IEEE Power & Energy Magazine - July/August 2015 - 81

With advances in smart-grid technologies,
distribution pricing has a greater role in sending
economic signals to network users.
Marginal and incremental costs are not reflected in cost
allocation. Cost allocation is based on the peak conditions
existing in a year.
In Germany, historical cost of the last completed accounting
year is used both for the benchmark, which is the base for the
revenue cap in each five-year regulatory period and for starting prices. Cost components include depreciation, interest on
debt, return on equity, and cost for network losses. There is no
forward-looking component in the calculation. However, network operators can apply for investment budgets for planned
investment. The costs are socialized onto the end users.
In Spain, access tariffs for transmission and distribution
networks are set by the government, taking into account
recommendations from the Spanish regulatory body, the
Markets and Competence National Commission (CNMC).
The CNMC tariff methodology is based on assigning costs
to consumers according to the cost-causality principle. Thus,
network costs are first allocated to energy and capacity, taking
into account the results of a reference network model. After
that, energy and capacity costs by voltage level are assigned to
different time periods: energy costs are assigned proportionally to energy consumption, and capacity costs are assigned to
specific hours in the year (between 876 and 1,500 hours) with
the highest demand in each voltage level. Finally, for each
time period and voltage level, energy costs are allocated to
consumers according to their energy consumption and capacity costs based on their peak demand in the corresponding
time period. A cascade network model is used to assign the
costs of the different voltage levels between the consumers
connected to the different voltage levels. Commercial costs
are assigned as a fixed charge per customer, and other costs
are assigned to create as little distortion as possible.
In Chile, distribution networks are assumed to be designed
to supply under peak demand condition, so the average cost
of the required efficient infrastructure to supply that demand
is used for charging calculations. Energy valuations are only
needed for the purpose of calculating distribution losses to
be paid by demand.
In China, there is no locational pricing. However, for the
generation side, a benchmark price system is used to determine the price of newly installed generators.

What Cost Allocation Methods
Are Used in Your Charging Methodology?
In the United Kingdom, for EHV networks the LRIC charging model allocates long-run incremental costs based on the
distance of the traveling paths and the degree of their utijuly/august 2015

lization for power injection and withdrawal at every single
node of the system. For FCP the allocation of future cost is
averaged within each network group. At the HV/LV level,
the DRM charging model allocates years-ahead cost based
on postage stamp.
In Brazil, inside each voltage level the allocation is based
on the postage stamp. Among the voltage levels, the LRIC is
used for allocating the allowed revenue.
In India, the network cost allocation is based on the costof-supply principle. The network costs are initially classified based on the type of costs involved-that is, whether
they are demand, energy, or customer related. These costs
are allocated on the basis of contribution of individual
customer categories on each type of cost. Actual customer
costs are a reflection of the proportion of the number of
customers connected to the system in each category. The
electricity price is similar throughout the state for a given
customer category. The pricing scheme is very close to a
postage stamp method.
In Germany, all network costs are socialized. The network charge is a postage stamp in each voltage level. Only
load pays the charge; the generation charge is zero. Distance
between feed in and consumption is irrelevant. There is
regional differentiation because the charges are calculated
for each network of which there are some 900. Cost from
higher voltage levels is passed on to lower levels and finally
to consumers.
In Spain, as in Brazil and Germany, a postage stamp
method is implemented inside each voltage level. The distance between generation and consumption is irrelevant.
In Chile, a postage stamp scheme is used inside each
voltage level, with differences only arising depending on the
density of the area served and whether networks are underground or overhead.

Is Demand Treated the Same
as the Generation? If Not, Why They Are
Treated Differently?
In the United Kingdom, LRIC treats demand the same as
generation. Both are examined for how they will impact the
present value of future reinforcement at each node of the
EHV network. For FCP and DRM, demand and generation
are treated differently. The FCP generation charge is based
on statistical generation growth, which is lumpy in nature,
and its cost allocation is based on average cost pricing. The
FCP demand charge is based on gradual demand growth,
and its cost allocation is based on a marginal approach. The
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