IEEE Power & Energy Magazine - May/June 2020 - 28

operation, and maintenance costs and earn a reasonable rate
of return on the cost expenditure. Another key objective is to
provide forward-looking economic signals that incentivize the
most appropriate locations for new generators and load and the
most suitable operational strategies so that they would encourage efficient use of the existing network and cost-effective
development of future system improvements.
There are no uniform economic pricing methodologies
in place in the deregulated power industry. The methodologies vary dramatically from one country to another in
terms of sophistication and complexity. These methods
reflect the different characteristics of networks (location,
length, utilization, and connection voltage) and customers
(generation technologies, load density, and load profiles).
Since privatization, Great Britain's electrical power systems underwent three major reforms, representing increased
sophistication and efficiencies in the move from average pricing to cost-reflective network pricing. As listed in
Table 1, Great Britain's network charging changed over the
last 25 years from reflecting only circuit length to accounting for circuit utilization, types of generation technologies,
and demand profiles. Great Britain first introduced locational pricing to its transmission network in 2003 and its distribution system in 2006.
During the initial stage of privatization, the use of system
charges for both the transmission and distribution systems

followed the same principle: postage stamp, in which the
main purpose was to recover network cost. At that time, the
use of a simple network pricing methodology allowed for
the electric power industry to focus on developing wholesale
energy markets. The first major reform in network charges
came in 2003, when investment cost-related pricing (ICRP)
was implemented. ICRP considered the need for future network investment based on the marginal increment of generation and demand at each location of the transmission system.
Under this pricing methodology, for the Great Britain transmission system, in which power is predominantly transferred
from the north to the south, network companies rewarded
new generators located in the south that could reduce the network power flows (i.e., reduce network usage). Conversely,
new generators in the north were heavily penalized for an
increased use of the network. Because distribution networks
were still operated in a passive fashion at that time, distribution system charges remained the same for all customers.
Since 2002, decarbonization policies have fundamentally changed the energy landscape at the distribution level.
Distributed generators have increasingly connected to the
edge of the supply system. If the postage stamp approach
had continued in distribution network pricing, generation
companies would have had no incentive to locate their generators closer to load centers with associated reductions in
network costs. Great Britain's distribution system expected

table 1. Great Britain's network charges reform timeline. The orange color background denotes the
transition from a postage stamp to cost-reflective pricing.
1990-1992
Status Quo

First Major Reform
(1993)

Second Major Reform
(2006)

Transmission

Postage stamp
* The same price
and network

ICRP
ICRP
* Reflects the distance
power must travel
from generation
to the distribution
center
* The same treatment
between generation
and demand

Improved ICRP
* Differentiates the
generation technologies,
i.e., intermittent renewable
generation and fossil
generation and their
impact on long-term
network development

Distribution

Postage stamp for each
voltage level-DRM
(EHV, HV, and LV)
* The same price and
voltage level
* Downstream
customers assumed to
use all the upstream
assets

DRM (EHV, HV,
and LV)

LRIC (EHV)
CDCM (HV and LV)

LRIC/FCP (EHV)
* Reflects the distance
power must travel
to the customers'
premises
* Reflects the degree of
utilization along the
distribution paths
* Treats generation and
demand the same-
CDCM (HV and LV)
* DRM pricing
* Time of use (TOU)
* Treats generation and
demand differently;
generation always
given a credit

Third Major Reform (2013)

DRM: distribution reinforcement model; EHV: extra high voltage; LV: low voltage; MV: medium voltage; LRIC: long-run
incremental cost pricing; FCP: forward cost pricing; CDCM: common distribution charging methodology.

28	

ieee power & energy magazine	

may/june 2020



IEEE Power & Energy Magazine - May/June 2020

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - May/June 2020

Contents
IEEE Power & Energy Magazine - May/June 2020 - Cover1
IEEE Power & Energy Magazine - May/June 2020 - Cover2
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IEEE Power & Energy Magazine - May/June 2020 - Cover3
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