Transmission network cost allocation with nodal pricing approach based on Ramsey pricing concept

This study presents a new method to allocate electricity transmission costs from nodal pricing viewpoint based on Ramsey pricing concept. Nodal pricing method is the most popular method of transmission pricing, which is based on the difference between marginal cost prices at nodes in transmission systems. The main drawback of this method is that it is not able to produce enough revenue to recover the total transmission network costs. To solve this problem, the marginal prices can be adjusted in such a way that nodal pricing can recover the total transmission costs. From economists´ point of view, if the marginal cost prices (first-best prices) do not satisfy other economic criteria, the second-best prices can be achieved by maximising the social welfare subject to budget constraint. The latter pricing approach is called Ramsey pricing which is varied in proportion to the inverse of demand elasticity. A new transmission cost allocation method based on the nodal pricing approach is proposed, in which the marginal prices are controlled by Ramsey pricing concept based on the inverse proportionality of price elasticity. The proposed method is implemented on IEEE 24 bus test system and the obtained results are reported. To show its validity and superiority, the necessary comparison is made with one of the relevant references.