costs more than Bs
• Ss extra capacity is less than either Ws or Bs
  need
• S sells only to W with nothing left over
• No wheeling takes place

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Scenario 1, Case 3

• Ws delivered cost of serving B is less than Bs
  avoided cost
• S has enough extra capacity to serve either W or
  B with some left over
• W does not agree to the socially optimal solution
  to build enough transmission capacity from S to W
  to transmit all Ss extra power and enough from W
  to B to satisfy Bs demand
• W, however, builds enough S to W transmission but
  only builds enough W to B transmission to wheel
  the power left over after its own demand is
  satisfied

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Distribution of gains under scenario 1, Case 3

• S receives no gain
• W receives a gain it would with SW coalition
• B receives smaller gain than it would under grand
  SWB Coalition
• Some but not all good wheeling takes place

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Scenario 2

• If the transmission rate (F) deviates from the
  long run marginal cost (T)
• If F lt T, under Case 1, W does not wheel
• Even in case 3, with regulated cost based
  generation market, no good wheeling takes place

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Scenario 3

• If Firm generation prices are market based or
  unregulated, but the firm transmission rate is
  set at incremental cost
• Under case-1 above, W cannot get all the gains
  because it cannot raise the wheeling rates
• Neither W nor B can be made better off by such a
  price change
• Good wheeling takes place but S is likely to get
  more gains than before

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Scenario 3, Case 2 and 3

• Under Case 2, S can bargain with W
• Under Case 3, all good wheeling takes place
• W now constructs W-B transmission capacity to
  enable flow and gain
• S gains more from S-W trade

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Does Bad Wheeling Take Place under Model A?

• No
• For wheeling to be uneconomic, it has to increase
  production costs
• Because all trades are voluntary, consent is not
  possible for a trade which would lower total
  benefits

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Model B Strategies Available

• Seller
• Can expand generating capacity and sell to
  accessible buyer who offers the highest price.
• If unregulated pricing of generation is allowed
  and W competes to sell to B, then S can match any
  price cut of W as long as it is profitable to do
  so
• Not do anything

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Model B Strategies Available

• Buyer
• Buy power from accessible seller who offers the
  lowest price.
• If unregulated generation pricing is permitted
  and W is competing to buy from S, then B can
  match any price offer of W as long as it is
  economic to do so.
• Force W to provide access to S
• Self generate or cogenerate, DSM, or firm power
  purchase outside SWB system

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Model B Strategies Available

• Wheeling Utility
• Construct new Transmission capacity for wheeling
  and wheel power at a fixed rate only if compelled
  (assuming rate is less than or equal to LRMC
  otherwise W might do so voluntarily)
• Buy from S
• Expand generating capacity and sell to B
• Do nothing if not compelled

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Does all good firm wheeling take place under
Model B?

• Yes, if wheeling fees is not so high that
• CB lt CS FSWB , even if CB gt CS TSW TWB
• Good wheel takes place even if wheeling charges
  are not economically feasible for the wheeling
  utility, because access is mandatory

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Does Bad firm wheeling takes place under model B?

• If CB gt CS FSWB and CB lt CS TSW TWB and if
  S sells its power at cost
• Bad wheeling can take place in this circumstance
• Ws share of the grand coalition gain is reduced
  because of regulation

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However .

• If generation price is deregulated
• Answer to the question can bad wheeling occur
  is no when S and W have just enough capacity
  to meet Bs needs and W can also buy from S
• W finds it in its self interest to block the
  wheeling requirement by forming a sub coalition
  either by outbidding B or by underbidding S to
  sell to B, whichever results in a smaller loss

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Cont.

• W does this when this loss lt loss it would incur
  in constructing wheeling capacity for which it
  would be reimbursed on historical embedded cost
  basis
• There may not be bad wheeling but an
  uneconomic decision has been taken as a result
  of the model
• Here the assumption that all the Ws components
  (ratepayers, stockholders and managers) share a
  common interest is crucial, otherwise the
  decision making component of W may accept a loss
  if another component of W would bear it

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Distribution of Gains in Model B

• CW and CB are close to each other relative to CS
• Gain dramatically shifts to B due to mandatory
  access policy