electricity transmission network development fsr workshop improving and extending incentive-based...

Electricity transmission network development

FSR WorkshopImproving and extending Incentive-based regulation

Florence, 24 November 2006

Laurens de VriesDelft University of Technology

[email protected]

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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



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



incentives

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Trade-off between cost and quality

reliability

p

rice

/ co

st

willingnessto pay

reliabilityfrontier

IntroductionNetwork



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



incentives

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



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



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



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



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



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



incentives

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



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



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



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



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



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



incentives

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



incentives

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Asymmetry of social costs

Reliability

Cost

s

Cost of outages

Cost of reliability

Social cost

IntroductionNetwork



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



incentives

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



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



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



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



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



incentives

electricity transmission network development fsr workshop improving and extending incentive-based...

Documents

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tso optimal network

network users efficient

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