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Contractual Framework for the Devolution of System Balancing Responsibility from the Transmission System Operator to Distribution System Operators

Author

Listed:
  • Kim, S.
  • Pollitt, M.
  • Jin, Y.
  • Yoon, Y.

Abstract

The goal of this research is to trigger the devolution of the system balancing responsibility entirely belonging to the transmission system operator (TSO) to several local distribution system operators by fairly allocating system balancing cost based on a cost-causality principle. Within the devolved system balancing scheme, distribution system operators (DSOs) have appropriate motivation for reducing the variability and uncertainty caused by units in their own area. As the number of renewable electricity sources (RES) being connected to the local distribution system increases, it would be advantageous for the TSO to share the increasing burden of the system balancing responsibility with multiple DSOs. To achieve this, we suggest that, first DSOs be designated as the representatives of their own jurisdictions with primary economic responsibility for balancing payments that are originally charged to each energy market participant. Second, this research proves that a cost-causality based cost allocation scheme(CC-CAS) is superior to an energy-amount based cost allocation scheme (currently widely used) in terms of economic efficiency. Additionally, to avoid the side effect that a DSO with a large amount of RES may face a high and risky balancing payment under the CC-CAS, this research also proposes an optimal balancing payment insurance (BPI) contract which helps the DSO hedge the risks associated with uncertain balancing payments.

Suggested Citation

  • Kim, S. & Pollitt, M. & Jin, Y. & Yoon, Y., 2017. "Contractual Framework for the Devolution of System Balancing Responsibility from the Transmission System Operator to Distribution System Operators," Cambridge Working Papers in Economics 1738, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1738
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    References listed on IDEAS

    as
    1. Stefan Ambec & Lars Ehlers, 2016. "Regulation via the Polluter‐pays Principle," Economic Journal, Royal Economic Society, vol. 126(593), pages 884-906, June.
    2. Seung Wan Kim & Jip Kim & Young Gyu Jin & Yong Tae Yoon, 2016. "Optimal Bidding Strategy for Renewable Microgrid with Active Network Management," Energies, MDPI, vol. 9(1), pages 1-15, January.
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    Cited by:

    1. Anaya, K. & Pollitt, M., 2018. "Reactive Power Procurement: Lessons from Three Leading Countries," Cambridge Working Papers in Economics 1854, Faculty of Economics, University of Cambridge.
    2. Michael G. Pollitt & Karim L. Anaya, 2021. "Competition in Markets for Ancillary Services? The Implications of Rising Distributed Generation," The Energy Journal, , vol. 42(1_suppl), pages 1-2, June.
    3. Tangerås, Thomas, 2020. "Competition for Flexible Distribution Resources in a ’Smart’ Electricity Distribution Network," Working Paper Series 1351, Research Institute of Industrial Economics.
    4. Anaya, Karim L. & Pollitt, Michael G., 2020. "Reactive power procurement: A review of current trends," Applied Energy, Elsevier, vol. 270(C).
    5. Yi, Ji Hyun & Cherkaoui, Rachid & Paolone, Mario & Shchetinin, Dmitry & Knezovic, Katarina, 2022. "Expansion planning of active distribution networks achieving their dispatchability via energy storage systems," Applied Energy, Elsevier, vol. 326(C).
    6. Bert Willems & Juulia Zhou, 2020. "The Clean Energy Package and Demand Response: Setting Correct Incentives," Energies, MDPI, vol. 13(21), pages 1-19, October.

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    More about this item

    Keywords

    System Balancing Responsibility; Devolution Principle; Cost-causality Principle; System Balancing Cost Allocation; Risk Hedging Contract;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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