Value Decentralized Power by Getting the Prices Right

The objective of the future electricity system should be to optimize efficiency of the use of electrical energy and the production and distribution of electricity. Regulatory commissions must quantify the benefits of dispersed power (and efficiency and storage) and develop pricing mechanisms and incentive programs that take these into account.

Pricingwill influence the shape of the future electric system and perhaps the size of the future power plant. At the transmission level, the Federal Energy Regulatory Commission (FERC) has been neutral on the pricing strategies, so long as the system adopted is applied equally to all suppliers.

The existing transmission system uses"pancake" pricing. The marketer is charged an additional transmission fee each time the electricity crosses a utility’s jurisdiction. Since at present transmission systems are under local-utility ownership, this means the cost of transporting electricity long distances is quite high. Such a pricing system favors local generation.

The new regional transmission authorities emerging under FERC rules are adopting three types of pricing.

Postage Stamp Pricing
"Postage Stamp" pricing, so named because it is similar to the way the U.S. mail system is priced. The transmission charge is the same whether the electricity goes a few feet or a few hundred miles. This system is the most favorable to long distance electricity traffic.

Mileage-based Pricing
The second is based on miles traveled. This favors more dispersed, local generation.

Location-based Pricing
The third major system is called location-based marginal pricing(LBMP), or congestion pricing. Here the price of transmission is based, not only on the cost of the transmission lines, but on the availability of capacity. The laws of physics dictates that electricity rarely travels along the contract path. The owner of a power plant in Montana might sell power to the owner of an office building in Seattle, but the electricity generated in Montana may well go toward Los Angeles because of the physics of electric flows along the integrated electric grid. One analysis concluded, "a power transfer from Indiana to New Jersey would produce flows over the lines of more than 20 different utilities and power pools. Less than half of the transferred power would flow over what would appear to be a relatively direct route."

LBMP,unlike any other pricing system, takes into account these loop flows of electricity caused by the varying congestion levels of transmission lines. Pennsylvania, New Jersey and Maryland’s transmission pool adopted LBMP in 1998. It computes the marginal cost of transporting electricity at 1,600 locations in its region. When congestion occurs, prices on the customer side of the transformer can be considerably higher than prices on the other side. This system favors more dispersed generation.

The Texas Public Utility Commission has endorsed the principle of congestion-based pricing in its investigation into distributed generation by ruling that distribution charges should be near zero for areas with excess distribution capacity but should be high in areas with congested distribution facilities. "Making customers pay the full incremental cost of distribution," Public Citizen argued in its comments to the Commission, "will provide an incentive to make more rational decisions about the deployment of distributed resources."

Pricingstrategies that reflect the true costs of distribution will encourage the siting of distributed generation resources when and where they are most needed.

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