Once the revenue requirements are established they should be converted into tariff systems. This session explains the major economic principles of electricity pricing and the general pricing models using average and marginal costs. Moreover the session explores the major pricing models for the electricity activities including: generation, transmission, distribution and retail activities. * Pricing principles : economic efficiency - cost recovery * General pricing models : average cost pricing - marginal cost pricing * Cost allocation issue * Pricing for different activities in the electricity industry : generation pricing - transmission pricing - distribution pricing - retail supply pricing

1. Training on Regulation A webinar for the European Copper Institute Webinar 8: Electricity Pricing Dr. Konstantin Petrov / Dr. Daniel Grote 9.2.2010

2. Agenda 08/02/2010 b) Marginal cost pricing a) Average cost pricing 2. General pricing models 3. Cost allocation issue 1. Pricing principles 4. International Examples

11. 2. General pricing models Marginal Cost (MC) pricing vs. Average Cost (AC) pricing 08/02/2010 Marginal Cost Pricing Average Cost Pricing Allocative Efficiency High Relatively low (not optimal), size of in-efficiencies depend on elasticity of demand Cost Recovery Company not financially viable, adjustments needed to MC tariffs (government subsidies) Ensures financial viability of regulated firm, cost recovery results automatically from the cost allocation, eliminates economic profits provides ‘fair’ rate of return Efficient Regulation Depends on the regulatory role in the tariff setting process. Administration and compliance cost of MC pricing may be relatively high Depends on the regulatory role in the tariff setting process Transparency and Simplicity Low – MC pricing concepts may apply sophisticated modelling High – AC pricing easily understood by users Non-Discrimination High – but also depends on adjustments for cost recovery Variable – depends on the rules for cost allocation and tariff setting Implementation in Practice Used to provide short and long-term locational signals, may require sophisticated modelling Usually used with energy and demand charges differentiated by voltage level

13. 3. Cost allocation Tariff design issues 08/02/2010 Possible levels of differentiation of tariffs Time-of-use Fixed and variable elements Uniform charges (postage stamp) Locational charges Voltage level Two-/ multi-part tariffs Peak load pricing Energy, demand (capacity) charge Generation – load split Charges for connection, network, meter etc. Payment liability Type of service Geography Household, commercial, industrial,… Type of customer

17. 3. Cost allocation Example: Distribution Pricing Optional Connection cost Depreciation Return on assets Operation and maintenance Purchased losses Transmission services Ancillary services Energy dependent costs Network 1 - 110 kV Network 2 - 35 kV Network 3 – 6 /10 kV Network 4 – 0,4 kV Network 1 Network 2 Network 3 Network 4 Metering / Billing Connection Connection Network costs Cost types Demand dependent costs Network 1 - 110 kV Network 2 - 35 kV Network 3 – 6 /10 kV Network 4 – 0,4 kV Metering / Billing Cost centres Customer tariffs Energy charge Demand charge Energy charge Energy charge Demand charge Energy charge Demand charge Use of network charge

20. 3. Cost allocation Energy vs. demand (capacity) charge 08/02/2010 Source: ETSO 2009 Energy and capacity related elements of transmission network charges in Europe in 2008

22. 4. International Experience 08/02/2010

23. Transmission Pricing – European Examples Germany: - Demand and energy charge by voltage levels - Payment liability : L Great Britain: - Locational charges (ICRP) - Payment liability : G&L Ukraine: - Single energy charge - Payment liability : L Norway: - Locational charges (SRMC) - Payment liability: G&L Spain: - Energy and demand charge - Payment liability : L Ireland: - Locational charges for G (reversed MW-miles) - Payment liability : G&L Greece: - Zonal charges - Payment liability : G&L

24. Distribution Pricing – European Examples Germany: - Demand and energy charge by voltage level - Payment liability : L Great Britain: - Standing, demand and energy charge - Based on LRMC (LRAIC) Portugal: - Demand and energy charge by voltage level - Payment liability: L Czech Republic: - Demand and energy charge by voltage level - Payment liability : L Austria: - Demand, energy and standing charge by voltage level - Time-of-use energy charge (peak / off-peak period) - Separate charge for network losses