0. Electricity transmission network development
FSR Workshop
Improving and extending Incentive-based regulation
Florence, 24 November 2006
Laurens de Vries
Delft University of Technology

1. Transmission investment
Types of investment:
maintenance
capacity increase (existing links)
network expansion (new links)
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

2. 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
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

3. 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?
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

4. Trade-off between cost and quality
reliability
frontier
 price/ cost
willingness
to pay
 reliability
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

5. 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
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

6. So… what are network costs?

7. 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!
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

8. Example: counter flows (all types of network)
Generator A:
sells 500 MW to consumer B
Consumer B:
buys 500 MW from producer A
contract: 500 MW A B
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!
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

9. 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!
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

10. Example: parallel flowsB R2
Ohm’s Law: V = I  R
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

11. An ill-planned new power line…
P1=500 MW
R1=1 A B
P2=100 MW
R2=3
I1=V/R1=V
I2=V/R2=V/3
I1=3I2
P2=100 MW
P1=300 MW
Ptotal=400 MW!
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

12. 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.
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

13. Given these complications, what are current incentives?

14. 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.)
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

15. 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
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

16. 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
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

17. 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)
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

18. 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
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

19. 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
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

20. So the incentives are probably wrong!

21. 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?
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

22. Asymmetry of social costs
Cost of reliability
Cost of outages
Reliability 
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

23. What if investment is not optimal?
Asymmetry of welfare loss
transmission network costs in order of 1 €/MWh
VOLL in order of 1000 – €/MWh
Given uncertainty, some overinvestment is prudent
(insurance against much higher cost of shortage).
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

24. What are the options?

25. 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?
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

26. 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
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

27. 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.
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

28. 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
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions

29. 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.
Introduction
Network
costs
Current
incentives
What if we
are wrong?
Options
Conclusions