AVAILABLE TRANSFER CAPABILITY INFLUENCE ON ENERGY PORTFOLIO J. W. Marangon Lima P. S. Quintanilha A. C. Zambroni de Souza Engineering System Group – GESis Federal School of Engineering at Itajubá - EFEI BRAZIL Abstract – This paper presents an approach to deal with the spatial basis risk for energy transactions. The concepts of hydrothermal coordination are described especially because it has a crucial effect in Brazil, where 92% of the power generation comes from hydropower. The spot market prices are derived from an optimization program, which performs the hydrothermal coordination. The volatility of the prices is high and this is stressed when the transmission constraints are considered. The probabilistic nature of the available transfer capability (ATC) needs to be incorporated to the risk and return assessment. So, a combined approach between the price forecasts due to hydrological uncertainties and the probabilistic ATC is developed. Probabilistic density functions are built to help the analysis of energy portfolios, i.e., to help in the decision-making process about long or short-term contracts. Example with the Brazilian electrical system is used to clarify the concepts presented in this paper. Keywords - Marginal Cost, Available Transfer Capability, Portfolio Analysis, Market Risk I. INTRODUCTION The portfolio theory is a well-known technique applied to financial markets [1], where a set of investments or contracts is composed to perform a better combination between return and risk. The current restructuring process of the electrical sector has allowed the inclusion of such a technique on the new electricity market. A serious problem of the electricity markets is the transportation of this commodity, since it is dependent on the transmission network. The way the transmission aspects are internalized in these markets varies from country to country. In Brazil, for instance, there are four sub-markets where the price of electricity is determined. They were formed based on the structural transmission constraints, which give rise to the transmission congestion. If one agent buys electricity from a generator that is in another sub-market, he/she is exposed to a risk of not having enough capacity to transfer the energy. Many papers have been dealing with the available transfer capability – ATC [2], which is a limitation on the transmission network that does not allow the power to go from one bus or set of buses to other ones. In reality, such limits depends on the load that varies along the day, voltage limitation, circuit or generator outages and the dispatch of the generators, which in general, is coordinated by an independent system operator (ISO). Therefore, the ATC has a probabilistic nature and cannot be dealt by conventional deterministic approach. Dealing with transfer capability requires, therefore, the analysis of several operating scenarios. Note that not only the topological aspects of the system are relevant. The inclusion of the economical considerations also plays a very important role. In this sense, the nature of prices (zonal or nodal) is crucial. In this work, zonal price is considered, and some issues associated with market definition are discussed. This paper proposes a method that combines the probabilistic characteristics of ATC with the volatility of the zonal prices. In Brazil, the zonal prices or the sub-market prices depend not only on the fuel prices of the thermal generation but mainly on the hydrological conditions. Moreover, the spot prices are determined by an optimization process to preserve the centralized dispatch of the generation system. Transmission constraints impose another source of risk, which is known as spatial basis risk [3]. If one agent wants to hedge his contracts that involve more than one zone or sub-market, he/she needs to take the spatial basis risk into account. This additional risk will probably affect the Value at Risk [4] of the agent portfolio. This paper tries to quantify this exposure. An actual example with the Brazilian electrical system is used to show the method proposed in this paper. Some interesting features appear from the analysis of the results. II. ELECTRICITY MARKET The power industry restructuring process under development in many countries has brought the competition at the generation and commercialization of electricity [5]. The implementation of the electricity markets is a reality today, although some drawbacks have been witnessed and vary from country to country. One major problem is the transmission and distribution interference on the market. Although the regulation about open access and tariff is evolving, many challenges have been observed, such as dealing with gaming among the agents, difficulties to establish the actual transmission boundaries, the power of the independent system operator – ISO, the trade-off 14th PSCC, Sevilla, 24-28 June 2002 Session 04, Paper 3, Page 1