Long-run Incremental Cost Pricing for Negative Growth Rate


 Restructuring Power sector

 Electricity market components
 Components of cost  Transmission Pricing Objectives  Long Run Incremental Cost(LRIC)  LRIC for Negative Growth Rate

 Conclusions
 References

Earlier Scenario
 Vertically integrated system  Government monopoly  Lack of competition- making market inefficient  non-payment, theft, overstaffing

 Privatizing generation
 Not attracted investment  Finally unbundling all sectors
Transmission Owners Disco Genco


Unbundling of Utilities

Benefits Introduced competition  Lower tariffs  Power Transactions based on Price rather than Cost  Quality improved  Revenue increased

Electricity market components
DISCOs Transmission Owners Power Exchange (PX) Independent System Operator (ISO)

Functions of PX
Receive bids from producer and customers Match bids and decide market clearing price Provides schedules to ISO Adjust scheduling when system congested

Functions of ISO
Security maintenance
Assure service quality Promote economic efficiency and equity

Components and Function

Transmission pricing Objectives
 It should compensate for the costs of operation and

maintenance of the transmission system;
 Encourage the efficient use and development of the

 Establish a price structure which is economically sound,

simple enough for users to understand and transparent to

 Provide pricing stability over time;

Long Run Incremental Cost(LRIC)
 LRIC charges help to realize constraints and congestion in the network, considering network expansion.  The approach examines how a nodal increment of generation/demand might impact the time to reinforce

system assets and then translate the time change into
charges.  It can produce cost-effective charges, reflect both the extent of the network needed to serve the generation or demand and the degree to which the network is utilized

Parameters Influencing LRIC Pricing
 Load Growth Rate: Represents the increase in energy

demand over time
 Discount rate: The interest rate used in discounted cash

flow analysis to determine the present value of future cash flows.
 Present value of future investment cost: future investment

can be discounted back to its present value.
 Modern equivalent asset cost: It is the current worth of a

transmission line system.

Mathematical Formulation of LRIC

for Negative Growth Rates

 Deriving

the Time Horizon to Reach Network Benefit:

For very small value of rs and rd

Using rs Time to reach benefit is

 Evaluating the Present Value of the Future Benefit:

 Evaluating the cost of an additional Power Injection or

Withdrawal at node N: If power flow changes by ΔPl due to nodal injection ΔPin

the new investment horizon nlnew is

the new present value of future reinforcement is

the change in present value as a result of the injection is

 Calculating the Long-Run Incremental Cost:
annuitizing the incremental cost and calculating the charges for a node

Demonstration on 2 Bus Network
Bus 1 Lf Bus 2

Two Busbar Network with demand D

The circuit Lf connecting busbars 1 and 2 is rated at 45 MW and costs £31293400 at its modern equivalent asset value. Discount rate of 6.9% and a load growth rate of ±1%

3.6 3.3 3.0 £ / M W / Y e a r 2.7 2.4 2.1

X 104

1% Negative Growth Rate

1.5 1.2 0.9 0.6 0.3 0

1% Positive Growth Rate



% Utilization




LRIC Pricing
 does not need to assume the size and siting of future

generation or demand.
 is based on forward-looking costs.  reflects the extent of the network used .  reflects the degree of component utilization.

The Proposed LRIC model seeks to directly relate a nodal
power perturbation to its benefit to the network.


Furong Li, Chenghong Gu, “Long-Run Incremental Cost Pricing for Negative Growth Rates”, IEEE Transactions on Power Systems, Article in Press. Chenghong Gu, Furong Li, Lihong Gu , "Application of long-run network charging to large scale systems",2010 7th International Conference on the European pp.1–5,2010.



Loi Lai Lei Power System Restructuring and Deregulation, (Edited), John WileySons Limited, 2001. D. Shirmoharnmadi, X.V. Filho, B. Gorenstin et al., "Some fundamental, technical concepts about cost based transmission pricing , IEEE Transactions on


Power Systems , vol. 11, no. 2, pp. 1002-1008,1996.

F. Li, and D. L. Tolley, "Long-Run Incremental Cost Pricing Based on Unused Capacity," Power Systems, IEEE Transactions on Power Systems, vol. 22, no.4, pp. 1683-1689, 2007.

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