The Australian Energy Market Commission (AEMC) is analysing inter-regional charging for electricity transmission in the context of its work developing the role of a National Transmission Planner (NTP), given the potential for charging arrangements to support or hinder effective transregional transmission planning and investment. The ERIG1 report and the debate over an NTP generally suggest that new investment in interconnection may be a significant issue that is not dealt with well under the current arrangements, and hence that addressing any investment incentives problem associated with inter-regional charging is important.
We have identified three fundamental challenges facing any inter-regional charging system, including any system that might be developed for the Australian electricity market (NEM):
- Efficient incentives for network owners (TNSPs). TNSPs should have incentives to look for and implement efficient interconnection projects.
- Efficient locational signals. New “footloose” generation and load should have incentives to locate efficiently (i.e., the resource cost of connecting to and using the system should be reflected in its own internal profit calculations).
- Equitable cost allocation. The charging methodology should also address equity concerns by providing for an appropriate sharing of costs and benefits between interconnected networks.
The aim of this report is to describe international experience in addressing these challenges, and draw conclusions for Australia. We have examined three different systems: the ISOs/RTOs2 in place in the United States, the approach taken on continental Europe through the operation of an “inter-TSO compensation scheme, and the Nordic model.