Balancing the transmission tariff structure

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: This is the conclusion of a two-part series on designing new tariffs Open access to transmission lines is an important aspect of a healthy transmission system. In order to ensure long-term and short-term open access, many regulations have been put in place. But, it is important to understand the implications of favouring one against the other. Any short-term access means a lower incentive to the investor, who will have to bear the risk of under-utilisation of his transmission assets. At the same time, too many long-term agreements indicate very little availability of transmission lines for short-term use and, hence, a discouragement to the short-term market, including power exchanges.

So, a tariff structure should maintain a balance between the two. To my mind, a reasonable proportion of long-term to short-term contracts seems to be three to one in favour of the former. Hence, it may be desirable to give a signal for this in the transmission tariff. Which means that a slightly higher long-term open access tariff than short-term would give the desired direction to transmission investments. When electricity is transmitted from point A to B, the losses in electrical energy are not the same as when transmitted from B to A. It is also not the same when electricity is transmitted for the same distance on any other part of the network. This makes the task of fixing electricity tariffs difficult, since at any given time, the transmission losses are different. But, in order to take commercial decisions, it is important that the transmission tariff is known upfront. Hence, the idea mooted by some leading institutions of dividing the geographical area of the country into cells with different transmission tariffs depending on losses may be a good idea. This has been discussed in the past as the ‘postage stamp’ system of transmission tariff.

In order to facilitate electricity markets, the tariff structure should be such that before a trader decides to bid in a power market, the transmission tariff is available to him upfront. The main impediment to this is the issue of transmission losses. We need actual loss data to estimate future losses and the value of a stamp should be declared for the next one or two quarters, periodically. In case of any deviation from the estimated losses, this can be adjusted in the subsequent quarter without causing any loss to the transmission company.