Optimal pricing of transmission and distribution services in electricity supply

Abstract

A new strategy for the separate pricing of transmission and distribution services in electricity supply is formulated and evaluated. The proposed methodology is a multivariate transmission generalisation of the method of peak load pricing previously applied to the optimal time-of-use pricing of generation on a power system with diverse generation technologies and with elastic demand. The method allocates both capacity and operational costs on a time-of-use basis, in an optimal manner, that avoids cross-subsidisation both between differing supply system participants and differing times of usage. The method is shown to promote the optimal development of the transmission, distribution or interconnecting systems, rewarding justified investments in transmission capacity and discouraging overinvestment. It also leads to appropriate returns on invested capital without significant 'revenue reconciliation'. This contrasts with SRMC (short run marginal cost) pricing as is shown by a comparative revenue evaluation. It is concluded that the method has wide potential application in electricity supply. These include the separate pricing of transmission and distribution services, the 'wheeling' and trading of electrical energy over intervening networks and use-of-system pricing in 'common-carrier' and 'second tier' trading.