Pricing Mechanism of China’s Trans-regional and Trans-provincial Electricity Trading

doi:10.4236/epe.2013.54B156

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Energy and Power Engineering, 2013, 5, 811-815

doi:10.4236/epe.2013.54B156 Published Online July 2013 (http://www.scirp.org/journal/epe)

Pricing Mechanism of China’s Trans-regional and

Trans-provincial Electricity Trading

Tian Xia1,2, ZhiYan Liu1 , Wei Xiong1, YongXiu He1

1School of Economics and Management, North China Electric Power University, Beijing, China

2Gansu Electric Power Corporation, Lanzhou, China

Email: [email protected]

Received March, 2013

ABSTRACT

With the large-scale development of Chinese electric power, the contradiction of China’s energy supply and demand

that reverse distributed is very prominent, therefore, promoting electricity trading is one of the important measures to

get optimized configuration of energy resources in nationwide. For the two kinds of trading method, the “power point to

the grid” trading and the “grid to grid” trading, this paper designed pricing mechanism model, and took one area as an

example, we analyzed the impact of the participants by using differen t pricing mechanism, and put forward reasonable

policy proposals for China’s pricing mechanism of trans-regional and tran s-provincial electricity trading.

Keywords: Trans-regional and Trans-provincial; Electricity Trading; Pricing Mechanism

1. Introduction

China’s trans-regional and trans-provincial electricity

trading has increased year by year. While with the scale

enlargement of the trading, some problems happened: the

low level of marketization, the imperfect price mecha-

nism, and the unified pricing mechanism which is diffi-

cult to meet the interests and the needs of different trad-

ing regions and different trading participants, etc. The

formation of scientific price mechanism has important

significance to promote the development of power trad-

ing.

Literature [1] researches the pricing problems of Con-

tract for Diff erences (CFDs) in th e No rdi c po w er tr ad ing .

Through integrating the power market in South Asia Re-

gional, examining the opportunities, benefits, and chal-

lenges, Literature [2] promoted a trans-regional power

trading scenario model of South Asia, in this model, the

trans-regional power trading price is determined by b id ing .

The studies in Literature [3] show that the convergence

of power price can be induced by cross-border and

trans-regional electricity trading, and the re-allocation of

resources in various countries can be promoted by the

optimization of exchange volume and exchange price.

Based on the Markal model, Literature [4] assess the

effectiveness of the trans-re gional power trading between

Thailand and Laos, and pointed out that Thailand is ex-

pected to gain benefit from the increased level of power

imported from Laos in terms of the lower energy system

cost, better environmental quality and, greater diversify-

cation of energy sources. On the basis of an analysis on

the price mechanism and methods for power trading be-

tween trans-region or trans-provincial grids in China,

Literature [5] puts forward some policy recommenda-

tions for innovation of power trading price systems and

mechanisms in China from different aspects. The char-

acteristics of Chinese cross regional transmission trading

price framework are summarized in Literature [6], based

on that, the targets of Chinese cross regional trading

pricing are proposed, and suggestions on related price

framework and mechanism are put forward. Based on the

different power supply and demand situation, and the

power purchase cost, the price model in trans-regional

power consensual dealings, as well as price compliance

mechanism are established in Literature [7]. The feed-in

tariff, the transmission price, the line loss as well as the

sales price are discussed in Literature [8] on the basis of

different costs: long-term, medium-term, short-term,

accident support as well as spare power to each other.

Literature [9] considers that, ration al transmission pr icing

mechanism is a key issue for the development of cross

regional electricity trading. The application of the Nash

bargaining principle in trans-regional and trans-provin-

cial power trading is studied in Literature [10], aim for

maximize the overall effectiveness of the trade subject,

the Nash negotiation price model in trans-regional and

trans-provincial power trading have been established

perceptively.

T. XIA ET AL.

812

2. Design of Pricing Mechanism for

Trans-regional and Trans-provincial

Trading

2.1. Design of Pricing Mechanism for the “Power

Point to Grid” Trading

2.1.1. Pr i cing Mech an ism Based on the Operat ion

period Price

The operation period price, namely inspecting the annual

cash flow in project life cycle so as to meet certain finan-

cial internal rate of return, that is:

()(1)

NPVCI COiB







0

(1)

where is the net present value, t is the t-th

year inflow; t is the t-th year outflow; n is the de-

preciation life, i is internal rate of return, B is the total

investm e nt for uni t kW.

NPV CI

The transmission pricing mechanism based on the op-

eration period price, namely taking the operation period

price as trading price, that is,

PP (2)

where a and P

P is the trading price for transmission

side and operation period price for generation companies

respectively.

2.1.2. P ricing Mechanism Base d on the Benc hm ark

Price of Coal-fired units of Power Accepted

Side

Currently, in China, benchmark price of coal-fired units

of power accepted side in each province (autonomous

regions and municipalities directly under the Central

Government) based on the operation period price, deter-

mined by the average cost of advanced generating sets in

the same period.

,aa

PPB

(3)

where ,aB is the benchmark price of coal-fired units at

transmission side.

2.1.3. Pricing Mechanism Based on Consultation of

Incremental Power Proportion

The trading price of generator set can maintain the same

in utilization time, above that, the price can be set

through consultation, and the determination methods

include marginal cost pricing, etc. While, the ratio con-

sists of two parts: one is the charge proportion, and the

other one is the price ratio of negotiation. The pricing

model based on consultation of incremental power pro-

portion is as follows:



aag

PKP KP



  (4)



tQ Q (6)

where is the current tariff at the transmission side,

Kproportionality

,ag

is the power coefficient,



is the

consultation coef

(5)

ficient, and



,

Q is the

transmi quantity in the governments’ plan, Q is

the total transmission power.

ssion



is determined by negotiation en the two sides.

From Game theory and Pareto optimal theory we know,

betwe





, the optimal value of



, represent the equal

dem

incremental profit under negotiations, which being

adjusted according to national policies, power supply and

and. The incremental profit distribution is shown as

following formulas.





 (7)

..st



 







()

aaj

bbBa

PP Q



PPQ











(8)

where, and b









are the incremental p

transmde apted side respectively

the trading volume

rofit at

, Q is

ission sind acce

, P



is the transmission price, P



ani of

rice Difference

Definition 1, “price pushed forward by market”: the price

Defy market”: the price

two minimum, genera-

tio

the line-rice.

2.1.4. Pri c ing Mechsm Based on C onsulta tion

Interests of P

loss p

is determined by the transmission side.

inition 2, “price pushed down b

is determined by benchmark price of coal-fired units mi-

nus the cost in transmission link.

In this mechanism, by locking the “price pushed for-

ward by market” and the “price pushed down by market”

at transmission side, based on the

n enterprise’s final trading price can be determined

through consultation of interests of price difference.

min ,

()

abBj

PPP PPP









 (9)





min ,

min ,()

jbB

PPPPP



 (10)

where is the minimum of “price pushed

market” aprice pushed down by market”,

benchmprice of coal-fired units at accepte

ion the

jointly consultation of both sides with considering the

k fac-

rket

In this mechanism, the trading price is determined by

ing

patter

min

nd “

ark

forward by

,bB

P is the

d side.

2.1.5. Pricing Mechanism Based on Negoti a t

In this mechanism, the trading price is determined by

market situation, the supply cost and the market ris

rs, etc.

2.1.6. Pr icing Mechanism Base d on Comp et itive

part or full market competition, which is, bid trad

ns.

T. XIA ET AL. 813

2.2. Design of the Pricing Mechanism for the

“Grid to Grid” Trading

For the “grid to grid” trading, it can also adopt the men-

ism

cing

princHowever, it is differ in

oned pricing mechanism except “Pricing mechan

based on the operation period price”, and the pri

iples are described as above.

incremental distribution, pricing mechanism at accepted

side based on consultation of interests of price difference

as well.

Incremental profit distribution of “grid to grid” trading

is shown in the following formula.



 (11)

()

.. (

aaaB

bbBa

PP Q

st PPP



 





 



 (12)

)

Pricing mechanism at accepted side based on consulta-

tion of interests of price difference is shown in t

lowing formula.



 

he fol-

min, ,

()

abBaB

PPP PPP







  (13)







min, ,

min ,

aB bB

PPPPP



 (14)

3. Case Study

3.1. Basic Data

The “power point to the grid” trading took an energy

owns 2 × 600 MW coal-fired units,

y to A province as an example. For

consumption rate of power supply is

57 yu-

ing Mecha nism Based on the Operat ion

the en/kWh, according to formula

298

377

local b

base plant, which

transmits electricit

this plant, the coal

345 g/kWh, unit annual utilization hours is 5000 h, coal

price is 140 yuan/ton, and ROI is 8%. We assume that

transmission price is 0.0623 yuan/kWh and line-loss

price is 0.0167 yuan/kWh. Then analyzing the effect on

main participants by using energy base plant electricity

substitute for local one, the replacement ratio between

1%-3% and 0.5% alternative electricity each increase, on

the basis of the total electricity purchase in 2011.

The “grid to grid” trading took provinces like B and C

transmit electricity to A province as an example. The

benchmark price of coal-fired units in these areas are: A

province is 0.4142 yuan/kWh, B province is 0.40

/kWh, c province is 0.3179 yu an/kWh. We assume that

transmission price in province “B to A” “C to A” is 0.03

yuan/kWh and 0.02 yuan /kWh, respectiv ely. We also use

alternative methods to analysis the effect on main par-

ticipants.

3.2. Measurement Results on the “Power Point to

the Grid” Trading

3.2.1. Pr i c

Period price

By formula (1), the operation period price of this plant in

nergy base is 0.298 yua

(2), price at the power transmission side is 0.

yuan/kWh, and the power accepted side is 0.

yuan/kWh which is 0.0372 yuan/kWh lower than local

benchmark price of coal-fired units.

For the power transmission side, that its trading price

is 0.0963 yuan/kWh lower than local benchmark price of

coal-fired units by using this pricing mechanism, not

only does it guarantee a reasonable return of investment,

but also helps to improve the level of electricity trading,

so as to gain more profit. For the power accepted side

under this pricing mechanism, when the replacement

ratio is between 1% and 3%, the average electricity pur-

chase price could drop 0.07 - 0.21 percent, that the de-

cline in the cost of power purchase is very significant.

3.2.2. P ricing Mechanism Base d on the Benc hm ark

Price of Coal-fired units of Power Accepted

Side

According to formula (3), price at the power transmissi

side is 0.3179 yuan/kWh, at the power accepted side

0.3969 yuan/kWh which is 0.0173 yuan/kWh lower th

enchmark price of coal-fired units.

For the power transmission side, if it uses this price as

its trading price, the plant would probably reduce its

trading size, so as to influence its profit. For the power

accepted side under this pricing mechanism, when the

replacement ratio is between 1% and 3%, the average

electricity purchase price could dro p 0.03 -0 . 10 pe rce nt.

3.2.3. Pricing Mechanism Based on Consultation of

Incremental Power Proportion

It can be seen from formula (4) - (6) that this mechanism

is related with consultation coefficient as well as re

placement ratio of electricity. Thus, according to formula

(7) - (8), we measured the price in different consultatio

coefficient as well as replacement ratio at the power

transmission side under this pricing mechanism, and the

result is shown in Table 1.

For the power transmission side, the essence of this

mechanism is to reduce its trading price to get more elec-

tricity deal, and certain conditions such as improving unit

annual utilization hours could th e plant gain a lot of prof-

it. For the power accepted side under this pricing mecha-

nism, when the consultation coefficient is between 0.7 -

0.9 and the replacement ratio is between 1% and 3%, the

average electricity purchase price could drop 0.04 - 0.08

percent. The smaller the consultation coefficient is, the

greater the average electricity purchase price would fall.

3.2.4. Pricing Mechanism Based on Consultation of

Interests of Price Difference

By formula (10) we get the result: Pmin=Pj , that is 0.298

yuan/kWh. As described above, the optimal value





T. XIA ET AL.

814

side and accepted side is shown in Table 3.



is 0.5, according to formula (9), price at the pow

ission side is 0.3166 yuan/kWer

transmh, at the power ac-

ricing Mechanism B ase d o n the Bench mark

das transmit electricity to A province, ac-

Price at the power accepted side, when electricity is

provided by B province, is 0.0215 yuan /kWh higher than

local benchmark price of coal-fired units; while when

electricity is provided by C province is 0.0763 yuan/

kWh lower than local benchmark price of coal-fired units.

By contrast, this mechanism makes C province more

competitive in the power trading.

cepted side is 0.3956 yuan/kWh. Taking the changes in

market supply and demand into account, the result of

nsultation may be fluctuated by optimal consultation

coefficient. Therefore, we measured the price in different

consultation coefficient and the result is shown in Table 2.

For the power transmission side, the trading price is

0.0043 - 0.0149 yuan/kWh higher than local benchmark

price of coal-fired units, this part is excess profit of en-

ergy base plant. For the power accepted side, when the

For the power accepted side, when electricity is pro-

vided by C province and the replacement ratio is between

1% and 3%, the average electricity purchase price could

drop 0.2 - 0.6 percent.

nsultation coefficient is 0.5 and the replacement ratio

is between 1% and 3%, the average electricity purchase

price could drop 0.04 - 0.11 percent. The higher the re-

placement ratio, the greater the profit gained by both

sides.

3.3. Measurement Results on the “Grid to Grid”

Trading

3.3.1. P

3.3.2. Pricing Mechanism Based on Consultation of

Incremental Power Proportion

According to formula (9 ), when electricity is provided by

B province, the measured consultation coefficient is

greater than 1, that is conflict with the constraint of





due to B’s benchmark price is higher than A’s

after deducing transmission costs.

According to formulas (4) - (8) we measured the price

in different consultation coefficient as well as replace-

ment ratio at the power transmission side under this

pricing mechanism when electricity is provided by C

province, and the result is shown in Table 4.

Price of Coal-fired units of Power Accepted

Side

ifferent are

cording to formula (3), price at the power transmissio

Table 1. The price based on the consultation of incremental power proportion Unit: yuan/ kWh.

0.8 0.9 Consultation Coefficient 0.7

Replacement Ratio transmission side accepted side transmission sideaccepted side transmission side accepted side

1.0% 0.3076 0.3866 0.3110 0.3900 0.3145 0.3935

1.50.3921

0.2992 0.3782 0.3055 0.3845 0.3177 0.3907

% 0.3032 0.3822 0.3081 0.3871 0.3131

2.0%

2.5% 0.2956 0.3746 0.3031 0.3821 0.3105 0.3895

3.0% 0.2923 0.3713 0.3099 0.3799 0.3094 0.3884

le 2. The calce results based on the fference cions UnitkWh.

Consultation Ct 0.5 0.

Tabulated pricprice dionsultat: yuan/

oefficien0.4 6

Price at transme 0.3166 0.3ission sid0.3129 023

Price at accepted side 0.3919 0.3956 0.3993

Taon the benchmark price at power transmission sidit: yuan/ kWh.

ided by B province Provided by e

ble 3. The price based e Un

Measured Price ProvC provinc

Price at transmission side 0.4057 0.3179

Piece at accepted side 0.4357 0.3379

Table 4. T on the consultation of incremion Unit:

Consultation Coefficient 0.

he price basedental power proportyuan/ kWh

0.7 8 0.9

Replacement Ratio accepted side transmission sidetransmission side transmission side accepted side accepted side

1.0% 0.3363 0.3131 0.3331 0.3147 0.3347 0.3163

1.5%0.3356

0.3088 0.3288 0.3118 0.3318 0.3149 0.3349

0.3109 0.3309 0.3132 0.3332 0.3156

2.0%

2.5% 0.3068 0.3268 0.3105 0.3305 0.3142 0.3342

3.0% 0.3048 0.3248 0.3092 0.3292 0.3135 0.3335

T. XIA ET AL. 815

For ther accepted sr this pricing mecha-

nism, whnsultatiocient is between 0.7 -

0.9 and thlacement ratio is between 1%, the

ge e purchasecould dro0.17

l and trans-provincial

electricity trading. For the “power point to the grid”

id to grid” trading, in this paper

anism can be used as a useful transition.

cknowlents

ork descin this papeppor the

(Grant No.

71273089) and Beijing Natural Science Foundation of

olicy, Vol. 32, No. 9, 2004, pp.

1075-1085. doi:10.1016/S0301-4215(03)00065-X

poweide unde

en the con coeffi

e rep and 3%

avera

plectricity price p 0.15 -

rcent. The smaller the consultation coefficient is, the

greater the average electricity purchase price would fall.

3.3.3. Pricing Mechanism Based on Consultation of

Interests of Price Difference

As the price difference between C province and A prov-

ince is larger, we measured that price at the power trans-

mission side is 0.3560 yuan/kWh which is 0.0382 y

an/kWh lower than local benchmark price of coal-fir

units, at the power accepted side is 0.3760 yuan/kWh

which is 0.0382 yuan/kWh lower than local benchmark

price of coal-fired units.

For the power accepted side, when the consultation

coefficient is 0.5 and the replacement ratio is between

1% and 3%, the average electricity purchase price could

drop 0.10 - 0.30 percent. The higher the replacement

ratio is the greater profit it gained.

4. Conclusions

Establish a reasonable pricing mechanism is one of the

core issues in China’s trans-regiona

trading and the “grwe

draw the conclusions as follows:

1) The pricing mechanism based on operation period

price ensures the power generation companies’ recovery

of the cost, is the most competitive trading price com-

pared to other pricing mechanism of “power point to the

grid” trading, thus, it is suitable for energy base power

trading.

2) The pricing mechanism based on consultation of

incremental power proportion considers the fairness of

the planned trading and the flexibility of the unplanned

trading benefit both sides at the same time. It is suitable

for the “grid to grid” trading.

3) As for the pricing mechanism based on consultation

of interests of price difference, its essence is the reason-

able distribution of the price difference and suitable for

the “grid to grid” trading.

4) The pricing mechanism based on negotiation as

well as the pricing mechanism based on competitive

market could reflect the actual market situation better,

thus they apply to the electricity trading at the mature

stage of the market. Before that, the above pricing

National Natural Science Foundation of China

mech

5. Aedgem

The wribed r was suted by

China (Grant No.9122022)

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