Transmission cost allocation based on the modified Z-bus

► The transmission fixed cost allocation problem in a deregulated power system is discussed in this paper. ► The paper presents a method for allocation of transmission cost based on power flow. ► The proposed method can allocate total cost to loads or generators separately. ► The results show considerable difference between the proposed method and the other methods. In this paper, the transmission cost allocation problem is discussed in a deregulated electricity market. The proposed method is based on power flow equation. In this approach, first, the relation between the generator or load currents and the bus injection currents is defined using a power invariant matrix, then the active power flow through each line is expressed in terms of generator or load currents. A four-bus test system is used to explain how the proposed method allocates the cost of real power flow to generators or loads separately. The obtained results are compared with the conventionally adopted methodologies to defend easy implementation and effectiveness of the proposed method. The obtained results explicitly show that the proposed method is fitting and behaves in a physically fair manner. This method dominates the difficulties of conventionally used approaches, encouraging the economically optimal usage of the transmission facilities. A case study based on IEEE 24-bus test system is applied to assess the effectiveness of the cost allocation procedure.