Public ISBN nr. 978-82-8368-046-1 Commissioned by Svenska kraftnät 11/4/2019 THEMA Report 2019-04 THEMA-Report 2019-04 Review of the Swedish transmission grid tariff model About the project About the report Project number: SVK-18-01 Report name: Review of the Swedish transmission grid tariff model Project name: Review of grid tariff for the Report number: 2019-04 national grid Client: Svenska kraftnät ISBN-number: 978-82-8368-046-1 Project leader: Berit Tennbakk Availability: Public Project participants: Åsmund Jenssen, Malin Finalized: 11.04.2019 Wikum, Julian Hentschel, and Eivind Magnus (QA) Brief summary In this report we review the tariff model employed by Svenska kraftnät in the Swedish transmission grid on the basis of economic efficiency criteria. We find that the main structure of the model is in line with economic theory, but recommend the introduction of a neutral residual charge and changes in the basis for capacity charging, in addition to various other changes with respect to the practical implementation of the model. About THEMA Consulting Group Øvre Vollgate 6 THEMA Consulting Group is a Norwegian consulting 0158 Oslo, Norway firm focused on Nordic and European energy issues, Company no: NO 895 144 932 and specializing in market analysis, market design and www.thema.no business strategy. Disclaimer Unless stated otherwise, the findings, analysis and recommendations in this report are based on publicly available information and commercial reports. 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Page ii THEMA Consulting Group Øvre Vollgate 6, 0158 Oslo, Norway www.thema.no CONTENT 1 INTRODUCTION ................................................................................................. 9 1.1 Background ................................................................................................ 9 1.2 About the project ......................................................................................... 9 1.3 About this report ......................................................................................... 9 2 MAIN PRINCIPLES FOR ECONOMICALLY EFFICIENT GRID TARIFF DESIGN11 2.1 Main principles for efficient pricing ............................................................ 11 2.2 Overview of tariff elements and principles ................................................. 17 2.3 Tariffs that provide price signals ............................................................... 18 2.4 Residual charges ...................................................................................... 24 2.5 Conclusions: Criteria for assessment of tariffs .......................................... 29 3 REVIEW OF CURRENT TARIFF DESIGNS IN OTHER COUNTRIES............... 32 3.1 Overview of tariffs ..................................................................................... 32 3.2 Case study: Norway .................................................................................. 33 3.3 Case study: Great Britain .......................................................................... 36 4 DESCRIPTION OF THE SWEDISH TRANSMISSION GRID TARIFF ................ 40 4.1 Overview of the Swedish electricity system ............................................... 40 4.2 Structural features of the grid .................................................................... 42 4.3 Grid access ............................................................................................... 46 4.4 Overview of tariffs ..................................................................................... 46 4.5 The impact of Svenska kraftnät’s tariffs on regional grid tariffs .................. 54 5 ASSESSMENT OF THE SWEDISH TARIFF MODEL ........................................ 56 5.1 Energy charges......................................................................................... 56 5.2 Connection charges and accounting for threshold effects ......................... 57 5.3 Capacity charges ...................................................................................... 58 5.4 Allocation of residual charges between injection and withdrawal .............. 65 5.5 Other tariff elements ................................................................................. 65 5.6 Summary of identified inefficiencies .......................................................... 66 6 RECOMMENDED CHANGES IN THE TARIFF STRUCTURE ........................... 68 7 IMPACT ASSESSMENT .................................................................................... 71 7.1 Tariff elements for injection and withdrawal .............................................. 71 7.2 Comparison of generator charges with exising and new tariff structure ..... 72 7.3 Changes in the capacity charge ................................................................ 74 7.4 Removing subscribed capacity as basis for the capacity charge ............... 75 7.5 Changes to the energy charge .................................................................. 77 7.6 Changes in cost distribution ...................................................................... 78 7.7 Shallow connection charges ..................................................................... 81 THEMA-Report 2019-04 Review of the Swedish transmission grid tariff model REFERENCES ........................................................................................................... 83 APPENDIX: TARIFFS IN SELECTED COUNTRIES ................................................... 85 Page 2 THEMA Consulting Group Øvre Vollgate 6, 0158 Oslo, Norway www.thema.no THEMA-Report 2019-04 Review of the Swedish transmission grid tariff model SUMMARY AND CONCLUSIONS The Swedish TSO, Svenska kraftnät, is currently conducting a comprehensive review of the Swedish transmission grid tariff. As part of this effort, Svenska kraftnät has asked THEMA Consulting Group to assess the efficiency of the current Swedish transmission grid tariff, and to propose amendments if inefficiencies are identified. The assessment is based on economic theory and a survey of transmission grid tariffs in other countries. Based on the findings from the assessment, we provide recommendations for changes in the tariff and assess distributional impacts of the proposed changes. Basic criteria for optimal grid tariffing Grid tariffs are to fulfil two very different objectives: On the one hand to provide efficient price signals for efficient utilization and investments in the grid, on the other to collect revenues that cover all grid costs. According to basic economic theory, efficient prices should reflect marginal costs. Efficient prices should reflect the short-term variable costs in the existing grid. As capacity becomes scarce, prices should increase and eventually reach a level where grid investments are profitable. Due to the need to maintain security margins in the grid, investments are made before the capacity becomes scarce, and short-term efficient prices will not adequately reflect long-term marginal investment costs. Thus, in addition to prices reflecting short-term variable cost, long-term price signals should be provided. Moreover, since the grid is a natural monopoly, marginal costs are lower than average costs. The residual costs, i.e., costs not covered by revenues from efficient prices, must be covered by a “tax” that should not affect the short- or long-term decisions of grid customers. Based on economic theory and the cost structure in the transmission grid, we conclude with the following basic criteria for optimal grid tariffs: ▪ Individually levied connection charges should reflect customer-specific elements only. ▪ Energy charges should reflect short-term variable costs, i.e. the marginal value of energy losses in the grid. ▪ Efficient investment signals should be provided by a general capacity charge related to the marginal long-term marginal investment costs (non-locational). ▪ Efficient locational signals should reflect capacity constraints in the grid, i.e., the impact on medium-term investment costs, and should take into account the locational signals provided by congestion rents. ▪ Residual costs should be covered by separate tariff elements that do not affect short-term use of the grid. ▪