Chapter 1 Introduction

The electricity power utilities in many countries have been, or are being, restructured. This has been driven by the desire of Government to meet the increasing demands for electricity by encouraging independent power producers. The consumers are allowed to choose their electricity supplier on the basis of price and service provided. In a deregulated system, operator’s goals are balancing consumer power demand using the available generation and ensuring that economical and technical constraints are respected. The prime economical aspect is the social benefit, i.e. power suppliers should obtain maximum prices for their produced energy, while consumers should pay the lowest prices for the purchased electric power. Prices have to be defined in a free market economy and restricted only by power exchange rules. Charging methodology is one important scheme in the deregulated environment in the way that it can be utilized to recover the investment cost from network users according to their different impact on the network [3]. The long-run incremental cost (LRIC) pricing methodology developed by University of Bath in conjunction with Western Power Distribution (WPD,UK) and Ofgem (the office of gas and electricity markets, UK) has drawn lots of attention from industry and academic circles and found its application in practice. Compared with the existing long-run cost pricing methodologies, this charging model can produce forwardlooking charges that reflect both the extent of the network needed to serve the generation/demand and the degree to which the network is utilized. The traditional LRIC pricing is based on the premise that the demand in the system is continuously growing over time, and there will always be a need for network reinforcement some time in future, which has been modified to reflect how a nodal increment might change the loading level of the distribution system with a negative load growth, and how this change can be translated into the costs/benefits to the network [1, 2].


Chapter 2 Power System Restructuring and Deregulation
Since power cannot be stored for marketing but must be sold the instant it is produced, it was generally assumed that power sector had to be a vertically integrated monopoly of generation, transmission and distribution [2].



Fig.2.1Vertically Integrated Structure

2.1 Forces behind the Restructuring of Power System 2.1.1 Unfair Tariff RatesSince transmission, distribution and generation were handled by a single utility, the tariff was the average of all the costs of the different services including generation, transmission and distribution and distributed among all consumers equally.

2.1.2 Lack of Public Resources for Future Development –
Since the power system was run by a single entity, mostly the central government which work on the least cost method, this caused a financial failure in many developing countries as they could not generate enough public resources for future expansion and development of power system.

2.1.3 Political and Ideological ChangesThe reform structure depends or influenced by party politics in most cases.


2.1.4 Technological AdvancementThe advance in technology makes low cost power plants owned by independent power producers very efficient. These independent power producers would not emerge without reform.

2.1.5 Environmental ImpactWithout the reforms most of the generation was dependent on fossil fuels and hence reform movement was required to decrease the dependence of electricity generation on fossil fuels and introduction of renewable energy like solar, wind etc. and thus decreasing the environmental impact of electricity generation.

2.2 Important Features of Deregulation 2.2.1 Vertically Integrated System Changed to Unbundled SystemEarlier the three components were bundled, if power system were operated and monitored by a single utility but with the reregulation the components of power system were unbundled.




Fig. 2.2 Different components of Reregulated Power System The structural components representing various segment of electricity market are:

Generation Companies (Gencos) They are responsible for operating and maintaining generating plant in the generation sector and in most cases owns the plant.


Distribution Companies (Discos) –
Discos assume the same responsibility on the distribution side as in a traditional supply utility. However, a trend in deregulation is that Discos may now be restricted to maintaining the distribution network and providing facilities for electricity delivery while retailers are separated from Discos and provide electric energy sales to end consumers. Another trend in developing countries is to sell to an investor, or to corporatize, portions of the distribution system so that investment for reinforcement can be raised and better operating practices implemented

Transmission Owners (TOs) –
A basic premise of open transmission access is that transmission operators treat all users on a non-discriminatory basis in respect of access and use of services. This requirement cannot be ensured if transmission owners have financial interests in energy generation or supply. A requirement, therefore, is to designate an independent system operator to operate the transmission system.

Power Exchange (PX) –
The PX handles the electric power pool, which provides a forum to match electric energy supply and demand based on bid prices. The time horizon of the pool market may range from half an hour to a week or longer. The most usual is the day-ahead market to facilitate energy trading one day before each operating day. Functions of PX    receive bids from power producers and customers. match the bids, decide the market clearing price and prepare scheduling time. provide schedules to the ISO or transmission system operators. adjust the scheduling plan when the transmission system is congested.


Independent System Operator (ISO) –
The ISO is the supreme entity in the control of the transmission system. The basic requirement of an ISO is disassociation from all market participants and absence from any financial interest in the generation and distribution business. The ISO has three objectives   security maintenance. service quality assurance. promotion of economic efficiency and equity

Scheduling Coordinators (SCs)SCs aggregate participants in the energy trade and are free to use protocols that may differ from pool rules. Competing Generators Bid Dispatch Independent System Operator Ancillary Services

Power Exchange






Transmission Facilities

Fig. 2.3: Market Components and Functions

2.2.2 Regulated Cost Changed to Unregulated PriceSince earlier the power system was a monopoly the tariff plans etc. were decided and fixed single handedly in a regulated manner. With deregulation many companies entered in the business of power system and tariffs etc. were decided by the market forces in an unregulated manner.


2.2.3 Consumer Changed to CustomerWith deregulation many companies entered in the business of power system and hence the consumers which earlier had no choice changed to customer who can chose from a verity of tariff plans, suppliers etc.

2.2.4 Monopoly Changed to CompetitionEarlier power system was a single utility and hence was a natural monopoly. With deregulation many players came into the market and competition was introduced.


Chapter 3 Transmission Pricing
3.1 Introduction
Pricing of transmission services plays a crucial role in determining whether providing transmission services is economically beneficial to both the wheeling utility and the wheeling customers. Transmission pricing is one of the most complicated issues in restructuring electricity supply because of the physical laws that govern power flow in transmission network, and the need to balance supply and demand at all times. Since generators and customers are all connected to the same network, actions by one participant can have significant consequences on others making it difficult to investigate the cost each participant is responsible for. Electricity unlike many other commodities cannot be stored easily and supply has to match demand at all times. The transportation of electricity is constrained by physical laws which need to be satisfied constantly in order to maintain the reliability and security of the power system. It became obvious that the transmission network is the main impediment to energy privatization. In all power markets around the world, generation and distribution parts are horizontally unbundled and have competition, but the transmission system is a natural monopoly and therefore it should be regulated. In this situation, defining a pricing scheme for transmission services to reduce the effects of transmission monopoly on market competition is very important. In this respect, transmission pricing in an equitable transparent manner to provide coherent economic incentives for efficient transmission operation and its expansion. To compensate for the revenue requirements of the owners of the transmission system and encourage its future expansion, transmission pricing schemes should be designed fairly. Also the schemes must aim to achieve the objective of maintaining system security by encouraging proper operation and maintenance of existing and investment in new facilities [2].


3.2 Objectives of Transmission Pricing
Ideally, the transmission tariff policy and methodology should satisfy the following objectives: Ensure revenues adequate to compensate for the costs of operation and maintenance of the transmission system; Encourage the efficient use and development of the network, both in the short and long term; Ensure equitable treatment of, and non-discrimination among, market participants who use the transmission system; Establish a price structure which is economically sound, simple enough for users to understand and transparent to administer; Provide pricing stability over time; Provide flexibility to adapt to changing circumstances in the short and long term; Accommodate embedded generators and private generation stations [2].

3.3 Transmission Pricing Paradigms
The goal of the pricing schemes is to allocate and/or assign a part of the existing and the new cost of transmission system to wheeling customers. Transmission pricing paradigms are the overall processes of translating transmission costs into overall transmission charges. These paradigms are: 3.3.1 Rolled-in transmission pricing In this paradigm all existing transmission system and the new costs of system operation and expansion, regardless of their cause, are summed up (“rolled-in’) into a single number. This cost is then allocated (divided) among various users of the transmission system, including the utility native (retail) customers, according to their ”extent of use” of the transmission system. Some of these “allocation” methods are:


Postage Stamp MethodIt depends only on the amount of power moved and the duration of use,

irrespective of supply and delivery points, distance of transmission usage or the distribution of loading imposed on different transmission circuits by a specific transaction.  Contract Path/MW Mile MethodIn this method, a specific path between the points of delivery and receipt is selected for a wheeling transaction called contract path. Loading of each transmission line due to each transaction is obtained and multiplied by the line length and summed over all lines in grid to find use of grid by the transaction. Transaction charged in proportion to their utilization of grid. But in this power flow outside the contract path and to neighboring utilities is not considered. 3.3.2. Incremental Transmission PricingAccording to this paradigm only the new transmission costs caused by the new transmission customers will be considered for evaluating transmission charges for these customers. The existing system costs will remain the responsibility of utilities present customers .Incremental cost of a transaction is evaluated by comparing the transmission system cost with and without the entire transaction. It also considers the reinforcement cost in it.   Short-run incremental cost pricing (SRIC) Long-run incremental cost pricing (LRIC)

3.3.3. Marginal Cost PricingIt is the cost of loading a marginal increase in transacted power. In this approach multiply the cost for a unit of additional transaction by the size of the transaction [2].   Short-run marginal cost pricing (SRMC) Long-run marginal cost pricing (LRMC)


Chapter 4 Long Run Incremental Cost
Network charges are charges against network users for their use of a network in order to recover the costs of capital, operation and maintenance of a network and provide forward-looking, efficient messages to both consumers and generators. Network charges, therefore, should be able to truly reflect the extent of the use of the network by network users. Efficient charges can help to release constraints and congestion in the network, deferring prospective network expansion or reinforcement. The present pricing methodology adopted by the majority of the distribution network operators (DNOs), the distribution reinforcement model (DRM), however, cannot provide location economic signals as the costs of network assets are averaged at each voltage level. Long-run cost charging methodologies, due to its merits of being able to reflect the cost of future network reinforcement caused by the nodal increment are recognized as more economically efficient. Most long-run cost pricing methods evaluate costs associated with projected demand/generation pattern and subsequently allocate the costs among new and existing customers. These approaches, however, can only passively react to a set of projected patterns of future generation or demand, failing to proactively influence the patterns of future generation or demand through economic incentives. Up to2005, investment cost-related pricing (ICRP) utilized, which works based on distance or length of circuits, is the most advanced long-run pricing model. One recent development in long-run cost pricing methodology is the long-run incremental cost (LRIC) pricing methodology developed by the University of Bath in conjunction with Western Power Distribution (WPD, UK.) and Ofgem (the office of gas and electricity markets, UK.).This charging 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 .The decision concerning of being penalty or reward is based on whether the nodal perturbation advances future investment or defers it. This method, compared with existing long-run cost pricing approaches, can produce cost-effective charges that reflect both the extent of the network needed to serve the generation or demand and the degree

to which the network is utilized. As being able to send forward-looking signals to influence prospective network connections, this charging model has been adopted by WPD in its EHV network and is being under consideration by several other DNOs [2, 4].

4.1 Long-Run Network Charging Model
In the original LRIC pricing model, for components in network that are affected by a nodal injection, there will be a cost or a credit associated for the injection according to Whether the network investment is accelerated or deferred. In this charging model, the time to reinforce is evaluated by assessing the time for a loading level to reach the full capacity of system components under a certain load growth rate with and without the nodal injection. The proper modeling and calculation of load growth rate, as a result, is essential for this charging model. The LRIC model is implemented using the following steps [2,4].

4.1.1. Present Value of Future Investment
If a circuit has a maximum allowed power flow of of , the number of years it takes , to grow to , supporting a power flow , under a given LGR (load growth rate)

r, can be determined with


is the number of years taking to


, taking the logarithm of it gives,

Assume that investment will occur in the

th year when the circuit utilization reaches

, and with a chosen discount rate of d, the present value of future investment will be


, is the modem equivalent asset cost.


4.1.2. Cost Associated With Power Increment
If power flow change along line is as a result of anodal injection, the time horizon , to year defined by

of future reinforcement will change from year

new investment horizon

The new present value of future reinforcement becomes,

The change in present value as a result of the injection is given by = ( )

The incremental cost for circuit is the annuitized change in present value of future investment over its life span, (4

4.1.3. Calculation of LRIC
The nodal LRIC charges for a node are the summation of incremental cost over all circuits supporting it, given by = Where, is the size of power injection at node i, and here we assign it to be 1 MW.


4.1.4. Flowchart of LRIC
The core of flow chart is contingency analysis, incremental power analysis and charge assessment [4].

Input system data

Base case power flow analysis

Base power flow

Incremental power flow analysis

LRIC charge evaluation

Use of system charges Fig 4.1 Flow Chart of LRIC Charging Model

4.2 Parameters Influencing LRIC Charging 4.2.1 Load Growth Rate
Demand growth represents the increase in energy demand over time, occurring through natural growth of a service territory resulting from the increased prosperity, productivity or population. Load growth rate is an averaged index derived by annuitizing the load growth in a particular time span. In the LRIC charging model, in order to simplify the process of assessing time to reinforce without and with nodal injection, assumed uniform loading growth rate along each circuit. In reality, however, loads at different buses may grow at quite different rates, leading to relatively diversified loading growth rate for each circuit.


4.2.2 Component Reinforcement Cost
Generally, the reinforcement costs of circuits or transformers need to be recovered though LRIC charging model. Based on their different functions or ownerships, these branches can be roughly divided into two different categories:   Transformer/circuit branches which have certain reinforcement costs; Transformer/circuit branches which have no costs (zero-cost branches). Those zero-cost branches are mainly branches, whose costs have been recovered from network users, or branches which are owned by network users, or branches which are used to connect different part of the substations, such as circuit breaker, and switches. All the components costs are annuitized through annuity factor into annuity costs, which is the actual amount of reinforcement costs that are recovered each year [2].

4.2.3 Annuity Factor
An annuity factor is the present value of an income stream that generates fixed income each period for a specified number of periods .The annuity factor can therefore be multiplied by the periodic annuity payment to determine the present value of the remaining annuity payments [2].

4.2.4 Discount rate
The interest rate used in discounted cash flow analysis to determine the present value of future cash flows. The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money available in the future because it could be earning interest) and the risk or uncertainty of the anticipated future cash flows (which might be less than expected).


Chapter 5 LRIC Pricing for Negative Load Growth Rate
5.1 Introduction
Long-run marginal or incremental cost pricing models account for capital investment cost in the network as a result of generation/demand increment at a given location. Traditionally, long-run incremental cost (LRIC) models assume that the demand in the system is continuously growing (positive growth rates assumed); thus, the network reinforcement is always required some time into the future. This positive growth rate assumption however does not reflect the whole reality that distribution network operators (DNOs) are facing. Some parts of the distribution network experience prolonged negative load growth. This can be driven by heavy industries shifting to elsewhere in the country or to other parts of the world [4,5]. Negative load growth rates could have two consequential impacts to the network planning and operation:  when the network assets come to the end of their useful life, their replacement can be smaller, and there would be cost savings to DNOs with smaller replacements;  If the assets’ loading levels fall to zero before the end of their useful lives, then the assets become redundant. There would be cost-saving in the maintenance and operation of these assets and in the capitals if the assets are re-used elsewhere.

For an underlying negative load growth rate, the asset utilization in the network can still vary significantly from one place to another. If the asset’s loading level is very low, i.e., the asset has a huge spare capacity, and if this capacity is still increasing due to a negative load growth, then there are great benefits to the network operator if the asset’s loading level drops to zero. Through network charges, DNOs can encourage demand customers to leave early or encourage distribution generation (DG) to connect at an appropriate point in the network. If on the other hand, the assets’ loading level is very high, then there would be little benefit to encourage demand to leave or DG to connect.

An extended LRIC model that calculates network charges for network assets with prolonged negative load growth rates. The model aims to reflect:   The magnitudes of benefit to the network in the future when the asset’s utilization drops to zero and How a nodal perturbation might accelerate or delay the future benefits. For network components that support a nodal power injection or withdrawal, there will be an associated credit if the benefit is accelerated or a cost if it is delayed.

5.2 Mathematical Formulation of Long-Run Incremental Cost Pricing For Negative Growth Rates
The time horizon to reach the network benefit is the time taken for the circuit’s loading level to fall from the current level to zero, or for the unused capacity to grow from the present level to the full capacity. The LRIC charge for the circuit is the difference in the present value of future benefits with and without the nodal perturbation. The proposed charging model can be implemented through the following steps.  Deriving the Time Horizon to Reach Network Benefit: (5.1) Where circuit has a maximum allowed power flow of the number of years it takes , to grow to , supporting a power flow of , ,

, under a given LGR (Load Growth Rate), .

is the Spare capacity increasing with the rate For a very small and

, (1) can be expanded using Taylor’s series: (5.2)

For (5.2) to be true for all future years

, the second term in the bracket at the RHS of

the equation must be zero; this leads to (3) giving the relationship between the growth rate of the spare capacity and the load growth rate: (5.3) Using to from (5.3), the number of years for the circuit’s spare capacity to grow from

can be determined by (5.4)


Rearranging the equation gives the time to reach the benefit as (5.5)  Evaluating the Present Value of the Future Benefit: Assume that investment will th year when the circuit utilization reaches , and with a chosen discount

occur in the

rate of d, the present value of future investment will be (5.6) Where,  , is the modem equivalent asset cost. Evaluating the cost of an additional Power Injection or Withdrawal at node N. is as a result of a nodal injection , to year at node N, defined

If power flow change along line

the time horizon of future reinforcement will change from year by

(5.7) Equation (5.8) gives the new investment horizon as (5.8) The new present value of future reinforcement becomes, (5.9) The change in present value as a result of the injection is given by





Calculating the Long-Run Incremental Cost: The long-run incremental cost for

circuit is the annuitized change in present value of future investment over its life span, the nodal LRIC charges for a node are the summation of incremental cost over all circuits supporting it, given by


= Where, is the size of power injection at node i.



Chapter 6 Case Study and Results
The demonstration of the proposed approach is on a simple two-busbar network as shown in fig. 6.1. The circuit Lf connecting busbars 1 and 2 is rated at 45 MW and costs £31293400 at its modern equivalent asset value. Assuming a discount rate of 6.9% and a load growth rate of ±1%, Fig. 6.2 gives the LRIC charge versus circuit utilization for withdrawal power from busbar 2.

Bus 1


Bus 2

D Fig. 6.1 Two busbar network with demand D ×104 3.6 3.3 3.0 2.7 2.4 2.1 1.8 1.5 £/MW/year 1.2 0.9 0.6 0.3
0 20 40 60 80 100

1% Negative Growth Rate

1% Positive Growth Rate

% Utilization Fig. 6.2 LRIC charges for Negative and positive Load Growth rates


For a negative growth rate, withdrawing power will increase the loading level of the circuit, thus delaying the network benefit. The customer will be charged; this is illustrated by the solid line in Fig.6.2. When the circuit utilization is high, it takes a long time to reach the network benefit; thus, the present value of future benefit would be very small. However, if the circuit utilization is low, there would be imminent benefit to the network if the last few customers would leave the network, thus having huge charges for additional power withdrawal. In contrast, a positive load growth rate will require network reinforcement in the future; withdrawing power from node 2 will bring forward the time to reinforce the circuit, thus giving rise to LRIC charges as shown by the dotted line. At high utilizations, additional power withdrawal would trigger imminent reinforcement, hence having huge network charges.


Chapter 7 Conclusions
Long-run incremental cost pricing methodology utilizes the headroom of network components to translate the investment horizon with and without the nodal increment into an incremental cost to the network .Unlike the existing long-run charging models, it does not need to assume the size and siting of future generation or demand. Instead, it relies entirely on the capability of the existing network to accommodate future generation and demand, and thus provides a forward-looking economic price signal to proactively influence the development of future generation/demand. This in turn helps the network planners to form a more realistic projection in the future generation/demand patterns in forward planning their networks. This charging model respects both the extent to which a network is used as well as the level of utilization of the network components. The LRIC charges monotonically increase as the degree of the circuit utilization increases reflecting the acceleration of future reinforcement. The present LRIC charging principle is based on the assumption that demand across the entire distribution network is continuously growing over time and there would always be a need for network reinforcement some time in future. In reality, there may be some parts of the network with prolonged negative growth rate. The proposed pricing principle seeks to directly relate a nodal power perturbation to its benefit to the network. This report illustrated that network charges could vary drastically depending on the assumption of underlying load growth rates.


[1] Furong Li, Chenghong Gu, “Long-Run Incremental Cost Pricing for Negative Growth Rates”, IEEE Transactions on Power Systems, 2011. [2] 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. [3] Loi Lai Lei Power System Restructuring and Deregulation, (Edited), John WileySons Limited, 2001. [4] 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. [5] 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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