Treatment of Loss Factors
The transmission of power from generating units to loads incurs losses in the transmission and distribution networks. It is essential that the cost of transmission includes these losses in order to achieve efficient dispatch of generation and loads.
The National Electricity Market (NEM) has adopted the principle of marginal pricing for electricity trading. With marginal pricing, the spot price at a location for electricity is defined as the incremental cost additional generation to supply an additional unit of demand at that location.
The NEM is divided into five regions (Queensland, NSW, Victoria, South Australia and Tasmania). Transmission losses are allocated within and between regions. Within each region static marginal loss factors are calculated that approximately represent the impact of marginal network losses at the transmission network connection points at which generation and loads are located. These static marginal loss factors are load weighted average values calculated from network flow data determined with load forecasts for the next financial year. Between regions, dynamic loss factor equations are formulated to represent the marginal losses on the interconnectors between the regional reference node (RRN) of one region to the RRN of the other region.
Unlike the losses in the transmission networks, losses in the distribution networks are calculated on an average basis rather than marginally.
This document details the theory supporting the adoption of marginal pricing in the NEM, with discussions on the benefits provided, including the efficient dispatch of generation and scheduled loads, and the provision of efficient locational signals.
For further information, please contact: Keng Loh, Specialist, Systems Capability, Operations.