# Ex-ante dynamic network tariffs for transmission cost recovery

## TL;DR

This paper introduces a new ex-ante dynamic tariff scheme and optimization framework that improves fixed cost recovery, market efficiency, and social welfare in transmission network planning, especially with elastic demand.

## Contribution

It presents a novel optimization approach that integrates long-term planning and market clearing with elastic demand considerations, addressing limitations of traditional ex-post tariffs.

## Key findings

- Enhanced cost recovery and market efficiency.
- Validated improvements through numerical case studies.
- Addresses demand elasticity impacts on transmission tariffs.

## Abstract

This paper proposes a novel tariff scheme and a new optimization framework in order to address the recovery of fixed investment costs in transmission network planning, particularly against rising demand elasticity. At the moment, ex-post network tariffs are utilized in addition to congestion revenues to fully recover network costs, which often leads to over/under fixed cost recovery, thus increasing the investment risk. Furthermore, in the case of agents with elastic market curves, ex-post tariffs can cause several inefficiencies, such as mistrustful bidding to exploit ex-post schemes, imperfect information in applied costs and cleared quantities, and negative surplus for marginal generators and consumers. These problems are exacerbated by the increasing price-elasticity of demand, caused for example by the diffusion of demand response technologies. To address these issues, we design a dynamic ex-ante tariff scheme that explicitly accounts for the effect of tariffs in the longterm network planning problem and in the underlying market clearing process. Using linearization techniques and a novel reformulation of the congestion rent, the long-term network planning problem is reformulated as a single mixed-integer linear problem which returns the combined optimal values of network expansion and associated tariffs, while accounting for price-elastic agents and lumpy investments. The advantages of the proposed approach in terms of cost recovery, market equilibrium and increased social welfare are discussed qualitatively and are validated in numerical case studies.