transmission systems improved regulation and management

Spanish Fund for Latin America and the Caribbean

Consulting: Conceptual Frameworks Proposals

Thematic Line 4:Transmission Systems Improved Regulation

and Management, and InterconnectionsAlberto Pototschnig and Guido Cervigni

June 25th 2021

Presentation Session of Final Report

2

Propose conceptual models and frameworks

for improving the regulation and

management of the Peruvian transmission

system

First stage towards a While Paper/Book for

the Reform towards the Modernization of the

Peruvian Electricity Sector

Project objectives

3

Agenda

1Objectives pursued and variables of choice for the organization of the

electricity transmission sector

2 The regulatory framework and the organisation of Peru’s transmission sector

3 Issues with the current arrangements and recommendations

Appendix: lessons from the international experience

4

Agenda






The relevant objectives

5

Effective planningMinimum

investment costs

Efficient use of

existing assets• Technical capabilities

• Effective forecast of

demand and generation

• Unified view of the

entire network

• Procurement of network

components and

engineering services

• Cost of capital

• System operator has

full control of assets

• Optimal maintenance

strategy

Coordination among

multiple planners

Incentives for

sub-transmission

concession holders

Competition for the

market vs regulation

Incentives and

resources for

government-owned

distributors

Variales of choice for transmission organisation

6

Perimeter of transmission

and sub-transmission

• Sub-transmission like distribution vs sub-

transmission like backbone transmission

Industry structure

• ISO vs TSO model

• Functional vs legal vs ownership unbundling from

generation, retail (and distribution)

Organisation of supply of

transmission services

• Auctions to select TOs and set allowed revenues

vs regulated monopoly

Network development

decisions• Planned vs merchant vs both models

Dimension Options

• Relative importance of coordination sub-

transmission/distribution or sub-transmission/transmission

• No clearly superior model between ISO and TSO

• Need for strong independence of SO-TSO

• Merits of competitions vis à vis regulation

• Coordination issues in case of fragmentation of asset

operations

• Planning is indispensable

• Interaction between planned and merchant development may

be complicated

• Merchant sensible way to address projects with uncertain value

Tariff structure• Congestion management via nodal electricity

prices vs other tariffication methodologies

• Relative importance of sending efficient price signals vs other

objectives pursued by transmission tariffs and electricity prices

(fairness among consumers at different locations)

Drivers of the choice

7

Agenda






The institutions

8

The institutional framework is in line with international practice (see Thematic line 1 on

issues reCOES independence)

Government

Independent regulator

Independent System Operator

Overview of the current regulatory and organisation framework

9

Transmission

Sub-transmission

PlanningImplementation (default /alternative

mechanism)

COES

(Plan de transmisión)

Competitive tenders /

Iniciativa privada

Concession holders

(Planes de inversión)

Regulation: assigned

by OSINERGMIN /

Competitive tenders

Redes no

planificadasPrivate developers Private developers

Allowed revenues

(default /alternative

mechanism)

Tender’s bid /

Regulation: standard

cost

Regulation: standard

cost /

Bid in the auction

Private agreement /

OSINERGMIN in

case of disputes

The general logic of the model is sound

Issues in implementation

Industry structure: transmission

10

Nombre de la compañía (Grupo)

KM de líneas (HV o HHV)

Capacidad del transformador MVA

Zona

ISA Perú (Grupo) 9,418 7,907 Norte

REDESUR (Grupo) 326 625 Sur

REDESUR (Grupo) 371 160 Norte

ATN S.A. 585 1,200 Sur

ABY Transmisión Sur S.A. 904 200 Sur

Compañía Minera Antamina Norte

San Gabán 325 Sur

Empresa de Generación Eléctrica Machupicchu S.A.

136 Sur

Ownership structure of Peru’s transmission system Major transmission investments in Peru since 2006

Some of the largest investments have been awarded to

parties different from the incumbents

The current arrangements

have not resulted in large

fragmentation of transmission

ownership in Peru

Industry structure: sub- transmission

11

• High concentration of assets’

ownership in each Demand

area

• Distributors are the main

owners of sub-transmission

assets

The current ownership

structure is consistent with

the technical and economic

characteristics of sub-

transmission

12

Agenda






Issues: subtransmission plannig and implementation

Sub-transmission

planning

• Some sub-transmission concession-holders show poor commitment to sub-

transmission planning

• Osinergmin ends up acting as network planner, which is beyond the typical

regulator’s responsibilities

• Measures for coordination with transmission planning (ITC planning) not yet

fully tested

Implementation

of sub-

transmission

investments

• The tender mechanism is not a suitable model for sub-transmission assets,

as it results in ownership fragmentation

• Government-owned distributors are reluctant / slow to invest in sub-

transmission. They are not committed to support the tender mechanism

Area Issues

13

Options for the sub-transmission integration

14

Sub-transmission planning

• Planning responsibility on Reference

distributor for the demand area

• COES to provide technical assistance

• Osinergmin supervision / approval

Implementation of sub-

transmission investments

• Implementation responsibility to distributor

• Reference distributor has last-resort role

• Incentive regulation

Sector’s organisation &

structure

• Current process and regulation retainedTransmission planning and

implementation

Area of intervention Option 1: Integrated sub-TO and DSOOption 2: Transmission model

extended to sub-transmission

• Sub-transmission assets treated

like transmission assets

• Planning responsibility on COES


• Current process and regulation

retained

• Current regulation retained,

except for sub-transmission

responsibilities

Public-sector distributors

• Explore long-term financial architectures

compatible with Peru’s national accounts

• Streamline cost-benefit assessment

• Performance-based mgmnt compensation

• Distributor/Reference distributor is the

monopolistic sub-TO

• Auctions as currently done for

transmission

Option 3: Integrated TSO and

sub-TO

• Transmission moves from ISO to

TSO model; TSO in also sub-TO

in the monopoly area

• Planning responsibility on TSOs


• Implementation by (regulated)

TSOs

• Current regulation retained, but

for sub-transmission

responsibilities


TSOs

Options for the sub-transmission integration

15

Sub-transmission planning

• Planning responsibility on Reference

distributor for the demand area



Implementation of sub-

transmission investments

• Implementation responsibility to distributor


• Incentive regulation

Sector’s organisation &

structure

• Current process and regulation retainedTransmission planning and

implementation

Area of intervention Option 1: Integrated sub-TO and DSOOption 2: Transmission model

extended to sub-transmission

• Sub-transmission assets treated

like transmission assets

• Planning responsibility on COES


• Current process and regulation

retained

• Current regulation retained,

except for sub-transmission

responsibilities

Public-sector distributors



• Streamline cost-benefit assessment

• Performance-based mgmnt compensation

• Distributor/Reference distributor is the

monopolistic sub-TO

• Auctions as currently done for

transmission

Option 3: Integrated TSO and

sub-TO

• Transmission moves from ISO to

TSO model; TSO in also sub-TO

in the monopoly area

• Planning responsibility on TSOs



TSOs

• Current regulation retained, but

for sub-transmission

responsibilities


TSOs

We recommend Option 1 because it is:

- consistent with technical features of

subtransmission

- coherent with an expanding role of

distributor as ‘system operator’

but the possibility to overcome the limits

of publicly-owned distributors needs to be

verified in order to assess feasibility

Recommendations

Sub-transmission

planning

• Planning responsibility assigned to a

‘Reference distributor’ for each demand area


• Open and transparent planning process

• Osinergmin’s role limited to supervision /

approval

Implementation

of sub-

transmission

investments

• Assign implementation responsibility to

distributor


• Consider introducing incentive regulation

• Discontinue optional tendering system

Area Measure Expected benefits

• More effective sub-

transmission (and

distribution) planning

• Exploit synergies of

distribution and sub-

transmission operations

• Prevent network ownership

fragmentation

16

Transmission planning and implementation

Area Issues

Transmission

planning and

implementation

• Plan de transmisión, plans ex-Contractos-ley, rural electrification plans and

sub-transmission plans are poorly coordinated (relaying only on ITC planning)

• Lack of information on large connection requests may result in (avoidable)

sub-optimal planning decisions

Reinforcements• Tendering system is ineffective

• Delays (and possibly sub-optimal investment) result from arbitrage between

regulatory regimes by the owner of assets needing reinforcement

17

Recommendations


Transmission

planning and

implementation

• A structured process to coordinate Plan de

transmisión, plans ex-Contractos-ley, rural

electrification plans and sub-transmission

plans

• Integrate large connection requests in

transmission planning

• Efficient network

development

Reinforcements

• Discontinue tendering system for

reinforcements

• Implement regulated model, possibly with

incentive features

• Timely implementation of

reinforcements

18

Publicly owned distributors

Public-sector

distributors

• Limited access to long-term financing

• Cumbersome cost-benefit assessment of network investments

• Lack of technical competencies on sub-transmission

Area Issues

19

Recommendations


Public-sector

distributors



• Streamline cost-benefit assessment of

network investments

• Performance-based management

compensation

• Correct incentives and

adequate resources to

invest in sub-transmission

20

Unplanned network systems (Redes no planificadas)

Area Issues

Redes no

planificadas

• Third party access regime is not effective (disputes)

• Planning by private parties of shared resources might result in inefficient

choices (e.g. on dimensioning)

21

Recommendations


Redes no

planificadas

• Limited to assets that are unlikely to be

shared; otherwise implement an appropriate

connection regime

• Integrate authorisation to build redes no

planificadas with sub-transmission planning

process

• The implementation mechanism selected

must ensure that connection rights for the

party that seeks authorisation to build a

private line be ensured, irrespective of

whether the asset is built and owned by that

party or by the distributor

• Efficient network

development

• Avoid disputes related to

third-party access

22

Tariffs

Transmission

tariffs

• Generators bear the risk that tariff revenues turn out to be lower than

allowed transmission revenues; this is not justified, as the generators do not

have any obvious advantage in managing or reducing that risk

• Energy based transmission charges on generators, to cover the cost of SCT

SST assets, add to their variable cost. This might have distortive effects

when bid-based dispatch is implemented.

Area Issues

23

Recommendations


Transmission

tariffs

Any consistent set of connection charges,

transmission charges and capacity allocation

mechanism:• Shallow connection charges

• Nodal electricity prices

• Flat transmission tariff on consumers for revenue

adequacy

• Fair cost allocation

• No or minimal redispatch-

cost

• Hedging possibilities for

generators

24

Cross-border interconnection

Cross-border

interconnections

• Multiple studies suggest that cross-border interconnectors would deliver

positive net benefits to Peru (benefits greater than costs)

• Market fundamentals and organisation in Peru and in neighboring countries

change over time, requiring

• regular reassessment of the benefits and costs of additional cross-border

capacity

• a robust model for cross-border exchanges

Area Issues

25

Recommendations


Cross-border

interconnections

• Regularly assess the benefits of further

interconnection capacity (through cost-benefit

analysis)

• Designate entity for cross-border commercial

exchanges

• Agree with neighbouring jurisdictions and

implement a robust cross-border exchange

mechanism (e.g. SIEPAC)

• Once wholesale markets in interconnected

countries develop, move to more dynamic

capacity allocation mechanisms (explicit or

implicit capacity auctions)

• Maximise the net benefits

from interconnection

• Address different market

structures /organisation in

neighboring countries

26

Appendix

Available options based on the international experience

Industry organisation

SO and TO organisation

SO/TO vs other

business

Topic International experience

No clearly superior approach. Rare cases

of ISO to TSO or TSO to ISO switch

Ownership unbundling is the prevalent model

Sub-transmission assetsUsually managed by distributors and

regulated as distribution assets Functional criterion is the main driver

Notes

Main models• ISO - US

• TSO - EU

Legal unbundling not uncommon.

Sometimes it is turned into ownership

unbundlieng

Regulatory framework

Regulatory institutions

Regulatory mechanism


Cross-border issues in EU are disciplined

at Union level, but implemented by NRAs

with ACER stepping in if NRAs fail to agree

• Risk of approved investments borne by

consumers

• RB_ROR regulation prevalent (except

where auctions are implemented)

Incentive systems

• Limited examples of incentive based

regulatory mechanism on network

development (Italy) and system

operations (GB)

They do not appear to be a ‘major’ feature

of the regulatory regime (or source of

revenues for SOs)

Notes

• US: FERC (interstate transmission

development and access), PUCs

• EU: ACER (coordination), NRAs

Brazil, Argentina, Peru select TOs via

auctions; Countries with monopoly TO use

auctions to build network assets

Network planning and allocation of transmission rights

Allocation of

transmission rights


Congestion rents/ FTR revenues cover a

relatively small share of total transmission

cost

Notes

• US: nodal electricity prices and financial

transmission rights

• EU: uniform nationwide electricity prices,

few cases of zonal prices (and financial

transmission rights)

Network planningMerchant investment is allowed both in the

US and in Europe (for cross-border

capacity only)

• Typically, SO responsibility. Regulators

approve SO’s proposals

Trasmission tariffs - 1

Generation /

Consumption charges


Some of those jurisdictions which do it,

convey (long term) locational signals to

generators

Notes

Less than half EU Countries charge

generators for transmission

In the US charging demand is the typical

approach

Energy / capacity

charges

Energy charges applied to generators may

be distortive of the merit order

Different mixes of energy and capacity

charges

Time differentiationQuestionable that time-of-use-like schemes

correctly capture transmission scarcity

situations

Not infrequent especially for withdrawal

charges (seasonal/day and night/peak ..)


Locational differentiation

/ Uniform


Long-run incremental cost pricing is not

efficient. Placing transmission cost risk on

generators is a questionable regulatory

approach (in a planned system).

Notes

Locational differentiation is not common

(exception GB). Some countries use ‘deep’

connection charges for generators.

Losses

Recovered through general transmission

tariffs, ad hoc charges or by correcting

consumers’ withdrawals and possibly

generators’ injections.

Ancillary services In addition to imbalance chargesRecovered through general transmission

tariffs, ad hoc charges


Timing


Multi-annual regulatoryb period essential

for enabling RPI-X-type incentive-based

regulation

Notes

Tipically, tariff methodology is set for 4-5

years and tariffs are updated yearly based on

predefined rules

Annex

Issues raised by commenters and referees

On the role of distributors in sub-transmission

Comment Our reply

Poor sub-transmission

investment performance

depends on the (publicly

owned) distributors It is

not a good idea to enlarge

their responsibilities.

For the same reasons it is

not a good idea to limit the

scope for private investment

in Redes no planificadas

Our recommendation is based on the assumption (to be verified at a later stage of the assessment)

that it is possible to remove the obstacles that impair the publicly-owned distributors’ ability and

incentives to invest in sub-transmission assets.

We note incidentally that the issues highlighted as possible causes of the distributors’

underperformance in sub-transmission are likely to affect also the distributors’ investment

performance in distribution. For that reason, addressing them should be a matter of priority for

Peru.

We argue that in case public ownership is identified as the source of the distributors’

underperformance, privatisation should be considered as an option to improve the industry’s

performance.

On cross-border interconnection

Comment Our reply

Long-term cross-border

transmission rights should

be allocated, to support long-

term cross-border supply

contracts

Agree

No basis for prohibiting

COES from planning cross-

border interconnections

Report was meant to stress the need for high level of transparency and neutrality of cost-benefit

analysis.

On transmission tariffs

Comment Our reply

Recommendation based on

a wrong understanding of

the current tariffication

mechanism

Generators should not be

charged the negative

difference between tariff

revenues and allowed

revenues to SPT/SGT

owners

We have revised our recommendations based on improved understanding of current tariff

systems:

• We see no reason to place demand risk on generators, since they don’t have any obvious

advantage in managing or reduce it.

• Transmission charges on generators to cover SCT/SST cost should be based on capacity, to

avoid distorting their offers in the market when moving to bid-based dispatch

On redes privadas - 1

Comment Our reply

Role of Osinergmin

Possible conflicts of interests

of distributors (that are also

retailers and possibly

generators) in connecting

additional generators

We see Osinergmin’s role in approving (or setting guidelines on) the distributor’s decision on

whether to implement the development proposed by a private party as part of the development of

the public network

Regulation should be able to mitigate the effects of distributors’ integration in generation on

discrimination of third-party generators seeking connection.

We consider that this conflict of interest is easier to address compared to the one due to

distributors being also electricity retailers.

On redes privadas - 2

Comment Our reply

How to:

• Decide if an infrastructure

is to be developed

privately or as an element

of the public networks? (in

particular for generation)

• Address financial

problems of the

distributor?

Some hints (tentative):

• Distributor should have the last word on whether he believes a new item is going to be shared, based

on available information

• One could think of moving ownership and management of the asset to the distributor (as the sub-T

operator) while granting to the generator a volume of transmission rights equal to his capacity (to be

negotiated when the infrastructure is built) for the assets lifetime.

• Alternatively, one could think of a mechanism where management and ownership of the asset is

moved to the distributor as soon as a connection request is submitted ba new would-be user.

• The problem of “unused capacity being not made available” would be solved by transferring

operations to distributors (but transmission rights granted in exchange of the asset’s ownership should

be firm, otherwise we would be expropriating the generator who built the asset).

Back-up

Transmission – Sub transmission – Distribution

42

transmission systems improved regulation and management

Documents