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Electricity transmission network development
FSR WorkshopImproving and extending Incentive-based regulation
Florence, 24 November 2006
Laurens de VriesDelft University of Technology
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Transmission investment
Types of investment:• maintenance• capacity increase (existing links)• network expansion (new links)
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Current situation
• Transmission planning: CBA, based on load flow forecasts.
• Incentive based regulation (if applied) typically limited to operating & maintenance cost─ popular method: network revenue growth rate = CPI-
X+Q─ the Netherlands exception: capital costs included
as a consequence major investments are made only if they are exempted from the revenue cap
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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What do we want to achieve - goals
• Functions of transmission: transport, reliability & trade• Goal: economic efficiency, with respect to
─ maintenance─ network availability (NTCs!)─ congestion management─ capacity increases─ network expansion
Trade-offs between cost and quality
• Second goal: integration of national markets, increasing competitiveness?
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Trade-off between cost and quality
reliability
p
rice
/ co
st
willingnessto pay
reliabilityfrontier
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Objectives for network regulation
• Incentivise network users─ efficient use of the network
optimal balance between cost and service(in theory: marginal cost of service = marginal benefit)
• Incentivise the TSO─ optimal network management
find optimal balance between cost and service─ regulation of monopoly rents
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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So… what are network costs?
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Categories of network investment
• In meshed AC networks parallel flows difficult to control
• DC lines─ flows are controllable
• Linear/radial networks─ no parallel flows─ trade-off with generation easier to calculate
• In last two cases: easier to determine the right incentives better prospects for IBR of TSOs
• But most investment in meshed AC networks!
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Example: counter flows(all types of network)
A B
Generator A:sells 500 MW to consumer B
Consumer B:buys 500 MW from producer A
contract: 500 MW
Consumer A: buys 400 MW from producer B
Producer B:sells 400 MW to consumer A
contract: 400 MW
physical flow: 100 MW
Short-term network capacity depends upon other contracts!
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Counter flows
• Two transactions in opposite directions smaller load flow. More transactions can take place, but only if the counter flows really take place.
• The network costs of a transaction can be negative!• When flows in a given direction double, energy
losses quadruple cost increase not linear!
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Example: parallel flows
R1
R2
A B
TT R
VI
R
VI
R
VI ;;
22
11Ohm’s Law: V = I R
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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An ill-planned new power line…
A B
P1=500 MWR1=1
P2=100 MWR2=3
I1=V/R1=VI2=V/R2=V/3
I1=3I2
P2=100 MWP1=300 MW
Ptotal=400 MW!
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Conclusion parallel flows
The load flow is mainly determined by the impedance (resistance) of the lines, but constrained by their capacity.
Consequence: the load flow depends upon:─ the location of generators─ the location of loads and transformers to different networks─ the resistance of the lines.
• Electricity flows do not necessarily use the available capacity fully.
• Load flow difficult to manage operationally. New network capacity must be coordinated with existing
capacity.
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Given these complications, what are current incentives?
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Incentives to network users: transmission pricing
• Ideal:─ cost-based rates in case of no congestion─ value-based rates in case of congestion
• Two groups of transmission pricing methods:─ Fixed, cost-based tariffs. Congestion handled
separately. (Decentralized market design, typical for Europe)
─ Locational marginal pricing (nodal pricing).(Integrated market design, typical of the USA.)
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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The American way: nodal pricing
• A different price at every node in the network• You can only sell and buy electricity at the nearest
node• The system/market operator varies nodal prices to
reflect network capacity─ congestion management is integrated in the process─ overall prices are minimized, given demand,
generation bids and network constraints
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Transmission pricing in Europe
• Fixed rates (typically not related to distance) allow market parties full freedom. TSOs intervene only when necessary to maintain balance or prevent congestion.
• Problem: load flows unpredictable untill all trades have been closed and reported. Therefore costs are unpredictable. tariffs are not efficient
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Current incentives to TSOs
• Build more capacity (especially interconnectors)• Reduce NTC on existing NTCs• In case of merchant interconnectors: reduce NTCs of
other interconnectors to increase price difference. TSOs should not be in merchant projects! (like Britned)
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Links between incentives to TSO and network users
• The choice of transmission tariff, access rules, congestion management method affect the incentives to the TSO
• The degree of unbundling affects the interests of the TSO
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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But… incentives for what?
• How much capacity expansion in anticipation of demand growth?
• Which network configuration is optimal?• When to build network capacity, when to rely on
local generation investment?• What is an optimal cost level?
We don’t know what is optimal
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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So the incentives are probably wrong!
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Limits to incentives
• Further complication: lead time for investments risk of investment cycle
• If we don’t know what is optimal, what are ‘good’ incentives?
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Asymmetry of social costs
Reliability
Cost
s
Cost of outages
Cost of reliability
Social cost
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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What if investment is not optimal?
Asymmetry of welfare loss─ transmission network costs in order of 1 €/MWh─ VOLL in order of 1000 – 10 000 €/MWh
Given uncertainty, some overinvestment is prudent(insurance against much higher cost of shortage).
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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What are the options?
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Options for providing incentives
• Benchmark competition─ each transmission network is unique
• Proxy incentives─ for calculating NTCs─ for reducing congestion─ for estimating need for new capacity correctly
• Possible solution to the issue of coordination with generation: ‘auctions’ for subsidies to G (Stoft)
• FTRs?
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Opportunities for incentives to TSOs
• Regulation of TSO revenues efficiency─ based on cost─ based on benchmarks
• Performance incentives─ congestion─ available network capacity─ network reliability─ economic performance of investments
typically proxy incentives
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Example of proxy incentives: NorNed
• Dutch & Norwegian TSOs• Regulated investment (rate base, not merchant)• Initial business case negative
• TSO’s response:─ capacity increase 600 MW 700 MW at no cost (!)─ guarantees from neighboring TSOs for full utilization of
cable─ lower connection costs
• Now business case neutral.
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Incentives in NorNed
• Dutch regulator attached conditions to regulatory approval: incentives relating to─ moment that cable is operational─ under/over budget realisation─ availability of cable
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives
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Conclusion
• Options for incentive-based regulation limited─ better in simple, linear networks and for DC links─ when theoretically optimal incentives are not feasible,
proxy incentives may be a solution─ evolution of pragmatic regulations credibility
problem, also repeat games between sector and regulator (Joskow)
• The social cost of too little investment is much higher than the cost of some excess investment.─ Given the complexity: better safe than sorry
simple regulation, slight overinvestment might be the most secure solution.
IntroductionNetwork
costsWhat if weare wrong?
Options ConclusionsCurrent
incentives