Location, location, location

FSR Executive SeminarWhich network for which market design?

Martin CrouchJune 2014

• Unbundling networks from generation decisions implies a need to coordinate.• Economics: prices are a means to an end; the end is efficient outputs• The outputs come from decisions to build (or close), to operate

• Locational signals (prices) can inform generation (demand) decisions• What are the options?• Is there evidence to support the theory? How big is the prize?

• Can locational signals directly inform transmission investment decisions?• Regulation based on value rather than cost?

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Overview

Options for locational signals• None

– single bidding zone, postage stamp pricing

• Transmission charges– flow-based model

• Energy prices– nodal– zonal

• Other– queues, non-price signals – rewards for being constrained

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Options• Single price (postage stamp)

• Single energy price market and administered transmission charging

• Multiple energy prices (market splitting)– nodal– zonal

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Arguments for bidding zones are well understood...E.g. this slide presented at the Florence Forum.

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Do locational signals affect generation investment?

CCGT build in England and Wales (illustrative)

1991-1994 1998-2002

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Source: National Audit Office report based on Ofgem/National Grid data

Are re-dispatch costs material?

Total balancing costs

Components

Transmission decisions• Transmission decisions take account of projections about

generation and demand (including location)• Difficult to predict: GB experience with “user commitment”,

auctions for gas transmission capacity

• On a European scale, market coupling gives us zonal prices• Current price signals don’t (can’t) tell us where to build

transmission – timing mismatch

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Can we use future price signals?• Why?

– regulation is an imperfect substitute for competition– competition rewards value, regulation traditionally based on costs– price differences tell us value => use the information

• We recognise:– congestion rents ≠ value; but we could calculate value, could address incentive to under-

size– keeping down cost of capital is key to value for money infrastructure– if the developer captures full value, no value for consumers (value>economic costs)

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Ofgem’s cap and floor proposals(published 23 May, consultation open to 18 July 2014)

• Regulatory regime for interconnection– moving regulation from costs to value– structured process

• application window for groups of projects • “needs case” assessment of socio-economic benefit of project

– in the current GB position, congestion rents taken as a proxy for fair share of value, without over-complication

– still rely on costs for cap and floor, to keep cost of capital lower

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