Nodal Pricing and Transmission Losses: An Application to a Hydroelectric Power System

Since January 1, 1997, the wholesale electricity market in the United States has been open to competition. To satisfy the reciprocity requirements imposed by the Federal Energy Regulatory Commission, Hydro-Quebec, a Canadian utility, made its transmission grid accessible to third parties. Under the current regulation, transmission losses are taken into account through a single, constant rate; location and time of use play no role. Hydro-Quebec generates most of its electricity from hydro resources. Long high-voltage power lines link production in the North to consumption centers in the South, where there are interconnections with neighboring areas. We develop an optimization model that allows us to calculate nodal prices on the basis of the opportunity costs of exports. Hydro resources and interconnections with neighbors tend to equalize nodal prices between peak and off-peak periods. However, transmission losses give rise to large price differences between the northern and the southern regions. That the price differences are not taken into account under the current regulation has implications for siting new power stations.(This abstract was borrowed from another version of this item.)