ALLOCATING ENERGY WHEELING COST IN A DEREGULATED

ENVIRONMENT

K T. Akindeji*

* Durban University of Technology, Dept. of Electrical Power Engineering, 71 Steve Biko Road,
Durban 4000, South Africa. E-mail: kayodea@dut.ac.za

Abstract: Correct pricing of transmission services in a deregulated environment is vital to power

systems operation, security, and development. This paper presents a viable and economic method of
allocating energy wheeling cost for this purpose. The proposed method reflects the actual system
operating condition, therefore allow the transmission provider to recoup the fixed and operating costs
of the network. The paper includes test results on a 6-bus system and 24-bus model of Nigerian 330kV
power network.

Keywords: Energy Wheeling, deregulation, power flow.

1. INTRODUCTION political consideration could also play major roles in

The power industry has moved rapidly from regulated
convectional setup to a deregulated environment [1]. The
former existed as a monopoly, where the same company
generates, transmits and distributes electrical energy. All
electrical energy consumers were required to purchase
their energy from the local monopolistic power company
since there was no alternative. Some of the drawbacks to
this arrangement are operational inefficiency, unreliable
power supply, and wrong costing method. However, a
number of countries have implemented or are
implementing a free market power industry in recent years.
It is strongly believed that deregulation will have profound
important implications on technology within the electric
power industry and the operation of industrial systems [2].
Deregulation changes how energy transaction and costing
are carried out in power system operations. While the
consumers are required to pay whatever price the regulated
utility offers, deregulation allows for negotiation between
the generating company (GENCO) and the distributing
company (DISCO). With this change, customers have the
option to purchase services and energy from different
sources. Therefore, in a deregulated power system,
transmission of electrical energy is treated as a separate
business to create a fair competition among producers of
electricity [1].
The general definition of wheeling is the transmission of
electrical energy from a seller to a buyer through the
transmission lines which maybe owned by a third party [3].
Pricing of transmission services plays a crucial role in
determining whether providing transmission services is
economically beneficial to both the wheeling utility and
the wheeling customers. However, it is important to realize
that pricing of transmission services, although a technical
issue is not wholly an engineering problem. Engineering
analysis which deals mainly with determining the
feasibility and the cost of providing transmission services
is only one of the many considerations in the overall
process of pricing transmission services. Market and
determining transmission prices.
Some existing pricing methods, such as postage stamp,
contract path, boundary flow, line-by-line, megawatt mile,
are considered to be more suitable for applications in
vertically regulated utilities, where transmission access is
not open [4]. Generally, pricing of any service or product
without regard to political considerations, seeks to [5]:
• Increase customer value by providing a wider
variety of services and price options;
• Promote economic efficiency by ensuring that the
value of service and the cost of service are
balanced;
• Change customer consumption patterns where
appropriate to improve the utilization of existing
resources;
• Encourage service use for application where it is
the least cost option and discourage its use where
it is not.
Pricing transmission services to account for the above
might be difficult but becomes easy when necessary tools
and data for evaluating the economic impacts of providing
transmission services are obtainable. The proposed method
is a hybrid of the megawatt-kilometre and the short-run
marginal cost methods. The former recoups existing and
reinforcement costs while the later covers the operating
cost of the system. In section 2, the proposed method as
well as its components are presented with explanations.
Section 3 shows the applications of the proposed method
on a 6-bus network and the 24-bus model of Nigerian
330kV power network. Discussions and conclusions
follow in section 4.
2. PROPOSED METHOD
2.1 Short –run marginal cost (SRMC)
In the short-run marginal cost, the marginal operating cost
of the power system due to a transmission transaction is
calculated first. Marginal operating cost is the cost of
accommodating a marginal increase in the wheeling
transaction. When the objective function is a cost function,
the marginal costs are obtained for each node of the system
with the aid of an optimal power flow (OPF) for small
changes around an operating point. As the srmc method
applies to the short run, investment costs remain constant
and can hence be considered as fixed costs [6]. The srmc
takes into account only the operating cost of the power
system. This operating cost includes fuel cost, cost of
transmission line losses as well as system constraints. In
order to incorporate all these in any transaction, an OPF
solution of the problem is required.
An OPF solution gives the active and reactive power
generated and consumed at each bus and the nodal prices.
The nodal prices are of special interest because they reflect
the marginal generation and load at each bus. These prices
are also called locational prices and are found to be the
optimal prices, maximizing social welfare and taking
transmission constraints into account. They can provide
the right incentives to market players and to society [7].
The MATLAB Package (MATPOWER 3.2) was used to
solve the OPF problem. The OPF was solved before and
after the wheeling transaction. After these solutions were
obtained, the SRMC for the wheeling transactions were
found using equation (1).
𝑠𝑟𝑚𝑐 = ∑(𝐵𝑀𝐶𝑖 × 𝑃𝑖,𝑡𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 ) (1)
where:
BMCi = bus marginal cost of bus i
Pi,transaction = net power injected at bus i due to the wheeling
transaction. (Power generation at bus i after transaction -
power generation at bus i before transaction).
The expression in parenthesis in equation (1) was
computed in a tabular form for all generator buses and the
sum calculated to give the wheeling cost of the transaction.
Optimal Power Flow (OPF) Formulation: The objective
of the OPF is to minimize the operation cost for a given
transaction such that the power flow equations are satisfied
and no limit is violated. For a given power system network,
the objective is to minimize the cost function subject to
𝐹 = ∑𝑛𝑖=1 𝑓𝑖 (𝑃𝑔 ) (2)
where:
F = the optimal cost of generation
fi(Pg) = the fuel cost of the ith generator
n = total number of generators connected in the network.
The cost is optimized with the following power system
constraint;
𝑃𝑔 = 𝑃𝑑 + 𝑃𝑙 (3)
where:
Pd = the total load of the system
Pl , = the transmission losses of the system.
The power flow equation of the power network is given by
𝑃𝑖 (|𝑣|,𝛿)−𝑃𝑁𝑒𝑡
𝑖
𝑔(|𝑣|, 𝛿) = | 𝑄𝑖 (|𝑣|,𝛿)−𝑄𝑁𝑒𝑡
𝑖
| =0 (4)
𝑃𝑚 (|𝑣|,𝛿)−𝑃𝑁𝑒𝑡
𝑚
Pi and Qi are respectively calculated real and reactive
powers for PQ bus i; PiNet and QiNet are respectively
specified real and reactive powers for PQ bus i; P m and
PmNet are respectively calculated and specified real power
for PV bus m. |v| and δ are voltage magnitude and phase
angles of different buses.
2.2 Megawatt-km (Mw-km)
Megawatt-km method requires two power flow
calculations, one without the wheeling transaction and
another one with the wheeling transaction. The Newton –
Raphson technique (formulated in polar form) was used in
this work. The first step is to establish the base case for the
test systems. The Megawatt-km method requires that two
power flow programmes be executed successively, this
involves solving the power flow problem without
considering any transaction and computing the voltage
magnitude, voltage phase angle at each bus and the power
flow on each transmission line. The next step is to include
any available transaction one at a time. This requires that
the generator and load bids be included at the appropriate
buses. The Megawatt-km is calculated for every
transmission line by multiplying the MW flow on it by its
length in km for both power-flow cases. The wheeling cost
is thus obtained as;
𝐸𝐺 ∑(∆𝑀𝑊−𝑘𝑚)
𝐶𝑇 = ( )( ∑ 𝑀𝑊−𝑘𝑚
) (2)
8760
where:
EG = existing transmission cost (fixed)
8760 = number of hours in a year
Three options exist for calculating the impact of the
wheeling transaction on the power system network as
follows [8].
(a) The negative and positive changes in power flow (∆
MW) on all lines are added together. The wheeling cost is
correspondingly small and may have negative value. It
might not be economical because of the small or negative
value.
(b) The absolute value of changes in powers, │∆ MW│ are
added to obtain the wheeling costs. This might not be fair
because of the high cost.
(c) Negative ∆ MW changes are ignored and only positive
∆ MW are used in computing the sum of the changes in
MW. The option described in (c) was used in this work in
order to have an economical and fair wheeling cost.

2.3 The hybrid

The proposed method is a hybrid of the two methods

explained above. Considering the fact that a wheeling cost
should enable participants (buyers and sellers of electrical
energy) to make efficient wheeling decisions based on
operating costs, embedded capital, and power security [3].
The revenue collected through srmc method generally falls
far short of the cost of transmission reinforcements but
accounts for the operating cost. The mw-km on the other
hand, consider only the costs of existing transmission
facilities, and do not consider changes in production costs
as a result of required changes in dispatch and or unit
commitment due to the presence of the wheel.
Figure 2: Single-line diagram of 24-bus model of
Nigerian 330kv Network
3.1 Wheeling Cost Calculation for 6-Bus Network
Two wheeling transactions were simulated as follows and
applied to all the methods;
Transaction T1: 10 MW Wheeled from Bus 2 (Seller) to
Bus 6 (Buyer)
Transaction T2: 20 MW Wheeled from Bus 3 (Seller) to
Bus 6 (Buyer)

3. TEST RESULTS Megawatt – kilometre: In this case, the power-flow

analysis of the system was executed without the
A 6-bus system and 24-bus model of Nigerian 330kV transaction, this is referred to as the base- case and again
power network are used to demonstrate the applications of the power-flow was solved with the transaction. Tables 1
the proposed method. Four wheeling cost methods were and 2 show the power flow results with transactions T1 and
investigated and analysed. The 6-bus network consists of T2 respectively.
six buses and 11 transmission lines. The one-line diagram
is shown in Figure 1. The 24-bus model of Nigerian Table 1: Power flow result with transaction T1 on the 6-
network is a relatively large system with 24 buses bus network
including 7 generators, 23 loads, and 39 lines. The one-line
diagram of 24-bus model of Nigerian network is shown in Fr To L Base T1 MW- ∆M ∆MW
Figure 2. om (km) Case Branc km W -km
flow h flow
(MW (MW)
)
1 2 4.00 19.10 18.80 75.20 -0.30 -1.20
1 4 3.20 56.50 56.50 180.8 0 0
1 5 8.64 47.20 48.20 416.5 1.00 8.64
2 3 5.12 16.20 19.10 97.79 2.90 14.85
2 4 6.40 75.60 76.20 487.7 0.60 3.84
2 5 10.1 32.30 33.50 337.7 1.20 12.10
2 6 13.92 47.40 52.40 729.4 5.00 69.60
3 5 14.40 28.90 28.10 404.6 -0.80 -11.52
3 6 5.60 57.20 60.80 340.5 3.60 20.16
4 5 8.32 5.50 6.10 50.75 0.60 4.99
5 6 6.72 1.90 0.20 1.34 -1.70 -11.42
Figure 1: Single-line diagram of 6-Bus Network
Srmc: The OPF was first solved without any transaction,
the bus marginal cost and generation dispatched for each
generator bus were recorded. The available transaction
was included and the OPF was solved again. Tables 3 and
4 show the computation of the SRMC for the 6-bus
network.
Table 2: Power flow result with transaction T2 on the 6- Table 4: Wheeling cost for T2 using SRMC Method on
bus network the 6-bus network.

From To L Base T2 MW- ∆MW ∆MW- B Gener BMC Gener BMC Pi,trans BMCi
(km) Case Branch km km u ation ation *
action
flow flow before after
(MW) (MW) s Pi,trans
1 2 4.0 19.10 20.7 82.92 1.63 6.52
before after (MW)
action
Transa Transa
1 4 3.2 56.50 57.9 185.4 1.43 4.58 Transa ction Transa ction (N/h)
ction ction
1 5 8.6 47.20 49.7 429.6 2.52 21.77 (N/M (N/M
(MW) Wh) (MW) Wh)
2 3 5.1 16.20 15 76.80 -1.2 -6.14
1 112.5 0.49 128.73 1.19 16.23 19.31
2 4 6.4 75.60 75.3 482.1 -0.27 -1.73

2 5 10.1 32.30 33.9 341.2 1.55 15.62

2 159.8 0.52 165.00 1.36 5.17 7.03

2 6 13.9 47.40 53.8 748.3 6.36 88.53 3 80.0 0.60 80.00 1.45 0 0
𝑛
3 5 14.4 28.90 31.6 455.0 2.7 38.88 26.34
𝑠𝑟𝑚𝑐 = ∑(𝐵𝑀𝐶𝑖 × 𝑃𝑖,𝑡𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 )
3 6 5.6 57.20 53.6 300.2 -3.6 -20.16 𝑖=1

4 5 8.3 5.50 6.6 54.83 1.09 9.07

Srmc: Through the use of the OPF, the srmc methodology
5 6 6.7 1.90 0.8 5.04 -1.15 -7.73 was implemented as discussed earlier. The srmc of the
wheeling transactions was estimated by solving the OPF
for both the system with the transaction and the system
Table 3: Wheeling cost for T1 using SRMC Method on without the transaction in place. After these solutions were
the 6-bus network. obtained, the srmc was calculated.

B Gener BMC Gener BMC Pi,trans BMCi 4. DISCUSSION & CONCLUSION

u ation ation action *
s before after Pi,trans 4.1 6-Bus Network
before after (MW)
action
Transa Transa
Transa ction Transa ction
Four methods of wheeling cost were investigated on the 6-
(N/h) bus network, postage stamp, contract path, Megawatt-
ction ction
(N/M (N/M kilometre and short-run marginal cost. Two wheeling
(MW) Wh) (MW) Wh) transactions were also simulated and the wheeling cost of
each transaction calculated using the four methods. The
1 112.5 0.49 117.95 0.96 5.45 5.23 results are given in Table 5.
2 159.8 0.52 165.00 1.06 5.17 5.48 Table 5: Wheeling cost results for 6-bus network.
3 80.0 0.60 80.00 1.13 0 0 Transa Postage Contract Mw- SRMC Proposed
𝑛 ction Stamp Path km Method
10.71 N/hr N /hr N /hr N /hr N /hr
𝑠𝑟𝑚𝑐 = ∑(𝐵𝑀𝐶𝑖 × 𝑃𝑖,𝑡𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 ) T1 33.68 24.93 49.09 10.71 59.80
𝑖=1 T2 67.35 17.28 38.01 26.34 64.35

3.2 Wheeling Cost Calculation for 24-bus model of
Nigerian 330kv Network
Two wheeling transactions were simulated as follows and
applied to all the methods;
Transaction T1: 50 MW Wheeled from KAINJI (Seller)
to IKEJA WEST (Buyer)
Transaction T2: 70 MW Wheeled from AFAM (Seller) to
NEW-HAVEN (Buyer)
Megawatt – kilometre: Also, the power flow analysis of
the system was executed without the transaction, this is
referred to as the base- case.
The Megawatt-kilometre method gave the highest
wheeling cost for transaction T1while the postage stamp
method gave the highest for transaction T2. The srmc was
the least in transaction T1 and contract path the least in
transaction T2. These results for the two transactions
showed that the wheeling cost does not depend only on the
magnitude of power wheeled but also on distance between
the source and the sink, power flow in Megawatts and the
cost of the transmission facilities.
Based on the proposed methodology in this work, that is
the combination of Megawatt-kilometre and srmc
(Megawatt-kilometre covers the extent of use of the
network while srmc covers operating cost), the wheeling
cost for the two transactions are;
Wheeling Cost for T1 = 49.09 + 10.71 = 59.80 N/h
Wheeling Cost for T2 = 38.01 + 26.34 = 64.35 N/h
The wheeling cost for transaction T1 is quite higher than
any of the four but that of transaction T2 is lower than the
highest of the four. The result will also help the DISCO at
bus 6 to decide which GENCO to enter into a bilateral
contract with based on the cost of energy wheeling not
considering other factors.
4.2 24-bus model of Nigerian 330kv Network
Two wheeling transactions were also simulated and the
wheeling cost of each transaction calculated using the four
methods. Table 6 gives the wheeling cost for the two
transactions.
Table 6: Wheeling cost results for 24-bus network.
Transa Postage Contract Mw- SRMC Proposed
ction Stamp Path km Method
N /hr N /hr N /hr N /hr N /hr
T1 135.84 82.50 277.91 41.50 319.53
T2 190.64 161.00 110.92 57.28 168.59
The Megawatt-kilometre method gave the highest
wheeling cost for transaction T1, this is due to the long
distance (473km) between KAINJI and IKEJA WEST and
the fact that the transaction increased the flow on the lines.
The srmc gave the least accounting for the operating cost.
For transactions T2, the Postage Stamp was the highest and
the Megawatt gave the least, this was because of the short
distance (257 km) and that the effect of the transaction on
the power flow was negligible compared to that of
transaction T1.
The contract path was also high because the power
wheeled was the same as the maximum power along the
contract path thereby making the ration to be unity. Again
these results, as in the 6-bus network have shown that the
wheeling cost does not depend only on the magnitude of
power wheeled but also on distance between the source
and the sink, power flow in Megawatts and the cost of the
transmission facilities. Based on the proposed method in
this work, that is the combination of Megawatt-kilometre
and srmc the wheeling cost for the two transactions are;
Wheeling Cost for T1 = 277.91 + 41.62 = 319.53 N/hour
Wheeling Cost for T2 = 110.92 + 58.67 =168.59 N/hour
As obtained in the 6-bus network, the result shows that the
wheeling cost from the proposed method for transaction
T1 is higher than any of the four methods investigated but
that of transaction T2 is lower. The result reflects the
impact of distance that is the length of transmission lines
in the cost of energy wheeling in any power system
network.
The various impacts brought by the deregulation of the
power industry led to the unbundling of the services once
provided by the vertically integrated electric utilities. As a
result, utilities that provide transmission services are
separated from other functions in a typical power system.
Therefore, accurate wheeling cost is essential for proper
investment planning by the utility and the customers so as
to maximize overall social welfare. This work investigated
four wheeling cost methodologies, postage stamp, contract
path, Megawatt-kilometre and short-run marginal cost.
The report has been able to propose a viable and economic
method of allocating energy wheeling cost to cover cost
and provide incentive for investment in new infrastructure
as and when necessary. Two of the wheeling cost
methodologies, Megawatt-kilometre and short run
marginal cost were combined to form a hybrid method of
charging for wheeling transactions on power system
networks.
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