Electricity transmission network development

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)

Introduction Networkcosts

What if weare wrong? Options ConclusionsCurrent

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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



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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?



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Trade-off between cost and quality

reliability

p

rice/

cos

t

willingnessto pay

reliabilityfrontier



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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



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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!



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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!



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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!



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Example: parallel flows

R1

R2

A B

TT R

VIRVI

RVI ;;

22

11Ohm’s Law: V = I R



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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/3I1=3I2

P2=100 MWP1=300 MW

Ptotal=400 MW!



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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.



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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.)



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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



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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



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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)



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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



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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



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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?



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Asymmetry of social costs

Reliability

Cost

s

Cost of outages

Cost of reliability

Social cost



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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).



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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?



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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



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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.



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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



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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.



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Electricity transmission network development