You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.
Energy players can lose a lot more than their shirt if they fail to model transmission losses properly.
It's no secret that the delivery of electricity from the generator plant to the end user causes energy losses in the power system. Since 1960, losses typically have ranged from 8.5 percent to 10.5 percent of total generation annually. If the national average retail price for electricity is used, these losses have a value of $25 billion-a staggering sum that evaporates into thin air if not properly modeled, tracked, and accounted for. However, a close look at the information technology (IT) platforms of power marketers, off-the-shelf transaction management systems, and IT systems used by energy service providers shows that loss modeling in many of these product suites is very rudimentary, if not non-existent.
Each market has its own methodology for calculating losses. Market participants doing business in a given market must therefore have an intimate understanding of how different markets model losses, and in turn have an IT system capable of accounting for losses using the given market's methodology.
Most market participant IT systems reflect a rather casual regard for the importance of losses in the energy trading business. The financial implications of not properly accounting for losses can be significant.
The Cost of Losses
Energy losses in the transmission and distribution (T&D) systems must be replaced by additional generation resources. Two factors determine the cost of the system losses: the initial cost of energy used to generate what is eventually lost, and the cost of the added generation needed to replace that loss. The former is often referred to as the energy cost of losses, and the latter cost is often termed a demand cost. Both are expressed in $/kW. The demand cost is the marginal cost of additional capacity in both generation and transmission/distribution facilities needed to provide for the system losses.
The cost factors for power loss replacement are the same as those for the basic energy service-capital, fuel, and operations and maintenance components. Usually, transmission customers pay for losses on a system-wide or zonal-specific $/MWh basis, depending on the system variable operating costs. Traders conducting wheeling transactions can either pay for the losses, or they can supply extra power to make up for these losses. Similar to transmission losses, the energy lost in the distribution system must be supplied by the generators at the system variable operating costs.
In 1996, Oak Ridge National Laboratory developed estimates of ancillary service costs using data, assumptions, and analyses from twelve U.S. electric utilities. The estimates show aggregate costs of ancillary services ranging from $1.50 to $6.80/MWh, with an average of $4.15/MWh for the utilities sampled. The power loss replacement is the most expensive service, accounting for 30 percent of the total ancillary service costs. Thus, the energy losses in the T&D system had an average economic value of $1.25/MWh in 1996 dollars.
According to the Energy Information Administration, two-thirds of transmission losses occur in the more than 2.6 million miles of transmission and distribution lines that make up the national transmission system