Guidelines on Transmission Pricing and Cost Allocation for Regional Power Trade

Regional power integration can offer economic benefits, enhanced power supply quality and security, and opportunities for scaling up climate change mitigation measures. To promote electricity trade and unlock its benefits, open and non-discriminatory access is essential—so any qualified participant can use the grid and trade power under the same clear, fair rules. Building on ESMAP’s Beyond Borders, which sets out five building blocks for deeper integration, this report focuses on transmission pricing and cost allocation—how the costs of building, operating, and maintaining the regional grid are shared among participants. Traditional approaches, such as the territorial principle (allocating costs in proportion to line length by country) and cost distribution among a limited set of participants, often distort trade and deter investment. To remedy these shortcomings, the guidelines advocate for, based on a single-system paradigm, a more effective approach for allocating transmission costs and setting tariffs for electricity trade.

Cost allocation should adhere to key principles:

Transmission charges must cover recognized costs and returns on investment.
Charges must be independent of individual commercial transactions.
Cost allocation should be proportionate to benefits received.
Cost allocation rules should be stable and predictable over time.
Charges must minimize market distortions.

A structured process is recommended for determining transmission tariffs:

Identify transmission network elements with cross-border relevance.
Define the revenue requirement for these assets.
Allocate the total revenue requirement among participating countries.
Establish national transmission charges accordingly.

Additionally, successful implementation requires a dedicated regional framework, such as a regulatory authority or an entity with enforcement and dispute resolution capabilities.