Nodal Pricing and Transmissions Losses. An Application to a Hydroelectric Power System

Since January 1st, 1997, the wholesale electricity market in the U.S. has been open to competition through FERC Order 888. In order to satisfy the reciprocity requirements which were imposed by FERC to foreign utilities, Hydro-Québec made her transmission grid accessible to third parties. A single flat rate is applied to account for transmission losses; location and time of use play no role. Hydro-Québec is a hydro based utility and it has very long linear high voltage power lines which link hydro power sites in the north to consumption centres in the south. In this paper, we compare three different methods of incorporating transmission losses into nodal prices for a simpplified model of Hydro-Québec electric network: flat rate, linear power loss rates, and quadratic power loss rates. The latter two vary by node and time of use. We estimate that nodal price differences between the flat rate and the quadratic power loss rates can be as large as 27.8% on the producer side and 32.7% on the consumer side. The implications of such price differences for the location of economic activity over the service area could be significant.