Hedging Strategy and Electricity Contract Engineering - IFOR

16 The electricity market
voltage and hence higher current [Big00]. 7
Ancillary services are necessary to guarantee reliability of the system, such as
dealing with congestions, provision for transmission losses and frequency
control and provision of reactive power to assure that the system is in
balance.
Since it is impossible to correctly determine the actual flow of a transaction, it
is also impossible to allocate the grid’s total costs to the different transactions
in a correct manner. Instead a number of approximate methods to determine
the transmission costs have been proposed.
The postage stamp method does not consider the contract path; a long transmission
is priced equal to a short transmission. A fee per transmitted unit of
electrical energy is paid, independent of location of the buyer and seller. The
contract path method determines a fictitious path between the buyer and seller,
the so-called contract path. By allocating each edge in the grid a cost, the
transmission cost over the contract path can be calculated. In the MW Mile
method, the fee is proportional to the geographical distance between the buyer
and the seller (mile) and to the power of the transaction (MW). In the empty
grid method only the current transaction is taken into account and the grid is
assumed to be empty except for this transaction. The effect on the concerned
lines is compensated on a per MW km basis. This is the first method that
tries to consider the real electric flow. The marginal participation factors
method calculates the marginal flow contribution of a transaction to each edge
in the grid. This divided by the yearly index for the flow in that edge gives
the marginal participation of that edge. The sum of marginal participation
multiplied by the transmission costs for each edge gives the total transmission
price for that transaction. The benefit factors method is similar to the previous
one, but here the economical utility for a transaction in each edge is the driving
force to determine the price. The nodal prices method determines the price
at every node in the grid as the cost derivative with respect to demand in the
respective node. The transmission price between two nodes is then defined
as the difference in the nodal prices. The Staffellauf method further tries to
model the real effect on the grid and traces the electricity from its origin to its
7 Losses are proportional to current