Duff & Phelps Credit Rating Co. has released a report advising that a properly structured plan for securitization of stranded utility investment should address third-party credit risk.
Loss Modeling in T&D Systems: Is $25 Billion Worth Losing?
be another effective approach. Such modeling permits the deal ticket entry screen to allow for inclusion of loss parameters based on different loss modeling calculations. For example, a pull-down menu might allow the trader to model losses using:
- A static loss percentage for the entire control area (this is the easiest method of handling losses during deal entry);
- Seasonal loss percentages;
- Energy payback schemes (also referred to as 7-day payback or 168-hour payback schemes); or
- A distribution factor matrix to compute different losses for each combination of points of receipt (POR) and points of delivery (POD).
In addition, some control areas require that traders provide for losses during the same hour that they schedule the energy, while others require traders to map the lost megawatts using a completely separate electronic tag. Others allow procurement of losses from third-party independent power producers and delivery of them to points in the grid other than the POR/POD listed on the main transaction. It is therefore very important to understand how the counter-party (in this case the ISO/Control Area/Transmission Provider) will require payment for losses. By mapping the business processes of interacting with each central market entity, it will be easy to have an IT platform automate most of that interaction.
Back Office Systems Accounting Techniques
Power losses are associated with all wholesale transmission service. The transmission provider is neither obligated to provide power losses, nor is the central market going to pay for the losses. The market participant ends up paying for these losses charges. It is especially important to ensure that back office systems track losses and account for them accurately, so there are no surprises with the monthly invoice from the control area. The ISO or RTO may have different schemes for recovering loss costs. Some ISOs recover losses through the marginal loss recovery mechanism, while others allocate losses based on a load weighted ratio (i.e., you pay for losses as a percentage of your serviced load as a ratio of the entire ISO system load), and yet others use concurrent energy payback schemes.
That is why there should be a feedback loop between back office invoice and front office loss parameters. The trader makes a trade based on interpretation of the loss charges in the transmission tariff document. That number may not always be the same as the total charge from the control area that makes its way into the month-end invoice. Loss percentages may be adjusted because of a more recent power flow run of the control area, or they could be adjusted based on payback charges, for example. Market participants need to know when there is a change in loss charges, so it is important to provide for the communication of these changes.
Some central markets allocate loss charges by using a load-ratio adjusted factor. In situations like these, risk management systems or transaction review systems have to deduct the loss costs from the identified bid-ask spread.
Perspective on Losses
Losses in the transmission and distribution system are inevitable, subject only to the laws of physics. However, these losses have