European transmission tariff harmonization: A modeling analysis

The Single Electricity Market (SEM) target model envisages zonal market price coupling across Europe by 2014 as well as harmonization of transmission tariffs of the coupled countries. To date the majority of EU countries have uniform transmission charges with the exceptions of a few countries, which have geographically varying tariffs. This paper presents a robust modeling methodology for evaluating transmission charging arrangements and analyses two options for transmission pricing, namely uniform and locational transmission charges, by evaluating the economic efficiency of each tariff and how it affects integration of low-carbon energy sources. Our modeling framework combines investment and operational wholesale power market models with models of transmission investment and charging. We have used our methodology to compare the development of the Great Britain electricity system to 2030 under the two different charging regimes. Our analysis demonstrates that moving from the current locational to a uniform transmission charge would incentivize generation to locate in more remote parts of Great Britain. This in turn would drive significantly higher transmission investment costs and losses leading to reduced social welfare. At the same time, we find no significant difference in performance between the two charging regimes in terms of CO2 emissions and the achievement of the UK target for 30% of renewables in electricity consumption by 2020.