Risk management in use-of-system tariffs for network users

Network use-of-system (UoS) tariffs play an essential role in the deregulated power markets to recover network investment and maintenance costs from network users, and send economic signals to influence the users' behaviors in using systems. The tariffs are essential to the business operation of both network operators and users. They, however, could have great volatility due to the uncertainties from both external and internal factors. Such uncertain tariffs could bring severe adverse impacts to network users, which justifies that there is an urgent need to reduce the tariff volatility and improve its predictability. This paper for the first time investigates the variations in network tariffs that cause great risks to network users and then designs financial tools to reduce the volatility. The causing factors of the variations are categorized into global and local groups according to their different features. After introducing the process from network planning, charging to revenue reconciliation, the paper discusses the benefits of hedging for network users. In order to reduce tariff volatility, it proposes a novel risk management strategy to maintain the consistency of tariffs. It is achieved by designing long-term contracts using financial hedging. The value of hedge contracts is decided by three key factors: hedged load/generation percentage, hedged price, and risk premium. The hedged part is charged at hedged prices and the non-hedged part is charged at actual prices, on top of which customers needs to pay extra for the risk premium. The paper also designs an optimal decision-making tool to assist network users to manage long-term contracts in order to reduce total tariff costs. As demonstrated in the case study, the proposed long-term products can effectively reduce tariff volatility for network users and create a safe environment for their business operation.