Electricity network regulation in a
    changing energy sector –
       the help of economics


                  Graduati...
Content

  1   Example

  2   Introduction

  3   Future developments

  4   Current regulations

  5   Future regulations...
Example: Cake-cutting
Suppose that my research was about cutting a cake into pieces, in
such a way that everyone here gets...
Example: Cake-cutting
Why it is impossible to implement the ‘perfect’ method ?

  1 Cakes are different   2 Always some   ...
Content

  1   Example

  2   Introduction

  3   Future developments

  4   Current regulations

  5   Future regulations...
Introduction I
The electricity value chain      Network operators




    Distribution
     networks




         The netw...
Current regulations
The network tariffs.......         .... compensate the
                                   network cost...
Introduction
The network tariffs are contested

 1   The maximum of the network tariffs are determined by a regulator.
   ...
Research question
The main research question:

  1   Research question
        a. Does the current regulatory framework fo...
Content

  1   Example

  2   Introduction

  3   Future developments

  4   Current regulations

  5   Future regulations...
Future developments
Transition to a low-carbon world

 1 New technologies to produce      2 New characteristics
   and to ...
Future developments
The network configuration will change

  1   Current configuration                2 Possible future co...
Future developments
The network configuration will change and investments go up

   1 Transition process
          a. Open...
Content

  1   Example

  2   Introduction

  3   Future developments

  4   Current regulations

  5   Future regulations...
Current regulations
Yardstick competition....                  ....the perfect formula?

  1    Simulation of competition
...
Current regulations
YC is only effective model if the world is in a
stable period of network development


  YC is not eff...
Content

  1   Example

  2   Introduction

  3   Future developments

  4   Current regulations

  5   Future regulations...
Future regulations
In the future investment regulation will be more difficult

  1 Different networks in   2 Always some  ...
Future regulations
Two approaches to deal with the future developments

                                 •   Ignore the co...
Future regulations
The role of the regulator

   The research shows four possible roles

   Two examples:

       1     Th...
Content

  1   Example

  2   Introduction

  3   Future developments

  4   Current regulations

  5   Future regulations...
Conclusions

 1   Current regulations were made for a specific set of circumstances, stable
     network development. Regu...
Questions




            Questions




                        23 |22
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Electricity network regulation in a changing energy sector: 'The help of economics?!'

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Presentation of my graduation project. In this presentation I show why the regulation of electricity networks via the RPI - X framework is not sustainable for the long run. Suggestions are given to improve the current regulatory framework.

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  • Welcome to my presentation. In the next 20 minutes I will tell you everything about my graduation project that I did for Enexis and is the final step of my master program here at the TU Delft. As you can see of this title slide, you will probably guess that it has something to do with electricity networks, the energy sector, regulation and economics. I have studied on these terms in the past months, and translated my thoughts into a thesis of more than 100 pages. I have no the task to tell you all this in 20 minutes, and hope that you will understand these terms a bit more.
  • This is of course not completely possible, that is why I will start with an example, To make it more easy for you, to grasp a bit more of the struggles that I had, I will give you first an example…. Of which is very simple but is a good methaphor for my work. After that I will give an introduction to my research and pose the research questions. I will tell you that a number of future developments are not taken into account and that we need a new approach to regulate electricity networks. <number>
  • At first sight this is a nice answer yes, well while I was doing my research I found out that the application of these instruments and formal methods in practise always results in chaos. Than I wondered why, why is cake cutting always results in chaos. That is because once you have found such formula, and you think it is perfect you will start to act on the automatic pilot. If I trusted my method I would probably be able to walk away and come back over an hour and hope that you have managed. Well, I think I walked away, or stayed very passive during the process of cutting it would result in chaos. The art of cake-cutting requires great care and skill to ensure no party is left feeling cheated or envious. Now, however, parents and party hosts can approach the task with a little more confidence - mathematicians claim to have found the perfect way to cut a cake and keep everyone happy.Traditional methods, such as the \"you cut, I choose\" method, where one person halves the cake and the other chooses a piece, are flawed because though both get equal shares and neither is envious, the division is not equitable - one piece may have more icing or fruit on it than another, for example.This \"you cut, I choose\" method, known since time immemorialFor example, suppose one half of the cake is frosted with vanilla icing and the other with chocolate icing, and suppose Alice values chocolate icing twice as much as vanilla. It is possible that Alice's valuation of the piece she gets will be less than Bob's valuation of his piece, making these the two valuations inequitable.<number>
  • one piece may have more icing or fruit on it than another, which will make people angry, and maybe you picked a piece but while cutting it turned out that the cake bleeded4
  • 5
  • Transmission is above ground, distribution networks to connect households etc. Verschillen tussen netwerkbeheerders, Aantal klanten. UTRECHT GEEL MAKEN!!!!!!!!!!!!!!!!!6
  • 8
  • Iets over research methode
  • 10
  • Link tussen technologie en impact op het netwerk -> elke technologie heeft een eigen impact<number>
  • One possible configuration -> I have analysed a number of scenarios for future configuration and all state that a two directional flow is needed, however to enable such flow the networks require more capacity and other components.
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  • Transcript of "Electricity network regulation in a changing energy sector: 'The help of economics?!'"

    1. 1. Electricity network regulation in a changing energy sector – the help of economics Graduation thesis Stefan Suurmond 3 April 2009 1 |22
    2. 2. Content 1 Example 2 Introduction 3 Future developments 4 Current regulations 5 Future regulations 6 Conclusions 2 |22
    3. 3. Example: Cake-cutting Suppose that my research was about cutting a cake into pieces, in such a way that everyone here gets a fair piece of cake, and with the objective that in the end no one feels cheated or envious. Do you think this is possible? Yes, there is a universal No, it is impossible to install solution – a ‘perfect’ formula - the perfect method, and will to deal with the issue result in chaos c b ∫ f A ( x ) dx ∫ f B ( x ) dx p= b b = c b ∫ f ( x ) dx ∫ f ( x ) dx a A a B 3 |22
    4. 4. Example: Cake-cutting Why it is impossible to implement the ‘perfect’ method ? 1 Cakes are different 2 Always some 3 Actors are different and heterogeneous spillovers 1 Basic lesson: Do not ignore the complexity to implement your ‘perfect’ method 4 |22 1 Unintended/unexpected results
    5. 5. Content 1 Example 2 Introduction 3 Future developments 4 Current regulations 5 Future regulations 6 Conclusions 5 |22
    6. 6. Introduction I The electricity value chain Network operators Distribution networks The network operators have a legal monopoly in a specific region 6 |22
    7. 7. Current regulations The network tariffs....... .... compensate the network costs Are part of the electricity bill 1 Operational costs 2 Electricity losses 3 Investment costs • Replacements • Expansions • New connetions • Innovations? Average network costs per household: €175,- 7 |22
    8. 8. Introduction The network tariffs are contested 1 The maximum of the network tariffs are determined by a regulator. Too ‘high’ tariffs results in excess profits, but too ‘low’ tariffs in less investments 2 Recently, discussions are initiated about the current methods to determine the tariffs 3 Main point of discussion is whether the regulation of investments is sustainable in the long run. 8 |22
    9. 9. Research question The main research question: 1 Research question a. Does the current regulatory framework for distribution network operators, takes into account the expected long term developments with regard to network investments? b. What is the contribution of economics to improve the regulation of network investments in the future? 2 Sub questions a. Future developments b. Current regulations c. Future regulations 9 |22
    10. 10. Content 1 Example 2 Introduction 3 Future developments 4 Current regulations 5 Future regulations 6 Conclusions 10 |22
    11. 11. Future developments Transition to a low-carbon world 1 New technologies to produce 2 New characteristics and to use electricity In contrast with the current technologies: - Decentralized - Shorter construction times - Shorter lifetime - Other predictability - Other locations Other requirements for the electricity networks 11 |22
    12. 12. Future developments The network configuration will change 1 Current configuration 2 Possible future configuration 3 Future configuration requires • A two-directional flow through the networks • More capacity of the distribution networks 12 |22
    13. 13. Future developments The network configuration will change and investments go up 1 Transition process a. Open ended b. Each player will choose different technologies 2 The future is open, but we expect: a. Investment levels will increase, but unpredictable when and how much exactly b. Investment levels will differ between different areas 3 In a dynamic period of network development, the optimal future capacity of the network is uncertain. 13 |22
    14. 14. Content 1 Example 2 Introduction 3 Future developments 4 Current regulations 5 Future regulations 6 Conclusions 14 |22
    15. 15. Current regulations Yardstick competition.... ....the perfect formula? 1 Simulation of competition In the period 2000 - 2007 between companies 1 Tariffs declined: 2 Tariffs depend on relative • 4,5 % on average performance • Total benefits < € 1,1 billion 3 Only compensation for costs 2 Quality remained the same that are efficient compared • 33 interruption minutes to the yardstick per year • Average reliability 4 YC force network operators 99,9943% to be as efficient as if they are in a competitive market 15 |22
    16. 16. Current regulations YC is only effective model if the world is in a stable period of network development YC is not effective if 1 Companies are not comparable Under the model of 2 Not all societal benefits can be YC it is not possible measured in a performance indicator to take the future 3 The network operator can’t find the developments into optimal investment level individually account 4 Historic and future cost level are very different 16 |22
    17. 17. Content 1 Example 2 Introduction 3 Future developments 4 Current regulations 5 Future regulations 6 Conclusions 17 |22
    18. 18. Future regulations In the future investment regulation will be more difficult 1 Different networks in 2 Always some 3 Actors are different different regions spillovers1 Economische Zaken 18 |22 1 Unintended/unexpected results
    19. 19. Future regulations Two approaches to deal with the future developments • Ignore the complexity 1 Standard economic approach • Find a perfect method and rules • Once such method is found there is no additional role for the regulator • You ignore the complexity to install the theoretical method 2 Institutional economic approach • Start with the complexity -> optimal equilibriums are irrelevant • During the process of change all actors will be guided by vested interests • There is a role for the regulator 19 |22
    20. 20. Future regulations The role of the regulator The research shows four possible roles Two examples: 1 The regulator should help to assess the real value to society of the investment level 2 The regulator should act as a platform to discuss the desirability of the future investment level 20 |22
    21. 21. Content 1 Example 2 Introduction 3 Future developments 4 Current regulations 5 Future regulations 6 Conclusions 21 |22
    22. 22. Conclusions 1 Current regulations were made for a specific set of circumstances, stable network development. Regulation could focus on ‘asset sweating’ 2 In the future the circumstances (the cake) will change, so we need new regulations. An investment oriented approach of regulation. 3 In the current assessments focus on one-off changes in the formulas: use of the mainstream economic approach 4 This research shows that these one-off changes will not be sufficient, the regulator should have a different role 5 To design this role we need some kind of theory that is able to address: • Technical complexity of the sector • Contradicting interests • Long term uncertainties 22 |22
    23. 23. Questions Questions 23 |22

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