1. Amount and cost of losses June 11 th 2014 - Florence School of Regulation Jose Luis Mata

2. June 11th/ Amount and cost of losses. Florence School of Regulation. 2 de 16 A N INTRODUCTION TO R ED E LÉCTRICA First transmission and system operator company in the world Operates the Spanish power system and guarantees continuity of supply Designs, builds, owns and maintains the Spanish transmission network Independence from market players and transparency as system operator Commitment with society and environment and excellence in managment Red Eléctrica guarantees the appropriate operation of the Spanish power system: Efficient management at the service of the society

3. June 11th/ Amount and cost of losses. Florence School of Regulation. 3 de 16 E NERGY EFFICIENCY ROLE Energy efficiency is a valuable tool to address these challenges EU facing big challenges due to increased dependence, scarce energy resources, the need to limit climate change and to overcome economic crisis SustainabilityCompetitivenessSecurity of supply

4. June 11th/ Amount and cost of losses. Florence School of Regulation. 4 de 16 C URRENT SITUATION IN E UROPE EU’s efforts should focus on this pending issue Current estimates show EU is not on track to achieve its target of energy consumption reduction Reduce greenhouse gas levels by 20% Increase share of renewables to 20% Reduce energy consumption by 20% Current trend to 2020 20% Current trend to 2020 10%

5. June 11th/ Amount and cost of losses. Florence School of Regulation. 5 de 16 E LECTRICITY NETWORKS AND EFFICIENCY Electricity network losses involve a significant component of electricity demand, and therefore represent an improvement area Source: Euroelectric EU network losses vs. total electricity demand The treatment of losses is a key topic to be addressed: in order to achieve energy efficiency improvements requires a proper economic and regulatory approach

6. June 11th/ Amount and cost of losses. Florence School of Regulation. 6 de 16 Losses= energy generated - energy delivered to customers “N ETWORK LOSSES ” FOR P OWER SYSTEMS Energy generated Energy delivered Technical lossesNon technical losses power dissipation in electricity system components such as transmission and distribution lines, transformers, and measurement systems Caused by actions external to the power system and consist primarily of electricity theft, non-payment by customers, and errors in accounting and record-keeping Power losses in transmission and distribution networks may account for up to 8-15% of the total amount of electricity produced 1 There is not a standard definition of network losses within the EU

7. June 11th/ Amount and cost of losses. Florence School of Regulation. 7 de 16 There are no standard procedures neither for the allocation of network losses among market participants Who should be responsible for losses costs? L OSSES COSTS ALLOCATION

8. June 11th/ Amount and cost of losses. Florence School of Regulation. 8 de 16 M AIN COMPONENTS Technical losses are the main part of network losses which include both transmission and distribution losses 1-2% 2- 4% 1- 2% 4- 6% Step-up transformer from generator to Transmission line Transmission line Step-down transformer from Transmission to Distribution network Distribution network transformers and cables Source: Schneider Electric

9. June 11th/ Amount and cost of losses. Florence School of Regulation. 9 de 16 L OSSES TREATMENT In many Member States, TSO’s are responsible for the procurement of energy losses in transmission through market mechanisms “Transmission system operators shall procure the energy they use to cover energy losses and reserve capacity in their systems according to transparent, non discriminatory and market based procedures, whenever they have such a function.” Average costs of losses are accepted by the regulator and used in the tariff calculation Directive 2009/72 Art. 15-6 Energy generated Energy delivered TSO procurement Power exchanges Bilaterally By action/tenders

10. June 11th/ Amount and cost of losses. Florence School of Regulation. 10 de 16 L OSSES TREATMENT However there are alternative models for losses management such as Spain, where consumers pay for all losses (transmission and distribution) Regardless of the chosen scheme, incentives for network operators can be set into place for losses reduction Energy generated Energy delivered 100 GWh90 GWh Consumer billed for 100 GWh Consumers have to pay the 100% of the cost. Losses are calculated through a coefficient associated to their tariff. Losses are priced at the same market price than the energy consumed

11. June 11th/ Amount and cost of losses. Florence School of Regulation. 11 de 16 TSO’ S ROLE Losses in the T&D system depends greatly on the physical characteristics of the system Joule effect: P=I 2 R R=ρL/S Losses increase with distance, network load and decrease with voltage How can TSO’s improve network losses?

12. June 11th/ Amount and cost of losses. Florence School of Regulation. 12 de 16 TSO’ S ROLE TSO are responsible for several activities that play a significant role in the determination of losses Network design Network operation 1 1 2 2 Network and equipment maintenance 3 3 Nonetheless the room for improvement in these activities for losses reduction is quite limited

13. June 11th/ Amount and cost of losses. Florence School of Regulation. 13 de 16 TSO’ S ROLE Geographical size of the market, number and dispersion of costumers and generation are important driving factors which can not be modified There are a number of external factors beyond TSO’s responsibilities with a significant influence on the level of losses Average demandAverage generationGeneration-demand

14. June 11th/ Amount and cost of losses. Florence School of Regulation. 14 de 16 I NCENTIVES Effectiveness of incentives depend on the real capability of TSOs to control losses Incentives for TSO must be tailored to the manageable part of technical losses Incentive associated to losses purchase Incentive= Losses procured – Losses accepted by regulator Volume of losses Unit cost of losses Incentive associated to a reference value Parameters Incentive= +/- (Loss energy target - Real energy lost) * % Revenue Do they consider external factors to fix a target? Volume of losses Parameters

15. June 11th/ Amount and cost of losses. Florence School of Regulation. 15 de 16 C ONCLUSIONS No standard definition for energy losses As part of electricity demand, network losses represent an efficiency improvement area Main losses drivers are not manageable by TSO’s The design of incentives is thus best left to subsidiarity 1 1 2 2 3 3 4 4

16. jlmata@ree.es Thanks for your attention