Allocation of transmission losses to bilateral contracts in a competitive environment

Under open access, market driven transactions have become the new independent decision variables defining the behavior of the power system. Understanding the impact of bilateral transactions on system losses is important to be able to allocate a loss component to each individual transaction and improve economic efficiency. The theory presented here is based on the argument that it is always possible to compute the exact loss allocation corresponding to an infinitesimal bilateral transaction. This leads to a set of governing differential equations whose solution yields the loss allocation for contracts of any size. Several examples illustrate the properties of both the proposed allocation equations and other methods, the dependence of the proposed solution on the path of integration, and a number of implementation issues.