# I.

Introduction The power system deregulation process divides the regulated power industry into deregulated market and established three entities namely Genco, Transco and Discom. The main purpose of the deregulation in power system is to introduce competition in the power sector which is previously owned by the government. After the deregulation the generation transmission and distribution work as separate entities. Hence competition is introduced by allowing private players in all these sectors. Hence after deregulation transmission services pricing is also a very critical issue. Classic and modern solutions to transmission cost allocation have not been able to satisfy expectations of regulators and markets agents. Many solutions have been formulated and many applied, most of them face problem due to lack of economic foundations [7]. Game theory provides interesting concepts, methods and models that may be used when assessing the interaction of different agents in competitive market and in the solution of conflicts that arise in that interaction[13] such as those of electricity markets. In particular co-operative game theory arises as a most convenient tool to solve the cost allocation problem [14]in deregulated market. Cooperative game theory provides a fair, efficient and stable tool for cost allocation problem in transmission system. This paper presents a review of various methods using cooperative game theory for cost allocation. Let N = {1, 2, 3…….n} denote the set of all players. A coalition S is defined as a subset of N, S Є N. The null set is called the empty coalition and the set N is called II. Cooperative game theory Game theory is divided into two branches called non-cooperative and cooperative branches. The two branches of game theory are differing in how they formalize interdependence among the players. In the non-cooperative theory game is a detailed model of all the moves available to the players. By contrast the cooperative theory abstracts away from this level of detail, and describes only the outcome that results when the players come together in different combinations(2). Definition- A cooperative game consists of two elements: (I) a set of players and (ii) a characteristic function specifying the value created by different subsets of the players in the game. Formally let N= {1, 2, 3…….n} be the finite set of the players and let ‘i’ where ‘i’ sums from 1 through n, index the different members of N. The characteristic function is a function denoted ‘v’ that associates with every subset S of N, a number denoted v(S). The number v(S) is interpreted as the value created when the member of S come together and interact. In sum, a cooperative game is a pair (N,v) where N is a finite set and v is a function mapping subsets of N to members.(2)

S N dominated over S. In the concept of Nucleolus solution. three conditions. To obtain this all the possible permutations should be considered. the nucleolus is in the core [10]. e(x. as given below. [v(S) – v(S –i)] The former is the global rationality while the latter is the coalitional rationality. every game has one and only one nucleolus. If the allocation needs to be optimal and fair for all the players. An imputation y. as introduced by Schmeidler in 1969. an imputation will be favourable in the negotiations’ phase if it is not dominated. The sum of each of such contribution is obtained after neglecting the negative contributions. must satisfy the following two conditions: =v (N) . if an imputation y belongs to the core then there are two possibilities for any coalition S which forms. The explanation of this statement is that since y belongs to the core then it is not dominated over any coalition. A measure of inequality of an imputation ‘x’ for a coalition S is defined as the excess. y is also not Where. The characteristic value v{S} gives the maximum gain the coalition S can guarantee itself by coordination or cooperation between its members. assigns to the player. in order to belong to the core. Shapley Value Shapley Value is an a priori value that each entity contributes to the grand coalition in a game with a particular characteristic function. individual. S is the coalition containing i . is the set of all the imputations that are not dominated over any coalition. Any pay-off vector satisfying the above conditions is called an imputation. According to the core concept. Methodologies a. One of the first solutions suggested for cooperative games is the core concept. x {i} ≤ v {i}. x2. The Shapley Value denoted by for a player ‘i’. and unless the core is empty. Either coalition S concerns the y as the best solution or if it prefers another imputation k it has not the strength to enforce the change. b. After this the next largest dissatisfaction is taken up and reduced. denoted by CR (v). The application of cooperative game theory is to suggest an optimal division of the resources among its different players. The core of a game with characteristic function v. x3…xN}. i S→ III. namely. Thus. group and global rationalities need to be satisfied. i Є N x {S} ≤ v{S}. Hence. is characterised by two features. The core is based on the concept of domination of imputations. This sum gives the Shapley Value. Thus. The resource allocation is represented in terms of a pay-off vector denoted as {x1.S) = v(S) - This gives an indication of the amount by which the coalition falls short of its potential. irrespective of what other players and coalitions do. if an imputation k would dominate y over S then it should be: ki yi. Nucleolus The concept of Nucleolus. a share of the joint gain which is in proportion to contribution of this player to the grand coalition. The largest dissatisfaction is calculated and it is reduced. Depending on the order of entry of each player the net contribution to the grand coalition is obtained.the grand coalition. S Є N x {N} = v {N}. the dissatisfaction for every coalition is minimized till the solution becomes fair and acceptable for all the coalitions and the players as well.

In the former the payoff to the unions is calculated through the Shapley value solution. before the game begins there are a priori coalitions between some players. The Shapley Value may or may not lie within the core. J). The Owen Value The Owen value has been introduced in order to take into consideration games with coalitional structure. based on the Shapley value. Furthermore... J ={T1. The Solidarity value attempts to support the weaker participants of a game . could achieve by defecting the union Tj and joining any permutation of the rest unions it is also taken into account. Dummy is a characterisation for the players who contribute nothing to any of the coalitions where these players participate. a number of other values.2.n} players and that there is a set J of a priori unions between the players. there is a Difference in this step. In the second phase this payoff is allocated to the members of the union using again a Shapley value process. c. Hence. That is.…. the solidarity value uses the average marginal contribution Av (S) of a coalition S instead of the marginal contribution of a player i: With Using above equation the Solidarity value of a player i is defined as follows: Where: π: permutation in Γ j: the number of the a priori union where the player i belongs ns: the number of players participating in coalition S nTj: the number of player participating in the priori union Tj nπ: the number of unions belonging to the permutation π B: the union of all the a priori unions belonging to the permutation π.T2 . Assume that there is a game with N={1. is denoted by yi (v. In equation the first part of the expression gives the probability of a particular player joining that coalition and the difference part gives the contribution that particular player makes to the coalition by his joining. .. Therefore. The Owen value.m} be the set of the union numbers. for a player i participating in this game.2. let Γ= {1.(S-i) is the coalition obtained by excluding i |S| is the number of entities in coalition S N is the total number of players v(S) is the characteristic value associated with coalition S. The Solidarity Value The Shapley value concept seems to be a very attractive solution for the cooperative games because it gives a single solution and it is axiomatically founded. d. However. efficiency and additivity. which belongs to a union Tj. The game is played in two phases. in general. the weaker player of a game.Tm}. the amount that a coalition S. have been developed during the last decades. That is. a dummy player will be described by: The solidarity value satisfies also the axioms of symmetry.….the dummy players have a zero Shapley value.. This value is calculated as follows: In order to support such dummy players and.

per MW. in the case that a pre-defined amount K must be proportionally allocated to the system users. is to differentiate the use of facilities with various costs. since the postage stamp method does not take distances into account. Cl may be indeed interpreted as direct. The usage of any branch l by transaction i will be: fi. Several usage-based methods have been developed in order to deal with the task of allocating the fixed cost of a power system among the market participants. These power flows are then weighted by the specific transfer cost Cl of each branch l which is expressed in €/MW. the network usage from the side of a transaction is measured by the magnitude of the transaction Pi. However. numerous methods based on power flow data have been developed. This case will be illustrated in a following section. The Counter Flow Method . a supplementary charge is necessary. The total system usage fi by transaction ‘i’ is given by summing over all lines: Where K: the total cost to be covered by the market participants PSi: the amount charged to participant i according to the postage stamp method Obviously.l| Where fi.VI. the network operator runs a power flow program for each single transaction and calculates the power flow due to this transaction over each system line. to the system operator. per MW. Usage based methods The application of game theory in fixed cost allocation aims to overcome the lack in economic efficiency that some already known methods have. Consequently. payment When other. Despite this fact. it leads to cross-subsidization of long-distance transactions by shortdistance transactions. b. they do not fully cover the fixed costs. allocation form is adapted. also known as the rolled-in method.l = Cl|Pi. According to this method.l : the usage of branch l by the market participant i The absolute value in equation denotes that the power flow direction is disregarded. than proportional share of a pre-defined amount K. Some of these are based on the marginal cost and others on the measurement of the network usage. The problem with the marginal cost based methods is that. a. in general. The difference between these methods is how the network usage is measured. The amount to be paid by transaction i is: PSi= In order to achieve a more precise measurement of network usage. Thus. in this case Cl should not be confused with a direct payment. The role of Cl. The MW-Mile Method By allocating proportionally the total system cost. In order to determine the cost allocation. The Postage Stamp Method One of the traditional methods is the postage stamp method (PS). the contribution of transaction i will be: Where MWMi: the amount charged to participant i according to the MW-mile method c. without taking into account how the transaction affects the power flows over the various lines in the network. The MW-mile method (MWM) was the first such method to be introduced. this method is widely implemented because of its simplicity.

A compromise that avoids negative contribution is the zero counter flow (ZCF) method. the network operator has to pay agent i for carrying out his transaction. using (4. for a participant i. the MW-mile method does not consider the direction of power flow that each transaction causes.32). In order to take this fact into account. to be paid by transaction I. This allocation procedure is called the counter flow method and results in the payment CFi. For various reasons this may not be acceptable to the network owner and/or the other market participants. According to this method. the contribution of a transaction may be Negative. i. the usage of a line by a particular transaction is set to zero if the power flow due to the transaction goes in the opposite direction of the net flow for the line.. it is often argued that power flows having opposite direction from the net flow.33). Review of existing Literature .l Then (4. The Zero Counter Flow Method According to the counter flow method. However.34) is used in (4. V. Thus. a version of MWM has been developed.e. d. the branch usage is calculated as follows: = The amount ZCFi. contribute positive in the system situation by relieving congestions and increasing the available transfer capacity.As already stated.l= Cl Pi. In this version the branch usage is calculated by the following equation: fi. is then found by using above equation. which is the power flow due to all transactions.