Syed Babar Ali

School of Science and Engineering

EE 556 Power System Planning – Fall 2019

Instructor: Fiaz A. Chaudhry, Ph.D., P.Eng.

Lecture 23 Review
Electricity Tariff Setting
 Electricity Tariff Setting - Review
Common Tariff Setting Approach
1. Estimate Company
Revenue Requirement
Estimate revenue required
to cover utility’s operating
and capital costs
2. Allocate Revenue to 3. Design End-User
Companies Tariff
Allocate revenue Design tariff to ensure
requirement to that level and
customer classes (e.g. components (fixed,
determine how much variable, customer) of
revenue must be tariffs for each
collected from each customer class recover
class) allocated revenue
Linked to how requirement
costs are incurred
(“cost causation”)

• Objectives of Tariff Setting Process:

• Supply adequacy
• Better cost recovery leads to better service
• Efficient costs
• Tariffs provide both consumers and utilities incentive to make
economically efficient decisions
Electricity Tariff Setting - Review
Costs of Electricity Supply Chain
Electricity Tariff Setting - Review
Typical Pricing Basis
 Generation
 Rate of return based pricing for public sector plants
- Return on net fixed assets (NFA)
- Depreciation
- Operating and maintenance (O&M) Cost
- Fuel cost (based on thermal efficiency and fuel price)
- Taxes
 Power Purchase Agreements for IPPs
- Long-term (over the project’s economic life)
- Cost Plus based on O&M costs, fuel costs and return on
assets with pass through for fuel Prices and indexation to
cover inflation)
 Competition
- Bilateral contracts (short- to long-term)
- Trading on the basis of bid prices
Electricity Tariff Setting - Review
Typical Pricing Basis
…Continued
 Transmission and Distribution
 ROR based Pricing Formulas
 Price revision on annual basis
 Performance based pricing formulas based on revenue or price
caps.
- 3-5 year (multi-year) control period
- Revenue or Price Cap with (I-X) indexation to cover inflation
(I) after accounting for productivity factor (X)
- RPI - X formula for transmission and distribution revenue
calculation
 Revenue requirements are based on benchmark transmission and
distribution (T&D) losses and assuming 100% collection of billed
amount.
Electricity Tariff Setting - Review
Consumer Tariff Structure
 Residential Customers
 Slab system for providing relief to low income groups
 Consumers pay more with increasing consumptions to encourage
energy conservation
 Industrial and Commercial Consumers
 Two Part Tariff to encourage higher utilization against the
demand
- Fixed Charge based on the peak load (kW) demanded
- Variable charge based on units of energy (kWh) consumed
 Time-of-the-Day-Use Tariffs for large customers
 Two Part Tariff to shift consumption during off-peak hours
- Peak time charges
- Off-Peak time charges
Lecture 24 – Power Wheeling and
Transmission Use of Service Charge
What is Transmission Open Access?
 Transmission Access
 The use of electric power lines and other power transmitting
facilities by parties other than the owners of the lines.
 Also known as common carriage.
 Transmission Open Access
 Enables all participants in the wholesale market equal access to
transmission service, as long as capacity is available, with the
objective of creating a competitive wholesale power market.
What is Power Wheeling?
 Simultaneous purchase and sale of electricity of non-adjoining
parties through the transmission lines of a third party

 Change in actual power flows in transmission lines owned by other

parties, when a seller sells to a buyer

 Use of utility’s transmission facilities to transmit power for any

buyers and sellers.
Prerequisite of Power Wheeling
 Separation of transmission from generation
 Open access rules
 Determination of Transmission Use of Service Charges (TUoSC)
 Transmission service agreement
 Ancillary service management
 Balancing market operations
Transmission Use of Service Charge
TUoSC
 Major approaches used by regulators to determine the basis of
revenue allowed to transmission utilities are:
 Rate of Return (RoR) based pricing
 Performance or Incentive-based pricing also referred to as price
control mechanisms
 Main components of the allowed revenue are:
 Depreciation of regulated assets
 Return on equity and cost of debt
 Operation and maintenance (O&M) costs
 Performance against incentives
 Timing differences

Continues…
Transmission Use of Service Charge
TUoSC
…Continued
 Examples of other components of the TUoSC are:
 System operation charge
 Metering service provider charge
 Connection charges
 Residual sub-transmission charge
 Technical services charge
 Ancillary service charge
Approaches for Calculation of TUoSC
Three Approaches
 Embedded costs or actual historical accounting cost
 Based on a specific 12 month period in recent past as the historic
test year data.
 Estimation of future accounting cost
 Based on forecast of future cost and future load expected in a
specific 12 month period.
 In some cases, the required return on assets is calculated by
periodically (yearly) revaluing the fixed assets based on current
replacement costs (net of accumulated depreciation).
 Estimation of marginal cost
 Based on cost of expanding system (efficiently) to satisfy the
forecasted load over along term horizon.
Basis of Wheeling Rates
Wheeling rates are the prices which are charged for the use of
transmission networks and are payments made by the sellers and/or
buyers to compensate the wheeling utility(ies) for the cost incurred.
Wheeling rates Include:
 Existing system cost
 The allocation cost of existing transmission facilities used by the
transmission transaction.
 Operating cost
 Production (fuels) costs due to generation re-dispatch and
rescheduling resulting from the transmission transactions.

Continues…
Basis of Wheeling Rates

…Continued
 Opportunity cost:
 Benefits of all transactions that the utility forgoes due to
operating constraints that are caused by the transmission
transaction
 Reinforcement cost:
 Capital cost of new transmission facilities needed to
accommodate the transmission transaction.
Methods for Charging Wheeling Rates

 Flat fee or liense plate pricing

 Same price for all customers based on transmission cost per
customer, usually within specified zones.
 Postage stamp method
 Price based on amount of power moved and the duration of use.
 Zonal rates to manage congestion
 Price based on amount of power moved and the duration of use
across specific zones to manage transmission congestion.
 Pro forma transmission tariffs
 Price based on a capacity fee, based on the installed cost of
transmission system as a whole, allocated on per kW basis. Plus
the variable operating cost incurred at the time of use.

Continues…
Methods for Charging Wheeling Rates

…Continued
 MW-km method
 A wholesale wheeling price proportional to both the amount of
power moved and distance.
 Contract path method
 Price based on the cost of a single identified path from point A to
point B.
 Rated system path
 Price based on the cost on a computed set of parallel paths for a
particular path identified by load flow or other system studies of
the grid.
Transmission Congestion

When the producers and consumers of the electrical energy desire to

produce and consume am amounts that would cause the transmission
system to operate at or beyond one or more transfer limit, the system
is said to be congested.
 Ways to tackle congestion
 Price area congestion management
 Available transfer capability (ATC) based congestion management
 Optimal power flow (OPF) based congestion management
Ancillary Service Management
Activities on the interconnected grid that are necessary to support the
transmission of power while maintaining reliable operation and
ensuring the required degree of quality and safety.
 Main ancillary services include:
 Regulation
 Load Following
 Energy Imbalance
 Operating Reserve- Spinning
 Operating Reserve- Supplemental
 Backup Supply
 System Control
 Dynamic Scheduling
 Reactive Power and Voltage Control from Generator Sources
 Real Power Transmission Loss
 Network Stability Services from Generation Sources
 System Black Start Capability
Transmission Losses
 Transmission Losses
 Loss of power in the form of wasted heat, associated with
transmitting electrical current over transmission line.
- Losses are directly proportional to the mathematical square
of the current.
- Losses are also directly proportional to the transmission
distance.
- Benchmark Losses (average or Incremental)
 Treatment of Losses in Transmission Service Agreement
 Borne by the Seller:
Seller inject additional power into the transmission network to
meet the contracted load requirement of buyer
 Borne by the Buyer
Buyer draws lesser power from the transmission network against
the contracted supply from seller
 Thank you

Fiaz.Chaudhry@lums.edu.pk

+92 321 999-0780

Methods for Charging Wheeling Rates
Subtitle
…Continued
 MW-km method
 A wholesale wheeling price proportional to both the amount of
power moved and distance.
 Contract path method
 Price based on the cost of a single identified path from point A to
point B.
 Rated system path
 Price based on the cost on a computed set of parallel paths for a
particular path identified by load flow or other system studies of
the grid.
Electricity Tariff Setting
Estimating the Revenue Requirement: Summary of two approaches
 “Revenue requirement” is an aggregation of the 1. Revenue 2. Revenue 3.Tariff
Requireme Allocation Design
total costs incurred to provide service nt

 Two different approaches to calculate revenue

Revenue Requirements
requirement: under Different Approaches
Cash- Rate of
◦ Rate-of-return (RoR) approach: Needs Return
 Revenue Requirement = O&M expense X X
Operating and maintenance expenses
Debt service X
Capital
+ Depreciation X
Improvements
+ (Rate Base (Net Assets) x Allowed Return) Depreciation
X
Return on Expense
◦ Cash-Needs Approach: Return on
invested X
 Revenue Requirement =
capital investment
Operating and maintenance expenses Other
X X
Revenue
+ Actual cost of debt service
+ Actual cost of capital improvements Principal +
interest debt
payments
Electricity Tariff Setting
Estimating the Revenue Requirement: General Comments
1. Revenue 2. Revenue 3.Tariff
Requireme Allocation Design
nt
 Short-term: Cash-Needs approach
◦ Overall more straightforward and
transparent than RoR
◦ Does not require evaluation of assets
◦ Avoids the complications of determining
a “fair” rate of return on assets What about depreciation?
Depreciation costs and
◦ Improves governance and transparency return on assets are used in
the Rate of Return approach
in the sector by removing perception as an approximation for
that profits are included in tariffs capital improvement and
debt service costs…these
 Long-term: Rate of return actual costs are included in
the cash-needs approach
◦ NEPRA follows this approach