The current ETSO ITC Model and possible development

The current ETSO ITC Model and possible development 1. Summary The present model for inter-tso compensation for transit (ITC) was introduced in 2002 and has been modified step-by-step from year to year. In 2005, as in 2004, there are 20 ITC parties representing 30 signatory TSOs. The total amount of compensation is estimated to be 370 M. The ITC Agreement is a major step forward towards a single European market in electricity. Progress achieved includes the abolishment of individual fees both for transits (Pancaking) and explicit fees for market actors (Export Fees). Two further points in the model s favour are that it is based on a voluntary agreement and after three years of experience and improvement, it is widely accepted by the participants. The model is also transparent, i e it is understandable and can be checked by the participants. It is in line with and reflects the aims of the objectives of the Directive and Regulation. It is also sufficiently flexible to be further evolved according to Guidelines expected to be published by the European Commission on this issue. Efforts taken to check the results of the present model using more detailed models suggest that an unequivocal and doubtless solution does not exist. This is due to the physical properties of transmission systems and their independent development under different political and economic frameworks Section 2 of this report describes the model step by step, outlines points for which improvements have been considered and explains results expected from more detailed models. Section 3 describes the routines and timetables for its administration. 2. The present ITC model The ITC model is a two-step model which: 1) Calculates compensation for each TSO and thus the total fund. Compensation is based on regulated costs for assets and transmission losses on the horizontal network for each TSO, multiplied by a simple transit key. 2) Finances the fund Financing is mainly claimed from the TSOs on a potential causation basis. A small part is covered by a fee on declared imports of electricity from neighbouring perimeter countries not party to the ITC Agreement. 2.1 Compensation (Cost claims) Each ITC party is compensated according to a cost claim based on regulated costs for assets and transmission losses on the horizontal network for each TSO, multiplied by a transit key. Transit is defined as the hourly minimum of export and import for an ITC party, where export and import are the sums of physical flows (measured values) on all exporting lines and all importing lines respectively. The values are accumulated and reported each month.

The model compensates (third party TSO) transmission systems for transit resulting in export from a first TSO area and import in a second area. It is assumed that the exporting and importing areas themselves derive sufficient benefits (from the trading transaction and from national grid tariffs) and do not require any extra compensation. The transit key is the quotient of transit and transit plus consumption. It is calculated monthly where the consumption is taken as the official annual value of the national (or ITC area) consumption for the previous year (e g taken from official statistics or annual reports) divided by 12. Possible future development The definition of transit may appear to be simple. However it has been shown to be practical. In the case of loop flows at a given border the present model assigns transit (and compensation) to both adjacent parties, as it is not possible to identify which party is hosting transit. In this respect definitions of transit and the transit key are not perfect accurate, but, when introducing current mechanism, the involved parties agreed that these definitions lead to reasonable, transparent and comprehensible results. Developments so far considered within ETSO have been to try to identify models where compensation of transit reflects increases and decreases of the prevailing flows in each element of the grid of the host TSO. Such analyses need to be based on more detailed data i.e. recorded situations and the models required are much more complex. Investigations so far indicate that it is doubtful that an unequivocal solution exists. Moreover, although it implies some degree of simplification, the transit key method is still used, even in some complex models. The horizontal network (HN) is defined as the part of the overall transmission network, which potentially transports transits. A standardised auditable procedure for defining the horizontal networks is applied. Grid elements in the overall transmission network are included if they transmit at least 1 MW in at least one of a series of DC load flow calculations performed on an empty network where MW is injected in and extracted from each pair of tie-lines in turn (see Appendix 1). In general only voltage levels of 220 kv and above are included in the horizontal network. HVDC interconnectors are included if they are regarded as a part of the TSO grid, but merchant interconnectors are excluded. However the cross-border flows on both sub 220 kv interconnectors and merchant HVDC links are included in the financing calculations as described in section 2.2. Possible future development The horizontal network procedure as such is regarded as satisfactory. However, some smaller TSOs use sub 200 kv for transmission and therefore, in exceptional cases, these voltage levels are also included according to a specification (see Appendix 2). We have already seen that likely future member countries in the ITC scheme, will almost certainly raise new claims to include lower voltage levels which, although justified, do not fit the limited specification of Appendix 2. The challenge then will be to find a new more satisfactory auditable procedure. 2 / 11 25 June 2005

Regulated costs are specified by each TSO individually and include costs for both assets and transmission losses. The specific values shall be the same as the costs accepted by the national regulators for the domestic transmission access tariffs. The total costs for the horizontal network will of course only represent a part of the costs for the entire network. The asset costs shall include costs for depreciation, yield, operation and maintenance, but exclude costs for ancillary services. Possible future development The costing of assets and losses will have to comply with to the requirements in the Directive and Regulation. The great variations in regulatory practice in Europe produce regulated costs, which vary significantly between countries. This has led to discontentment in countries with lower regulated costs at having to pay for transit at higher rates. At the same time the argument for regulated costs is that there should be no discrimination between national and international (transit) grid users. For 2005 it was envisaged that the new EU regulations would apply and that the costing of the horizontal network and losses would be based on long-run average incremental costs (LRAIC) instead of on regulated values. However, ETSO s attempts to define standard costs or to interpret LRAIC, using replacement costs for assets, have also shown high and widely diverging cost levels. Similar attempts to use regional market prices for losses have also proved difficult. The main challenge is to obtain from regulators and accounts auditors a more formal validation of asset and loss costs. 2.2 Financing the fund When describing how the fund is financed, it is necessary to define different types of parties and countries: ITC Party A country or control block which is party to the ITC Agreement. Internal ITC Parties An ITC Party not having any electrical border to any Perimeter Country. Perimeter Country A country (control block), which is not party to the ITC Agreement, but which has an electrical border to an ITC Party. Edge Country An ITC Party which has at least one electrical border to a Perimeter Country. The fund is financed by two components: The injection fee for perimeter countries to the ITC agreement area. The fee is 1 /MWh based on the declared export from the perimeter country to the ITC area. It is extracted from players using the border interconnectors. Payment based on net flows between the ITC parties finances the rest of the fund. The net flow is calculated from hourly physical (measured) values. For internal ITC parties, the hourly net flow is the absolute value of the total import flow minus the total export flow. For edge countries modified rules apply as described in Appendix 3. 3 / 11 25 June 2005

The basic idea is that the flows from perimeter countries are not counted in the net-flow calculation for the edge country if the edge country is a net importer from both the ITC are and the perimeter country, or if it is a net exporter to both. In other cases the net flow is set to zero if the net exchange with the perimeter country is greater than the net exchange with the ITC area. Possible future development This second step of the model, payment with respect to causation, is a good compromise. It assumes that all physical net imports and exports can potentially cause transit for one or several other TSOs. It is not possible in a meshed network to unequivocally identify the responsibility for power flows based on physical principles only. Certain assumptions are always required. Other methods have been examined, but further analysis is necessary before any proposal can be made. Regardless of the chosen model, the treatment of perimeter countries presents some difficulties: The existence of the injection fee for traders on declared imports was easily justifiable in 2002, when the same fee was applied both inside and at the borders of the scheme. But it is less easy for traders to understand subsequent to the removal of this fee internally. On the other hand, no injection fee would grant a free ride for users in perimeter countries thus discriminating against users within the ITCarea. Already the 1 fee is lower than the average price per net flow within the scheme and some ITC Parties have declared that it would be economically advantageous for them to leave the ITC scheme and instead become a perimeter country. It is questionable however whether the Regulation allows for this possibility. The assumption that export and import are equally responsible for transit costs does not fit with the non-symmetrical application of the perimeter fee. The emergence of other ITC schemes (e g in SEE) bordering to the ETSO scheme creates different categories of perimeter countries with resulting interface difficulties. 3. Routines and timetables The routines for the ITC Agreement so far can be divided up into three periods, ex-ante preparations, monthly settlement, and final settlement. 3.1 Ex-ante preparations This phase comprises the following activities and starts during the spring of the year (n-1) prior to, and finishes preferably in good time before the start of, the agreement period, year (n). Collection and calculation of the horizontal networks The French TSO RTE has preliminarily performed this task so far for most parties. In a few cases the parties themselves have performed it. The collection of the horizontal network from the parties and the calculations and verifications have started in the spring and taken about 3 months totally. 4 / 11 25 June 2005

Costing of the horizontal network and losses After the horizontal networks have been defined, the parties submit to the ETSO Secretariat the total costs for the assets and transmission losses in their horizontal networks. In the autumn 2004 a peer-review audit was arranged to verify, in some cases, that the submitted values were in fact decided by the Regulators. Collection of ex-ante net-flow data The parties send to the ETSO Secretariat historical hourly measured values of net flows for a pre-defined 12-month period, typically 1 July year (n-2) to 30 June year (n-1). Declared imports from perimeter countries are also sent for the same period. Preparation of the ex-ante spreadsheet Using the above data, the ETSO Secretariat calculates an ex-ante spread sheet, which shows the estimated cost claim, contribution to the fund, and net result for each ITC Party as well as the total amounts. A complication so far, which has resulted in last minute negotiations, concerns a reduction of the Swiss cost claim to compensate for the fact that a proportion of the Swiss interconnectors is not open to the market. In the current agreement this reduction was divided; Italy received half, and the other parties split the rest. The final ex-ante spread sheet is attached as an appendix to the ITC Agreement. Preparation of the ITC Agreement The Agreement is prepared by the ETSO Secretariat for signature by the parties before the start of the year. 3.2 Monthly Settlement Supplement to the ITC Agreement there is a document, the Business Process Description (BPD), which describes responsibilities and reporting routines for data and calculations for the monthly settlement. Two TSO:s, RWE and ETRANS (soon to become Swissgrid) act as data administrators and they have also been given this role for the ETSO ITC Agreement, for which they also perform settlement calculations. RWE is responsible for northern Europe and ETRANS for southern Europe. Each month the parties send data to their Data Administrator which initiates the monthly settlement process according to the following timetable: Notification Day within 10 business days after the end of each month, each ITC Party faxes a Notification Statement to the Data administrator with details of his net export, net import, declared import from perimeter countries and transit for the previous month. Compilation Report within 15 business days after month end the Data Administrators check the received data and post it, protected by a password, on the ETSO web-site in a report to be checked and approved by each ITC Parties contact person. The Data Administrator settles any disputes, performs calculations and submits them to the ETSO Secretariat. 5 / 11 25 June 2005

Settlement Notification within 20 business days after month end, the Secretariat posts the settlement result on the web-site to be approved or disputed by the contact persons within 2 days. Formal Approval within 23 business days after month end the contact person shall then sign and fax the approved version, after any correction, to the Data Administrator. Billing According to the final approved Settlement Notification the compensation is netted (so that each ITC Party is either a sender or receiver) and converted into bilateral bills. Bills are then sent by the ITC Parties themselves (the senders) according to their internal routines. 3.3 Final settlement Figures collected during the year are finally checked to see whether over or under funding has occurred. If so an additional settlement procedure is performed to correct this. In addition any necessary capping of the total fund is also taken care of. These procedures are defined in the Agreement and should be completed by the end of March of year (n+1). 4. Final comments The voluntary agreement to use the current mechanism was reached because it gives reasonable and comprehensible results. After three years of experience and improvement, the present model is widely accepted by the participants. It is more transparent than other models that are currently being considered for the future. Further improvements have been suggested to incorporate the requirements specified in the new Directive on common rules for the Internal Market in Electricity and the Regulation on conditions for access to the network for cross-border exchanges in electricity. First results based on more detailed load-flow calculation show that such approaches are no guarantee for better more cost-reflective results. Comparison with the current model has so far shown that the compensation achieved with simplified models is reasonable. It is therefore debatable whether a supposed more complex load-flow based model produces a better result than the current model. Complex models have the additional drawbacks of requiring input data in the form of national load-flow scenarios and these have proved cumbersome to collect. Also the models are not easily understood and therefore the results are not transparent. Some of the difficulties experienced, e g costing and treatment of perimeter countries, are partly independent of the model itself. As a result it has been suggested within ETSO that it could be sensible to continue to apply a simple model for ITC settlement. A simple model is defined as one that uses input data based on measured export and import flows (as does the present model) rather than load-flow scenarios. The present ITC model, modified to satisfy the Directive and Regulation, could provide the basis for such a simple permanent model. More complex models could serve in the background, for example to calibrate parameters to be used in simpler settlement models or to verify that the results obtained are reasonable. 6 / 11 25 June 2005

Appendix 1 Procedure to determine the horizontal network 1. Principle - simulation of one-to-one transits The horizontal network for each country 1 is the set of grid elements whose flows are significantly influenced by transit. Its determination is based on the variation of flows on lines and transformers when adding a transit, i.e. a flow entering on a set of tie-lines and exiting through another set. Each country is studied independently. Tie-lines are modelled as the only external injections or extractions from the network of each country. It is impossible to simulate all possible transits through a network; as there are too many possible patterns and an infinite number of possible magnitudes. However, any transit through a country can be seen as a combination of several individual transits, called one-to-one transit. Each one-to-one transit is defined as a flow of MW entering a country on one tie-line to a neighbouring country and leaving the same country via another tie line, with no flows on all other tielines. For a country with N tie-lines, there are N*(N-1) possible one-to-one transits. If the flow on a grid element is significantly influenced by at least one of all the possible one-to-one transits, it isincluded in the horizontal network. A significant influence is defined as the absolute difference between the flows on the element with and without a one-to-one transit being above 1 MW for a transit magnitude of MW. (The model is further exemplified in Appendix 1.1) The simulation model used is a DC load flow on an empty network. 2. The procedure A simulation administrator is appointed to perform this task in co-ordination with the involved parties. Typically the procedure described in the 6 steps below takes about 2 3 months. Step 1 - The simulation administrator sends a first reference data set to each country (e g for UCTE, the UCTE recorded snapshot of xxth Jan 200Y, 10.30 am, or the final reference data set of the previous year). Step 2 - Each country validates its own network in the first reference data set. For this purpose only resistance and reactance for lines, and resistance, reactance and nominal power for transformers, need to be validated. Step 3 - The Simulation Administrator creates a final validated reference file for simulation. Step 4 - The simulation administrator performs the simulations of MW one-to-one normalised transits to determine the horizontal network for most countries. However a country can instead choose to perform its own simulation following the method described. Step 5 - The simulation administrator determines which lines and transformers are included in the horizontal network for each voltage level and calculates selection ratios for each voltage level: The percentage of line lengths included in the horizontal network, compared with the total length of lines described in the final reference data set. These percentages are calculated pro rata the reactances available in the final reference data set. Real lengths can be used instead when data is available. 1 Country is used throughout even though some ITC Parties have borders which differ from the national ones (e g Denmark is divided into two parties, and 2 Austrian control areas are part of ITC country Germany. 7 / 11 25 June 2005

The percentage of nominal power of transformers included in the horizontal network, compared to the nominal power of transformers described in the final reference data set. These selection ratios will be used in the cost procedure to calculate the asset costs of the horizontal network by multiplying them by the asset costs of the overall network for each voltage level. Step 6 - The simulation administrator, and countries who have performed simulations themselves, send the following results to the ETSO Steering Committee and to each (other) country: The final reference data set, The list of all the grid elements that are included in its horizontal network, The list of all the grid elements that are not included in its horizontal network, The total length of lines included in the horizontal network by voltage level and the sum of the nominal powers of transformers included in its horizontal network. Each country checks the results and sends any comments to the Simulation Administrator. 3. Auditability So far it has not been considered necessary to appoint an independent auditor. Since all concerned parties will receive all the results (horizontal network, cost of horizontal network) from each other, they will be able to check (audit) the results of the other parties to the contract. 8 / 11 25 June 2005

Appendix 2 Conditions for including lower voltage levels than 200 kv as exceptions in the Horizontal Network 1. Background As a general rule within ETSO, the horizontal network to be considered for transit compensation shall only include transmission voltage levels of 220 kv and above. Despite the fact that the networks of several TSOs include a substantial amount of lines of voltage lower than 220 kv, inclusion of them generally in the calculation of the horizontal network would create many practical difficulties. In most countries these voltage levels are regarded as distribution. However, a few countries usually with smaller transmission systems still use lines of voltage 110 190 kv significantly for transmission. Therefore it is permitted to make well-founded exceptions for these voltage levels. The ETSO Steering Committee must approve applications for such exceptions. 2. Physical or economic inclusion in the horizontal network The question of inclusion or not in the horizontal network can concern physical inclusion in the network model and/or economic inclusion in the cost claim. 2.1 Physical inclusion As in the case of merchant HVDC links the flows through certain 110 kv lines will have to be included in the physical representation, in order that the flows through the rest of the horizontal network will be correct. Examples of such exceptions are 190 kv lines which interconnect two ITC countries, or between ITC countries and other countries, and make energy exchange or transit possible. 2.2 Economic inclusion 190 kv transmission networks can be included in their entirety in the calculation of the horizontal network when the following conditions are satisfied: when there is not (and never has been) any significant transmission system at a voltage level between and 0 kv. Significant in this context is taken to mean more than 20 % (line length or MW.km). when transit in the 110 kv network represents a significant part (say more than 10%) of the total flow in the 110 kv network. Calculation of which part of such networks actually are included in the horizontal network is then performed in the same way as for the 0 and 220 kv networks. 9 / 11 25 June 2005

Appendix 3 Treatment of perimeter flows in ITC mechanism Background In the context of the ITC mechanism and perimeter flows, three kinds of country can be identified: Internal ITC countries (IC) these countries are party to the ITC agreement and have borders with other ITC countries only. Perimeter countries (PC) these countries are not party to the ITC agreement but have borders with at least one ITC country. ITC edge countries (EC) these countries are party to the ITC agreement and have borders both with at least one ITC country and at least one perimeter country. In the 2003 ETSO ITC mechanism, perimeter countries pay a fee of 1 /MWh to the ITC fund for declared imports to the ITC area. The neighbouring ITC edge country collects this fee from the importer. (So far no ETSO fee for export to perimeter countries has been applied.) In addition the perimeter flows are counted when calculating both transit (potential income) and net flow (potential payment) for the edge country. In connection with preparing the rules for the ITC agreement for 2004 some countries (including some new and potential ITC countries) identified flaws in this treatment of perimeter flows, as follows: If an edge country (e.g. Finland, Greece) imports simultaneously both from a perimeter country and from other ITC countries, the import from PC does not cause any transit in the other ITC countries. Why should it then be included in the net flow of the edge country? The same question applies for an edge country (e.g. France) exporting simultaneously both to a perimeter country (GB) and to other ITC countries. If an edge country (e.g. Poland, Finland in dry year) imports from a perimeter country and exports to other ITC countries, its contribution based on Net Flow (including perimeter flows, thus reflecting transits created in ITC and perimeter countries) can be smaller than the contribution that would be calculated without perimeter flows (reflecting transits created in other ITC countries only). The opposite would be expected. Solution Transit calculation for edge country: Perimeter flows must be included in the calculation of transit for the ITC edge country, to compensate this country for any transit resulting from trade between other ITC countries and perimeter countries. Net-flow calculation for edge country: In order to reflect only the transits created in ITC countries, the net flow calculation for the edge country should exclude the perimeter flow. It should also be adjusted to remain smaller than the net flow that would be calculated including perimeter flows. This is done by also excluding any resulting transit component in the same direction. This is illustrated by eight simple examples below, which show different exchange patterns between the ITC edge country (EC) and the rest of the ITC area (ITC) and perimeter countries (PC) respectively. For each example the modified net flow (NF) is shown. 10 / 11 25 June 2005

Calculation of net flow (Examples 1-4) Net flow (excluding PC flow) in export direction (from ITC 1 to ITC). Subtract PC contribution to transit through ITC 1, if in export direction (from PC to ICT 1 ) 1) NF = 60 (= ) 2) NF = 0 (= ) 3) NF = (= 0) 4) NF = (= 0) ITC 1 PC ITC Calculation of net flow (Examples 5-8) Net flow (excluding PC flow) in import direction (from ITC to ITC 1 ). Subtract PC contribution to transit through ITC 1, if in import direction (from ITC 1 to PC) 5) NF = (= 0) 6) NF = (= 0) 7) NF = 60 (= ) 8) NF = 0 (= ) ITC 1 PC ITC 11 / 11 25 June 2005