Egeruoh chigoziri


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Egeruoh chigoziri

  1. 1. Re-regulating the DutchLiberalized electricitymarketIdentifying the regulatory challenges tothe Dutch electricity sector for fulldecarbonization by 2050EGERUOH CHIGOZIRI C
  2. 2. Egeruoh Chigoziri Cyrinus 201117663 Introduction With the EU decarbonization target set for 2050 , all the member states needs a plan for the resultant fullpower system decarbonization goal and this does not have to be only state based but include a regional plan.This report looks at the Dutch electricity sector with its existing peculiar characteristics to designmodifications to the existing regulatory framework based on the 1998 Dutch electricity act so that herpower systems evolves towards meeting the full decarbonization goal. The shortcomings of the currentDutch regulatory framework was scrutinized and an evaluation into the diverse regulatory changes thatcould be implemented was made. This paper is broken into two sections. In section 1, for each of the aspects ofthe Dutch power sector value chain that was considered in section 2, an appropriate regulatory response wasidentified. These regulations anticipated and is set to encourage faster adoption of more sustainable formsof production, transport, distribution and consumption of electricity, and remove unnecessary existingbarriers. The future Dutch power system as a whole was looked into in section 2, considering that the 2050 plan willexperience a strong presence of renewable sources of electricity generation, specifically very largepenetration of intermittent generation ( mostly wind and solar, with or without storage) and carbon captureand storage plants to take care of Lucrum ceasans that will likely arise from the retirement of less relativelysustainable and obsolete production technologies to be replaced by “cleaner” ones. Expected large volumesof new investment will demand favorable investment climate to stimulate the investors in the “right”technologies. The resultant effect is that it is likely to result in a much higher and, probably, also much morevolatile electricity prices which will drive huge and generalized implementation of energy efficiency andconservation that will include the output channel in the measures that will directly or indirectly impact on theconsumption of electricity. To achieve this The Dutch plan to introduce the use of enhanced metering ofelectricity consumption to facilitate demand response in 2012 is essential and on time. This is because theenhanced metering and communications is expected to allow increased distribution automation and enhancednetwork supervision and control at transmission level and even distribution level. Also the escalating issue ofquality of service in electricity supply was approached using the recent OFGEM model of the UK. Finally it wasjustified that it most likely and reasonable to assume that universal access to electricity will be achieved by2050 although with associated conditions. Section I1 Energy legislation The energy legislation in the Netherlands cannot be discussed without incorporating gas and electricity;however, most of the recommendation here will be for electricity although gas has to change as well and almostat the same time. There are selective changes that have to be done if the transition into the renewable energydominated regime will come to stay. These will be based on the loopholes that are noticed in the current Dutchlegislations based on electricity act of 1998. Other changes and procedure for these changes are explainedrelatively in detail in section 2.1.1 Regulatory recommendation It is strongly recommended that a legislation that will grant TenneT the right to siting major transmissionnetwork should be passed, in order to reverse the investment order and time of generators and networks toenable quick investment and locational signals. These legislations should be an extension of a harmonious lawthat permits the building of interconnectors between the countries of which Netherlands is coupled to. Energiekamer should transit to dynamic pricing regulations and fixed network cost should be recoveredthrough customer charges. NMa should have a representative that jointly monitors the coupled countries toavoid price disparity in these countries (Belgium, Norway). A legislation on how and when to use electricity storage facility is paramount especially when it has tocross border and this should be an extension of a directive that should be issued on EU level since electricitydoes not follow transaction path and integration of EU network is necessary and obvious. Cyber security is paramount and the power should be given to a branch of the NMa to enable dataprotection and security towards transition to smarter networks. 1
  3. 3. Egeruoh Chigoziri Cyrinus 2011176631.2 Networks1.2.1 Transmission There should be legislative changes about the grid spurs in the grid code protecting the affected producersby humanitarian and universal access law .Gridcode should be modified to include grid spurs in other toanticipate micro grid solution when need be. The Dutch congestion management is mostly by implicit auction explained in system code and this needs tobe modified to enable loopholes that can accrue when there is excess renewable to avoid spilling as a strategicbehaviour from non-dispatchable technologies of coupled countries. This will stimulate other countries toinvest in storage. Metering code should be extended to distribution because of the DG’s and mechanism toseparate the thin line between distribution and transmission should be established in the Gridcode. Systemcode should be modified to take care of the balancing issues that will arise from distributed generations and therenewable energy sources that are non-dispatchable.1.2.2 Distribution Sequel to the issue that could arise from the two major constraints stemming from the high penetration ofDistributed generations (DG)1, the following recommendations is suggested to the Dutch electricity sector and areform in her 1998 electricity act. This should be done by the Energiekamer.DSO unbundling should abide by the provisions stipulated in the European Directive 2003/54/EC. This mostlikely may imply a design of measures for achieving a higher level of national compliance with therequirements of both legal and functional unbundling tailored towards accountability and transparency .Asubsidiary of NMa should conduct frequent benchmarking analysis to measure performance and adjust toshortcomings arising from existence of entry barriers, network charging methodology and national regulatoryframework (e.g., network regulation and support mechanisms/prioritized access) in place.The next regulatory challenge which is related with DSO revenues and incentives to integrate DG might point afinger to the need for incentives that will aid the improvement of network planning taking into account DG, todesign regulatory arrangements for compensating DSO extra costs due to DG, and to improve DSO performancein quality of service taking into account DG. This may explicitly imply that outside the existence of incentivebased mechanism indexed to inflation, there might be a need to implement use-of-system (UoS) charges for DGand/or support mechanisms applied to DG, differentiated by time of use (ToU) and voltage levels, together witheconomic incentives for the DG to provide ancillary services to help DSOs to operate the network (for instance,providing voltage control and reactive power support, with a more active management of the network byDSOs). Efficiency to DSO should include a better optimization of the existing facilities leading to efficientinvestment in new installations. However there is a strong requirement for a specific regulatory mechanism tocompensate DSOs for incremental CAPEX & OPEX that will arise due to DG penetration to prevent anti-competitive behaviour from the DSO.DG penetration might not be evenly spread, hence the higher the DG penetration and concentration levels in anarea the more the required compensation to the affected DSO for incremental energy losses. The responsibilityshould go to those generators connected in those areas that could be charged with an energy fee (€/kWh)proportional to the value of the incremental losses they produce in the network. This mechanism can becombined with the implementation of UoS charges for DG and/or support mechanisms applied to DG, with avoltage levels differentiation, which could incentivize the DG connected in lower voltage networks to reducelosses at higher voltage levels.As the DG becomes a significant portion of the generation, there is a need to charge them with theresponsibility to help in the improvement of reliability indices in terms of duration and frequency of supplyinterruptions and voltage quality keeping voltage disturbances within defined limits especially when they areworking in is landing mode in case of network outages. Compensations for DG that can provide ancillaryservices such as voltage control, frequency reserve, or black start to improve voltage quality is necessary. Thiscan be encouraged by implementing-performance based regulation for quality of service targets that provides explicit incentives to DSOs forimproving quality of service levels.- Dynamic efficiency based incentives for DSO whose innovation programs that aids deep transformation frompassive to active management increasing DG participation in network control and DG contribution in case ofnetwork disturbances. 1 See distribution section 2
  4. 4. Egeruoh Chigoziri Cyrinus 201117663- incentives to DG for providing ancillary services to relive the TSO’s burden and assist DSOs to in networkoperations related to issues of voltage control and reactive power support, frequency reserve, islandingoperation aimed at net improvement in quality of service levels.Incentives to promote dynamic efficiency for the DSO to integrate DG should be added to the networkregulation. This can be achieved by including R&D investments as a separate item in the Regulated Asset Basewith higher rates of return or with a partial pass-through item. Another approach could be by using identifiednetwork innovation key performance indicators or by involving the regulators in the testing of some of thesemethods to confirm efficacy. Another crucial challenge is the need to send economic signals to DG for their efficient integration are whichindirectly means a need for an efficient and effective design of support mechanism not only for DG connectioncharges and UoS charges but also for ancillary services and other network services provided by DG. A supportmechanisms factoring in a significant DG shares should ensure compatibility with energy market prices andnetwork UoS tariffs that will drive efficient DG operation and network location should be implemented. Withrespect to DG operation there is a need to achieve efficient market integration that will improve the net socialvalue of the MWh to the consumers. RES_E promotion mechanism should be dynamic and have temporaldiscrimination to stimulate production during scarcity ( i.e. Implement feed-in tariffs with time discriminationor feed-in premiums on top of market prices that promote efficient DG operation, i.e. higher production at peakhours, and storage and controllability capabilities in medium and large size DG installations. )Ensuring a level playing field for DG integration is necessary in Netherlands and this implies that DG connectioncharges should be paid once when the connection is required, regulated, based on simple rules and may or maynot remains the shallow costs, i.e. the direct costs of connection. There should be transparency in calculatingthis cost and other associated network reinforcements and upgrades due to DG connections should besocialized among the network users and paid through the Use of System (UoS) charges. Depending on thecircumstances, DG should pay or receive UoS charges which should be cost reflective accordingly anddifferentiated by time of use and voltage levels. DG connections at lower voltage levels and DG production atload peak hours should be incentivized to discourage instability in transmissions and this can be achieved bydifferentiated DG support mechanisms such as feed-in tariffs by voltage levels1.3 Market powerThere should be a law that prohibits the largest share holders in conventional generation to have larger amountof RES-E to avoid likelihood of abuse. Measurement of market power should not be based only on capacity butalso production. The use of HHI index should be complemented with other methods and monitoring marketpower should be controlled both ex ante and ex post.1.4 RetailThere is a need to redefine and make new legislations that will take care of supplier of last resort and define theprocedures for transfer. Also a regulation needs to be in place to see how DG and RES-E, can be programresponsible or not. Section II2 Leaving the EU 2050 decarbonization roadmap for the Netherlands to the “market” The Dutch electricity regulation of 1998 has been adapted to take care of the turmoil’s that have existed inthe days through the learning by doing (Ajodhia, Franken, & Van der Lippe, June ,2003), but to contribute theirquota in the EU 2050 energy roadmap might mean extra adaptation. The Dutch is a good disciple of the marketonly system, however knowing that market is not perfect, one might have to complement this strategy withother mechanism. This is where regulation can be of help. On a closer look at the EU 2050 energy roadmap as a country, the first challenge should be to considerwhether it is worth a while to actually venture into this plan ab initio. Considering the fact that all the countrieshave their plan, meeting or even exceeding this target depends on variables like the cost of the technology thatwill be viable in the country in question because of lack of generosity and equality in the availability of primarysource of energy, maturity of technology and the actual total percentage that can come online considering theinstalled capacity and implied lucrum ceasans if there becomes excessive penetration of electricity fromrenewable energy sources (RES-E). Also this decision cannot be taken unilaterally as acting independently ofother EU member states can lead to blind investment or overinvestment. Hence there is a need for a long termstrategic planning involving all countries with diverse abundance of primary source of energy with the onesthat don’t have, to facilitate a regional economic development or at least avoid the issue of over investment. 3
  5. 5. Egeruoh Chigoziri Cyrinus 201117663 The next challenge of how to distribute RES to sectors considers the transport and the electrical sector asthe major “victims”. However, it seems relatively cost effective and efficient to approach the RES plan from theelectric sector. In other to make sure that reduction does not come as a public good, it is essential to raise thetaxes in other sectors in other to avoid leakage and to provide incentive for innovation that will use cleanelectricity like electric cars and discourage their reckless squandering of fossil fuels without internalizing theexternalities and also to stimulate research in the transport sector. Focusing now on the electric sector with relatively easier and more matured technology, the thirdchallenge could be how to redistribute the development percentages to the technologies available. Assigningthis to the technologies with higher maturity might lead to the loss of innovation capabilities anddiscrimination, while an equal distribution of percentage of development might not be cost effective. To tacklethis dilemma, it becomes necessary to implement different economic instrument to promote differenttechnologies according to again, different variables. These variables include but not restricted to the costeffectiveness, protection of knowledge spill as a public good, non-discriminatory promotion, politicalacceptability, and maturity of technologies involved. The implied multi-criteria evaluation might be subjectiveto the Dutch cultural dimensions2 to avoid direct institutional transplantation3 and economic determinants thatmight attach different weights to the decision criteria. (Geert, Gert Jan, & Michae, 2010) (Martin, konstantinos,& Mamodouh, 2002) The issue of funding could be one with conflicting factors. However, it apparently seems normal todistribute the funding across board in all the sectors, including the output channel, in order to stimulate thedemand side response while making sure those taxes sustain competition and avoid leakage especially to thetransport sector where the issue of renewable has seen a sluggish growth. The issue of Ramsey pricing,although might seem attractive still poses the challenge of discrimination and response of inelastic demand onthe long term that might distort the investment recovery plan since the investment is long term based. Theneed to tax other sectors in other to ensure competition across sectors makes it obvious that a multi facetinstrument is essential to promote RES plan and the funding might as well exploit different avenues whilereducing discrimination to the minimum.2.1 Regulation as a complement to the market In as much as the Dutch regulators are good disciples of the “market paradigm” and its efficient allocationof resources, they are still conscious of the fact that this will work up to the extent the microeconomic structureof the Dutch electricity market permits and this in reality entails micro- granularity in market structures.Devoid of this perfection, its implication is not farfetched: difficulty and complications in the design,implementation and monitoring of markets which undoubtedly, is present in the Dutch electricity market.(Sioshansi & W, 2006) The issue of the networks (distribution and transmission) is under consensus to be under regulationfollowing their natural monopoly characteristics, however the generation and retail that is well suited to thecompetitive environment has not had a good history in the Netherlands considering the XS energy saga(Coquet, 2010). Moreover, the issue of market deciding the level of investment is almost compromising theminimum adequacy requirement in the Netherlands hence demanding the need for the regulator intervention.Sequel to these limitations of the market in taking care of long term availability of energy resources and alsothe strong need to influence the level of energy dependency and resources mix, there is a need to take care ofcontingencies arising due to this market failure in the Dutch market from the issue of security of supply andadequacy that might even worsen due to exposure to dependency. Looking at the support mechanisms for RESwhich is long term cannot be done effectively from the perspective of the market because of political interest,regulatory failures and uncertainty that accompanies long term investment, it seems apparent that there is aneed to help the market with a strategic vision orientation so that agents can be assured of uncertaintyminimization in long term investment. Going a layer further in the exploration of the Dutch electricity market onion reveals a problem of adequacysince she is a net importer of electricity with more than 98% oil import in 20104 used mostly by the fossil fuelplants. Referencing the average of 50% primary energy dependency in Europe, the Netherlands can be assumed2 Hofstede five dimension for Netherlands shows that they can have behaviour orientations to a particular group of EU countries3 Martin de jong refutes the issue of forcing a policy on a country rather they should be allowed to adopt it.4 4
  6. 6. Egeruoh Chigoziri Cyrinus 201117663vulnerable to energy dependency, relying mostly fossil fuels with energy dependency of 38%. Even thoughthere was a proliferation of CHP and energy efficiency program, the issue of energy efficiency paradox remainsrelevant5 with the growth of energy intensity almost doubled (referenced to 2000) and their non encouragingeffort to reduce GHG. Another source of complication is that the Netherland electricity system is capacityconstrained and not energy constrained as there are no hydro in the Netherlands making them dependent onGas especially since they have it in abundance in Groningen. With the Netherlands having the lowest share inNuclear energy in the EU15 (4%) coupled with the German nuclear moratorium, the issue of adequacy and badenergy mix cannot be overemphasized6. Another issue that cannot be neglected is the industrial growth rate of the Netherlands especially in theregion of Rotterdam, Maastricht where the heavy industries are consuming power with a lot of emissions. TheNetherlands is supposed to reduce their emission by 6% according to the Kyoto protocol burden sharingagreement before 2020 however; their emission is on the rise (200 Mt/CO2 eq) with 90% of that coming fromthe energy sector. Hence an eyebrow can be raised on the “total market control” and the quest for regulation asa complement is obvious and this can be long term and mostly indicative.2.2 The role of indicative planning Sticking to the market model in the absence of centralized planning, provokes the policy need to identifythe lack of sustainability in the current regime, the minimum application timeline requirement, the role of RES-E and the required minimal mix, the method that can stimulate energy efficiency and conservation acrosssectors (especially electricity and transport) and the use of the market for obtaining signals. The regulatormight be needed to design mechanisms for adequacy, incentives for RES-E support while avoidingdiscrimination in technologies, ensuring that the EU 2050 roadmap is achieved and ensuring universal accessto electricity in the Netherlands. This complementary function requires a strategic appraisal and normativeplanning of the electricity generation in Netherlands and EU as a whole, and hence indicative planning might bean essential requirement. The indicative planning which should be more than a scenario analysis7, will allow the degree of freedomthat is healthy for the market while complementing the market in many situations. Its aim should be toenshrine what should happen in the future into a holistic approach considering all the stakeholders, clarifyingthe necessary requirements to achieve the EU 2050 target in the Netherlands in time frames of maybe 10, 15and 30 years. Modifying J Black definition, “indicative planning should attempt to promote a more stable, rapidand efficient growth in the electricity market via the exchange of forecast leading to generally held set ofconsistent expectations especially with the 2050 target” The role of indicating planning in the Dutch achievement of the 2050 plan will focus on the provision of aframework that is clear to all affected agents, encompassing the goals and the required resources needed toaffect the regulated aspect of the electricity sector. This should include but not limited to the volume target ofthe renewable energy, the time and secured rate of penetration, the corresponding support mechanisms anddynamism that could accrue due to variation in technology maturity that might affect incentive methodologychange, the lower boundary of reliability that can be accepted due to intermittent penetration of renewable andhow to effectively engage the output channel. Also, it should outline the investment rate especially in lump suminfrastructures, issues of interconnectivity in the Netherlands for the security of networks, demand sidemanagement which should not be devoid of sound educational programme for consumer’s orientation. Anupper layer of the indicative planning should acknowledge that the Netherlands cannot achieve this target onlynationally, hence there should be regional analysis of the EU and the global implications of the carbonemissions and incorporate them and all these should be done in a manner that explores the challenges posed bydelivering the EUs decarbonisation objective while at the same time ensuring security of energy supply andcompetitiveness in Netherlands. It should respond to a request from the European Council on the EU 2050roadmap. The inner layer should focus on the Dutch electricity value chains and their connectivity.5Energy efficiency paradox 6 According to the fact sheet of 1, the energy mix of the Netherlands is 40% oil, 50% gas, 5% coal, 1 % nuclear and 45 renewable. However inelectricity generation, renewable penetration is 9% with 62 %, 21% and 2% of generation from gas , coal and oil respectively 7 Unlike the 2030 transmission plan, a proper indicative planning should be inclusive 5
  7. 7. Egeruoh Chigoziri Cyrinus 2011176633 Renewable generation The design of renewable energy sources of generation plan (RES) is no longer a single variableconstrained optimization problem in terms of looking at technologies constrains alone. Taking the EU memberstate into this context could mean extra variables like EU targets on reducing emissions, renewable energy andenergy efficiency, constraints on energy security, differences in cost of technologies and their impact on thecompetitiveness of the economy and of course environmental impact. This could make this complex problemelude Energiekamer of feasible solution set or provide one with conflicting challenges. Because of thegeographical location of the Netherlands and the associated weather conditions, this section will be basedmostly on wind and biomass. Bearing in mind that the objective of every EU member state of which the Netherlands is almost the same,which is to design a plan to achieve a target on renewable energy imposed by the EU at minimum cost andwithout putting security of supply of its consumers to risk. This could translate quantitatively to a 20% share ofrenewable energies in final energy consumption, implying a 40% share of renewable in the electricity demandby 2020 and an almost a 100 carbon free electricity by 2050. Moreover, understanding that climate changecannot be separated from the EU 2050 decarbonization target which concurs with the IPCC in its FourthAssessment Report8 that recommends the target stabilization level of 450 ppmv CO2eq emissions with result ofexpected global mean temperature increase above pre-industrial level, at equilibrium, of 2.0 to 2.4 ºC fromAnnex I9 parties of which the Netherlands is a member. This should boil down to a decrease of about 25% and40% below 1990 levels in 2020, and between 80% to 95%, below 1990 levels in 2050”. This will surely come ata cost, as it was estimated that a reduction of global GDP in the range of 3% total (or 0.2% per year) to nil by2030, and up to 5.5% total by 2050. However, this might be if the basics are on the fossil fuel technologies,however incorporating the RES-E could change the results posing a challenge of how to achieve thedevelopment and the massive deployment of these new low carbon technologies as soon as possible. In as much as it has been established that economic instruments are better than standards and there arepros and cons of using the price or quantity instruments, (Linares & Labandeira, 2010))10 and some othereconomist11 negates the belief of a single instruments to deal with the climate change. Hence one could notagree less that it is preferable to use a multi-instrument approach to support the renewable sources supportwhile combating the associated climate change. This should be a carbon price established as the benchmark,preferably through the auction mechanisms with a safety valve to hedge against risk which can be in the formof a price ceiling and a price floor to avoid total price excursion. This could be complemented with a technologypolicy, technology standards, information and educational policies. Voluntary approaches should also beencouraged. The reasons follow. The issue of the cost competitiveness of the RES-E can be a problem especially when the fossil fuelgenerations as cheaper. Two approaches can be to standardize some processes in the production lines thatcould reduce the emission or preferably, internalize the carbon price as an externality, thus paving way for theeconomic instruments. The argument against the standards is the lack of equimarginality which the economicinstruments favors, however that does not rule out the entire use of standards in this multi-instrumentalityapproach. Because electricity is a homogenous good and the output channel (demand side management) isinelastic on the short term, there might be a need for standards when the output channel is to be included. Astep further shows that when the economic instrument is to be used, a price or quantity instrument poses achallenge. Using a tradable quota as being used in the EU addresses the problem of volume uncertainty but notwhen there is no safety valve (as can be seen in the price of carbon that has just fallen) hence there might be aneed for the safety valve as both a price floor to avoid what is currently going on and a price cap to avoid thecarbon prices going through the roof. The cost of carbon should be high enough to discourage the constructionof fossil fuel plants while making the RES-E technologies competitive. For the Netherlands, the adopted targetof renewable is around 15% by 2020 and 30% by 2050. To achieve this, there will be a need for technologystandard. Leaving this target to the market is obviously unfeasible especially because of its long term orientationfavoring a need for technology policies that will promote the amount of renewable penetration that is requiredespecially support their R&D because knowledge spillover is a public good. This can be done through different 8 IPCC report 2007, see reference 9 Annex 1 countries are the OECD countries. 10 Pedro linares suggested multi-system because of the energy efficiency paradox 11 Others that supports multi—Newbery, Kohoene etc . See references 6
  8. 8. Egeruoh Chigoziri Cyrinus 201117663approaches depending on the maturity of the technology. For technologies that are still in the demonstrationphase or in their cradle a policy that will push them into the market will be the right one. Hence there will be aneed to have a technology push policies accepted into the Dutch regulation. This is essential as 90% of theelectricity generation that are existing in the Netherlands are fossil fuel ( coal, oil, gas) and hence are polluting.Sequel to the long life of this generators, it is obvious that technologies like Carbon capture and storage has tobe encouraged as an abatement technology to capture the emissions. Shutting down these plants will incur adouble cost, firstly, the cost of renewable replacements within short periods and the associated lucrum ceasans. Another pressing need for the renewable will be the technology mix that is to be achieved. Promotingtechnologies according to maturity will not only discriminate against growing technology, but will discourageproper technology mix, frustrate dynamic efficiency and encourage technology dependency. Thus in other toavoid these, a market pull mechanism that will compliment the technology push policies is essential. However,using the right according to battle et al 201112, RES-E support mechanism can be seen from 2 perspectivesdepending on the involvement of the regulator. If the Regulator provides an implicit payments or discounts orprovide institutional support tools that include: research and development funding, below-cost provision ofinfrastructure or services (costs of technical adaptations such as shadow connection charging) , removal ofcosts of imbalances and ancillary services in general), and positive discriminatory rules (such as regulationsfacilitating grid access for RES-E power, RES-E dispatch priority in the EU and other: net metering, buildingcodes, etc.).It can be referred to as indirect methods otherwise it is called the direct methods. Also for maturedtechnologies , it could depend on the learning curve which can favour the quantity instrument if they are flat (for matured technology) or price instrument if they are steep ( immature technology)3.1 RES –E Support schemes When categorizing the different types of support mechanisms available to electricity from renewableenergy sources (RES-E), a fundamental distinction can be made between direct and indirect policy instruments.Direct policy measures aim to stimulate the installation of RES-E technologies immediately, whereas indirectinstruments focus on improving long-term framework conditions. Besides regulatory instruments, voluntaryapproaches for the promotion of RES-E technologies also exist, mainly based on consumers’ willingness to paypremium rates for green electricity. Further important classification criteria are whether policy instrumentsaddress price or quantity, and whether they support investments or generation. Table 1 of appendix, shows theclassifications and the best applications to the Dutch electricity market. The Netherlands might not have the luxury of sunshine; however they can harness the offshore wind by thecoast of Maastricht13. Nonetheless, the price of wind energy cannot compete with the price of fossil fuel unlessthere is a support mechanism. A price based mechanism to guarantee entrance into the market will favour theimplementation of Feed-in-Tariffs (FIT)( although they have been using Feed in premium ) in the Dutchregulation which will promote investment by guaranteeing RES-E generators a specific price per MWh that isproduced. To encourage development of new RES-E capacity, FIT must be high enough to ensure long-termrecovery of costs for a given technology and the time duration should be up to 20 years to discourageinvestment uncertainty on the long run. Even though FIT can come in form of regulatory agreements orcontracts ,a flat or stepped tariffs, because of variation in RES-E development especially considering wind ,solar and biomass and also variation in siting and scale (e.g. onshore vs. offshore wind) a stepped” tariffs willbe encouraged to differentiate levels of remuneration according to the RES-E profile. The payment will bedecreasing and should be indexed to a lot of factors like the learning curve, and the influence of other RES-Etechnologies. A quantity instrument can be applied also which should be enforceable and this can take the form ofrenewable portfolio standards (RPS), also referred to as tradable green certificates (TGCs) or renewableobligations (ROs) in the EU, establish quota requirements for consumers to have certain percentage ofrenewable in their consumption. This will help in price recouping for these technologies. There will be cost associated with the integration of large scale wind. The balancing cost will rise becauseof the likely frequent need for more reserves and balancing services which will lead to a need for differentreserves for Regulations, load following and scheduling. The associated cost increase will be because of theneed for additional quick start capacity and conventional power plants running at technical minimum .Weakcontribution of wind power to peak situations due to variability of wind power generation will lead to 12Battle did a nice design on how penetration of different renewable can take care of the current issues of proper mix and who pays 13The most likely renewable that will dominate the Netherlands RES-E is likely to be wind and a little of biomass since the APX has startedtrading in biomass. the issue of wind is the high intermittency while biomass does not have intermittency 7
  9. 9. Egeruoh Chigoziri Cyrinus 201117663additional reliability cost due additional installed generation capacity needed to achieve the same level ofLOLP14.Additional congestion and losses cost will also accrue because of locations of the wind parks whichmost times leaves one with no choice and this is because the lead time of construction of wind plants is lessthan the time for network capacity expansion. There will also be associated connection cost and hence the needfor network reinforcement.3.2 Market design The market design will determine the quality or accuracy of market signals .With the Dutch day ahead andintraday market being the most liquid, the volume of trade of the bilateral market (OTC) dominating the APXtrade ( spot market) , it might be ill equipped for optimized generation scheduling. In terms of gate closure,there might be a need to reduce the time for real time emulation, to decrease imbalances. Balancing signals byTenneT should be cost reflective to induce efficient behaviour and this leaves a dilemma of single or dualbalance prices15. In terms of market signals, wind technologies have no way to react to market signal and the agreementmight favor their non-exposure to market signals. However, this might be for the short term only. In the longrun, there might be a need to expose wind to market signals since there are positive effects. These includeoptimal selection of wind site to harness the varying wind patterns that will take the different temporal value ofenergy expressed in forward and balancing market signals. Locational signal should entail the optimal selectionof wind sites to minimize the congestion costs and losses hence favoring the adoption of locational networktariff or cost –reflective connection costs. There should be improvement in maintenance planning andimprovement in technology combination in portfolio. Also exposure of wind energy to market signals willencourage control (reduction) of production for extreme cases of imbalance or network constraints,improvement of controllability by innovation, improvement in individual forecasting and system balanceefficiency and transparency of the support schemes that were employed. The wholesale market (APX) will have to adapt to these RES-E infiltration. There might be a need forpriority in dispatch as the renewable cannot store the primary source of energy. Although this might distort themerit order for large penetration context (example solar or biomass), the increasing accuracy weather forecastcan help reduce these uncertainties. In the case of lucrum ceasans for the older technologies that are polluting, this avenue can be used topromote the CCS as a transition technology. The CCS technology could be broken down as a business in its valuechain, which includes transport and storage and mandate the polluting technologies to use it if they want tocontinue to generate although this might demand a legal back up since they have license given to them.However CCS has to come out of the demonstration phase and there is a need for educational awareness toencourage its social acceptability. All these require an indicative planning in order to coherently implementthem in the regulation adjustment.3.3 Evaluation of the Different RES-E Support Schemes (Effectiveness and Economic Efficiency) It is not all about the mechanism for supporting investments, there is a need for reviewing and evaluatingthe different RES-E support schemes described above, the key question is whether each of these policyinstruments has been a success. In order to assess the success of the different policy instruments, the mostimportant criteria are Effectiveness which checks if the RES-E support programmes lead to a significantincrease in deployment of capacities from RES-E in relation to the additional potential. The effectivenessindicator measures the relationship of the new generated electricity within a certain time period to thepotential of the technologies. Also the Economic efficiency checks the absolute support level compared to theactual generation costs of RES-E generators, and what was the trend in support over time. It also analyses if thenet support level of RES-E generation is consistent with the corresponding effectiveness indicator. Otherimportant performance criteria are the credibility for investors and the reduction of costs over time.4 The regulation mechanism for the Dutch electricity Networks The regulation of the networks in Netherlands shares some characteristics and regulated by the sameauthority: Energiekamer, although with variation in specifics hence the implied method of regulation differs alittle. In general the Dutch electric network regulation is incentive based, which involves a yardstick ex-ante 14 Loss of load probability of the initial system will reduce due to high wind penetration. 15 See table 3 8
  10. 10. Egeruoh Chigoziri Cyrinus 201117663methodology by an explicit use of benchmarking employing non –parametric frontier analysis called dataenveloping analysis, with generic efficiency scores . It is necessary to look at the performance of the networks from two perspectives viz efficiency and qualitywhich is still a regulatory concern the Netherlands now more complicated by the EU roadmap. Consideringefficiency, the use of simple indicator of inefficiency which can be defined as the ratio of an output measure toan aggregate measure of inputs, even though it does not require a multivariate is not adequate to account forthe environmental factors and more elaborate methods are generally preferred. These methods are generallybased on distance functions called frontier analysis of which the Dutch uses DEA which is very recommendable.This benchmarking is used to deduce the level of attainable costs and in setting the X-factors within periodicprice control reviews assuming that assumption that cost data of a group of firms are mutually informative Measuring service quality can be linked to its importance to consumers, the controllability by networkoperators and its measurability by regulators. The choice of X has an influence on the migration of low carboneconomy and thus a need to set out a new sustainable regulatory framework. Borrowing a leaf from the RIIOmodel (Revenue set to deliver strong Incentives, Innovation and Outputs) 16of the UK seems quite interestingin other to encourage the network industries to get fully involved in the delivery of a sustainable electricitysector and deliver long-term value for money network services for existing and future consumers The current industry sector is adequate in running this although there might be need for offshoots ofparastatal from the Energiekamer and NMa to take care of the indicative planning. The stakeholder shouldempower Energiekamer and the TenneT in network planning and expansion decision. The level of involvementof whom and how will vary17 and this will influence the level of third party modification request which shouldfollow the rules meted out by NMa. The result of this modification should be oriented to the delivery of safe and reliable services, non-discriminatory and timely connection and access terms, customer satisfaction, limited impact on theenvironment and delivery of social obligations. Regulatory control will remain ex-ante maintaining the upfrontprice control indexed to inflation using Consumer price index (CPI). The length of the price control will be a bone of contention. The initial 4 years might not work well in thelow carbon economy due to the influence of investment cycles and dynamic efficiency. An extension might benecessary which has to be at least 6 years initially (50% increment relative to the past time) which however,will have to be reviewed before the end to avoid gaming. This price period can be adjusted as time goesdepending on the lesson learnt. This is expected to be proportionate since the Netherlands uses a yardstickmeasurement, however this can be internationally benchmarked but taking spatial and temporal differencesinto consideration. In terms of incentives, this should be a carrot and stick mechanism, favoring the good and punishing theoffenders. Penalties should be high enough to deter offenders which might get up to license revocation whilereward should adequately stimulate performance. Finally, for distribution to have dynamic efficiency, it shouldhave an innovation stimulus package limited in time that favors innovation in performance and cost savings asfast as possible. A detailed concern of distribution and transmission follows.4.1 Distribution The Dutch are not new to distributed generation (DG) especially with the proliferation of micro combinedheat and power (CHP) in her power system, however currently; this does not contribute significantly18 to thetotal generation volume. Subsequently, when it does which is likely to be the case, there may be a lot ofdifferences in the operation of their power system. Unbundling at the distribution level is very essential as itmay negatively impact the access conditions for new DG operators trying to penetrate the market especiallywhen Distribution system operators (DSO’s) exhibits anticompetitive behaviour if neglected. 16 OFGEM RIIO Model - 17 Sherry R. "A Ladder of Citizen Participation," 18 What is significant can be relative 9
  11. 11. Egeruoh Chigoziri Cyrinus 2011176634.2 Distributed generation and smart metering The current Dutch electricity regime is expected to experience a significant metamorphosis, primarilydriven by the need to deliver a low carbon economy - with a target of more than 80 per cent reduction ingreenhouse gas emissions by 2030 and decarbonizes electricity generation by 2050 – while maintainingsecurity of supply. The drivers of change will be dynamic hence the network companies and the regulatoryframework will need to evolve with it. These drivers that will be the offshoots of the replacement of ageingassets include the offshore networks, electric vehicles, electric heating, smart grids, electricity storage, newnuclear and having a predominant renewable energy sources. However, this is expected to come at a cost ofwhich the security of supply; the issue that is mostly dreaded could be affected by local generation, energyefficiency, district heating and climate change adaptation. One could not agree less with the DG grid report19that under the resultant decarbonized system, two broad categories of issues will most probably arise. Thisinclude how DSO regulation should be changed for enhancing the share of DG and the economic signals to begiven to DG to achieve its active integration in distribution networks. However the rate of penetration of thesedrives the temporal dimension of the above two challenges The penetration and integration of Distributed Energy Resources (DERs) is a major planning challenge tothe DSOs. There will be a need for accurate assessment of the impact that DER will have, when it will have itand how , since the specifics of installed DERs may affect the control of the networks within limits, quality ofsupply losses and may have resultant financial hurdles. Limiting this to effect of inclusion of electric vehicles(EVs) on the distribution networks raises the question of efficient use of EVs as responsive demands anddispatchable storage. The considerations for connection of EVs to the Dutch distribution networks are similar to that of otherDERs and should be subject to the same technical, economic and regulatory challenges. Technical challengescan be analyzed in terms of three main categories of impacts: network demands, network voltage levels andsecondary transformer overloading with general effects that includes large voltage drops, increased losses,voltage unbalance and other issues related to power quality20. Economic challenges include costs ofinfrastructure, maintenance and shifting the operation of distribution networks toward active instead ofpassive management21. The third and perhaps most important challenge is a regulatory one which demands aclear policy from both governments and utilities across car manufacturers and consumers However, it isunlikely that PHEVs will have the impact that some researchers are suggesting is possible hence might not beconsidered here .224.3 Transmission The Dutch system comprises several regional grid administrators, while the national high-voltage grid isonly managed by TenneT. The duties and areas of authority of all grid administrators have been laid down inthe 1998 Electricity Act, and various transmission procedures and regulations is based on this act of which itsimplementation is monitored by the Office of Energy Regulation (DTe) on behalf of the government, bychecking the services and tariffs of the grid administrators. In order to harmonize performance, the joint gridadministrators have submitted an annex to the Act for the tariff structure and the technical conditions(regulations) to DTe. The technical regulations are summarized in codes which are the Grid Code, the SystemCode and the metering code and tariff code TenneT is not lagging behind in the concern of the 2050 decarbonisation road map of the EU because of thedetailed plan that they have 23 which might be called an indicative planning is supposed to provide an efficienttransmission grid that facilitates a high degree of security of supply, and reacts in a timely fashion todevelopments in the energy market such as internationalization and the drive for greater sustainability The Dutch electric transmission grid operates at a number of voltage levels (see figure appendix) wherehigher voltage levels (Extra high voltage (EHV) and high voltage (HV)) transmit large quantities of electricity 19 DG can be a serious issue when not taken care of . see reference by Gomez et al 20 V. H. Méndez, J. Rivier, J. I. d. l. Fuente, T. Gómez, J. Arceluz, J. Marín and A. Madurga. Impact of distributed generation on distributioninvestment deferral. International Journal of Electrical Power & Energy Systems 28(4), pp. 244-252, 2006. 21 A. Vojdani. Smart integration. Power and Energy Magazine, IEEE 6(6), pp. 71-79, 2008 22 J. A. P. Lopes, N. Hatziargyriou, J. Mutale, P. Djapic and N. Jenkins. Integrating distributed generation into electric power systems: A reviewof drivers, challenges and opportunities. Electric Power Systems Research 77(9), pp. 1189-1203, 2007. 23 Vision 2030 and quality and capacity plan .TenneT is tasked with providing an efficient transmission grid that facilitates a high degree ofsecurity of supply, and reacts in a timely fashion to developments in the energy market such as internationalization and the drive for greatersustainability 10
  12. 12. Egeruoh Chigoziri Cyrinus 201117663over long distances with low levels of energy loss while the lower voltage levels are used to connect theconsumers .This grid cannot be exonerated in the need to integrate the north west European electricity marketeven though it is obvious that the transition to a sustainable energy supply has posed other challenges. This isevident in the EHV that was meant to be an interconnection that has now changed its role24.4.3.1 Sustainable development impact on the Dutch transmission grid The impact of the carbon free electricity market in the EU will influence the Dutch grid of which most of theinfluences will be observed in • The liberalization of the market has made the national borders less relevant in this respect as theinvestor’s decisions transcend national border (CWE coupling with the Belgian and German borders has shownthe same price) (Energiekamer, 2011). • The market integration and coupling is on the rise leading to a growing international trade in electricityresulting to increased transmission instability over longer distances across the Dutch border including theHVDC line with the UK and growing lines with other borders25. • The location of the Netherlands with respect to the North Sea which is considerably an attractive locationfor large scale electricity production partly due to availability of sufficient cooling water and partly due to theexcellent possibilities for shipping in fuels such as coal and biomass not neglecting the abundance of wind. • Energy conservation, reduction of CO2 emissions and the increased use of sustainable energy, in pursuitof the EU 2050 agenda will result in new initiatives and the application of new technologies, Nonetheless, theelectricity demand in Netherlands is expected to rise substantially. In the response to these likely developments, four scenarios 26, with the corresponding possibletransmission grid configurations and their associated transmission capacities have been analysed for theirresilience of which the analysis shows that the electricity transmission grid will increasingly have to handlelarge transmissions over longer and longer distances. The trend of ever greater distances between productionlocations and consumption centers is set to continue, resultant from some developments such as theconstruction of new power stations on the coast and the installation of large scale offshore wind farms.4.3.2 Gray areas in current Dutch transmission regulation The current legislation of the Dutch and the neighboring countries especially the ones with which hermarket is coupled. In terms of planning criteria, there might be a need to have a harmonized planning criteriawith the neighbors and this should be frequently announced to the give the generators indications forinvestment location and also give locational signals. The TenneT should be given full responsibility to engage inwell proven expansion for the Netherlands. Then for the interconnection expansion, there is a need to have aregional institution responsible for this with full power given although the might be a need for a competitionauthority in all the associated member states that can have a veto power when there is a fear of market power.Also the cost allocation should be harmonized and most probably be from the citizens. The business models for transmission development should be a little ahead of the generation and shouldalso be harmonized with the siting procedures and also explicit for the Netherlands and for the neighboringcountries. The clearing of these gray areas will be a major step towards legislative support for the efficienttransmission system in the coming regime. Investment Using the security of supply and cost effectiveness as the criteria for analyzing the pros and cons ofinvestments in the EHV grid and the HV ,it is obvious that investments to respond to the earlier mention issuesmay result to adjustments to the grid structure, grid upgrades, better control of the grid, and modifications toEHV/HV interconnections One loophole in the regulation can be observed in a situation where the HV grid is connected to the EHVgrid via a single EHV/HV interconnection, this makes the underlying HV grid to become more susceptible to 24 The capacity planning docs 25 ts_Europe/Internationalesamenwerking.aspx 26 See appendix for scenario diagrams 11
  13. 13. Egeruoh Chigoziri Cyrinus 201117663interconnection related ‘common cause failures’27 if structural changes are not made to the EHV/HVinterconnection. This is a problem as the grid code does not consider the common cause failure because gridcode recognized only the failure of single component during operation and not during simultaneous failure oftwo components. In as much as structural changes in configuration like the transformer substation might provide aneffective solution to this problem, analysis with a mid to long term focus indicates that splitting the EHV/HVsubstation’s busbars into sections instead of investing in HV connections between the high voltage grid sectionsis the most cost effective approach because it fully resolves three long term challenges of controlling the effectsof parallel transmissions on the HV grid, managing the short circuit capacity in the EHV and HV transmissiongrid and reducing the long outage duration that may result from a common cause failure. This is however moreexpensive. In light of the above limitation of the grid code, issues of grid spurs that is a major concern as it neglectssome part transmission grid of 110 kV and 150 kV spurs with a total load of 100 MW or less. In the regulatoryresponse to this there is a need to upgrade those spurs with a load that currently exceeds 100 MW or will do inthe near future by TenneT which involves an investment of 127 million euro in these upgrades over the comingyears with the expectation of reducing consumers in the Netherlands dependent on spurs by a 33%.28According to the Grid Code and analysis of social costs and benefits, spurs with a load of less than 100 MWdoes not merit structural investments. The lack of economic justification of these investments within thecontext of current legislation will demand a change in the prevailing legislative regime and authorization fromthe Office of Energy Regulation. However this can be justified using the equality rights and lack ofdiscrimination. Access With the strategic location of Netherlands near the North Sea, the development of offshore wind farms isexpected and this will step by step with the first step being the construction of a number of wind farms closerthe coast. Their most economically efficient access to the grid is expected to be via the onshore grid, singly asvia a high voltage AC cable connection. The plan for the deeper offshore connection will be via the developmentof a ‘collecting station’ (the ‘Socket at Sea’ project) which will be transmitted to one of the onshore 380 kVgrid’s four coastal locations 29by means of a high voltage AC connection. However, for wind farms with greatercapacity (or energy extraction areas) and with deeper offshore location, the sockets will be used to connectthem to onshore grid via a DC line. Rules of connection whether deep or shallow needs to be set because of thecost that is involved and hence, a regulation for this is essential. Tradeoff between centralized and decentralized planning The issue of balancing that TenneT currently achieves by regulating large scale production units andkeeping several major industrial producers on call to provide emergency capacity if necessary works . However on the advent of sustainability objectives set out by the European Union and the Dutchgovernment .The implication is that current flexibility arrangements might no longer be sufficient in the futureas a result of likely high increase in the generation of electricity by sustainable methods, including very largenumbers of small scale energy sources which are close to consumers (e.g. photovoltaic systems integrated intobuildings) and large scale energy sources which are usually far away from consumers (e.g. offshore windenergy). This kind of electricity generation is source dependent (supply driven) with high output variability(fluctuating, intermittent). In terms of investment, the integration these sources on a large scale requires the use of intelligent, flexibletechnologies in the electricity system. Another complication is the decentralized regime in generation whichresults in bidirectional traffic in the distribution grids, with high intermittency leading to imbalance. Hencebalancing will have to change and not by using the traditional matching of supply to demand rather better 27 A common cause failure is defined as a failure of two or more components (leading to an interruption in the supply of electricity) which can beattributed to a single cause. 28 TenneT’s Quality and Capacity Plan 29 The four locations are the coastal locations Eemshaven, IJmuiden, Maasvlakte and Borssele. 12
  14. 14. Egeruoh Chigoziri Cyrinus 201117663flexibility is essential in which includes demand side response, controllable consumption including the use ofelectric cars and storage systems5 Locational signals for new generation A clear look at Figure 3 and 4 in the appendix shows that a large penetration of renewable will most likelyshift balancing from “business as usual “of demand matching supply to something innovative. Ab initio,locational signals in electricity pricing applies only to the transmission level which is certain to change with thechange in regime. The application of locational signals can be categorized into short term signals and long termsignals. For the Dutch electricity transmission grid, the short term signals ( energy prices ) has been in form ofimplicit and explicit capacity auctions that is relevant in their trilateral market coupling while the long termsignal ( network tariff)has been a postage stamp. In as much as these choices could have been driven bysimplicity, the complexity of the system did not disappear by their use and is likely to worsen. In the situation of excess proliferation of the RES-E capacity which is obvious as shown in figure 5 of theappendix, it becomes succinct that a need of strategy is essential that will drive both long term objectives whilenot causing chaos in the short time. There is a need to differentiate horizontal signals, referring to pricedifferentiation per location on the same voltage level, and vertical signals, referring to price differentiationbetween voltage levels. While the former case relates to only transmission, there is a need to includedistribution in order to ensure an optimal dispatch of DG units in the later regime.5.1 Impact on Transmission In the transmission network in the Netherlands, the short term signals can be continued especially withthe extent of maturity and vibrancy of their auction market. However the long term signals may need to bereviewed, having in mind that there is a need to make DG connected to the transmission grid effective and toensure that cost causality principle rules. A clear understanding that electricity flow does not commercialtransaction will provoke a suggestion of a methodology that is maintains cost causality while retaining thesimplicity and clarity of use points all fingers to average participation. Average participation is a good method for the Dutch considering them as an integral path of the EUnetwork, a major force in the North sea wind farm project and also better than the existing postage stamp.5.2 Impact on Distribution Locational signal is very essential with the likely development which can be seen in the disparity betweenfigure 3 and figure 4 of the appendix. The implied need for locational coordination is to solve the dilemma ofavoidance but not to impede necessary investment in the network. This is necessary since the liberalizationwith the sustainable generation regime could lead to a decentralized system at distribution level working witha decentralized market system hence the need to achieve coordination so that network and energy chargesshould reflect the actual network condition in both long term and short term. Not only that, this could stimulatedistributed generation and demand to relieve the system in case of instability and attract flexible users(controllable generation / demand or storage) to suitable Because of the difficulty in using the locationalmarginal pricing like the nodal pricing in distribution that arises through the dense network, a no costreflective pricing in distribution is used in Netherlands with shallow connection charges and locationaldifferentiation is still rare. Thus with the likely development in the distribution level, it becomes apparent thata voluntary agreements between system participants that can create a pareto improvement, reward a gridfriendly behaviours and compensate for control might be a good solution to the Netherlands. This is calledsmart contracts. The smart contract30 is designed to be an individual agreement that is not mandatory which target specificusers that are influenced by the DG proliferation while sparing the little consumers. It is designed to complywith the priority of dispatch for RES-E while not compromising regional competitiveness in attracting newindustry. It may entail some standardization to drop transaction cost, varies according to location, size of user,pattern and flexibility of network use. Although a voluntary agreement, it uses standard tariff as a fall back 30Locational signals to reduce network investments in smart distribution grids: What works and what not? Christine Brandstätt ,Gert Brunekreeft, Nele Friedrichsen 13
  15. 15. Egeruoh Chigoziri Cyrinus 201117663solution which can be default tariff for most customers or individual contracting where additional benefit ispossible. An extra advantage of smart contract is that no major system reform required except a fewrequirements concerning market design and regulatory approval is only for standard (fall-back) tariffs In order to implement smart contract in Netherlands, there is a need to set a level playing ground and putcertain things in order. There is a need to incentivize The DSO’s to optimize network development inpreparation for the penetration of renewable and also incentivize network users to accept smart contracts. Alsothe electricity regulation need to allow for the voluntarily in this arrangement and allow network operators orretailers to have flexible charging. Also this cannot be effective without smart metering which the Dutch wantsto roll out en masse in 2012. Thus there is a need to adjust the tariff code of the regulation to take care of this6 Generation adequacy One fact that is obvious with the penetration of renewable is that the Dutch electricity system becomesmore energy constrained than capacity constrained. A closer look at figure 4 in the appendix again will explainthe implications of adequacy in the presence of generation mix which is assumed to be optimal considering thisenergy constraint. However, how to reach the level of optimality in the mix and in the investment is a questionthat the Dutch electricity sector needs to look into. The introduction of large penetration of Wind, photovoltaicsolar and concentrated solar power without storage will lead a gap in variability, unpredictability andlocational dependency, hence the need for attention in the regulation that affects this intermittency decisions.Intermittency can be preferably seen from the spectacles of Ignacio Perez Arriaga as the combination oflimited controllable variability and partial unpredictability31. Even though these characteristics exist, theircombination makes the issue complex especially when the volume of impact is relatively high. In terms ofintermittency characteristics of the renewable in the Dutch system, it will be mostly looked at in terms of windgeneration rather than solar generation. The concern for this intermittency can span from technical issues of reliability, need for increase ofrequired flexibility in the power system by the better utilization of transmission capacity, effective demand sidemanagement to employing more storage. Economically, this will definitely influence the market rules whichwill need adaptation to effectively emulate real time operation and hence translate to different patterns in theelectricity prices. This brings up the regulatory issues of the efficient scheme that needs to be adopted in orderto make the intermittent generation financially viable. These concerns when adequately treated will influencethe volume and the cost of investment. The issue of capacity mechanism will now involve flexibility. 6.1 Flexibility as a tradable commodity Because the proliferation of RES-E will bring a lot of flexibility issues, there might be a need to haveflexibility traded like capacity, if not this will lead to having a reserve that is almost as much as the installedcapacity of RES-E which does not make economical sense. The Dutch can be advised to have a limited amount ofNuclear but because of the associated NIMBY and BANANA , it might be very difficult to achieve. Riding at the back of the reliability option that was excellently designed by Ignacio Perez Arriaga and thathas been successfully implemented in many power systems, one can extend this to flexibility in the systemadequacy requirements. Therefore, it is necessary to provide a much stronger incentives for Flexible reliability-oriented operation because the proliferation of RES_E makes the system more energy limited than capacitylimited. Through these incentives, the markets bring the consumers a broader security that the contractedgeneration equipment will be available during the critical periods to provide capacity and flexibility at the sametime. This will be like a derivative call option with a physical delivery obligation is tied to the option, in order toprovide stronger incentives for the generators and to make sure that the more flexible reliable production unitswill be in a better position at the reliability market. The generators for the reliable flexibility provision will be assessed based on the following properties 31See Ignacio framework presentation in 2011 MITEI symposium for a perfect approach that can be tailored to fit many situations 14
  16. 16. Egeruoh Chigoziri Cyrinus 201117663 Then an auction is organized for these generators that will be categorised into different groups of loadfollowing, regulating and scheduling where the auctioneer has to determine, in advance, at least the followingparameters: - the strike price, s : which based on reliability option standard , should not be too low, since it acts as aprice cap for demand and somehow represents the frontier between the “normal” energy prices and the “near-rationing” energy prices, - The time horizon: typically a year; the seller can be required to generate the committed capacity at theexpected flexibility at any time during that period, - The total amount of power to be bought and at what range of rate should it be produced, - The value of the explicit penalty for capacity tied to flexibility - The generators submit one or several bids to the auction, expressing quantity at a flexibility range that isstandardized (the capacity they want to sell) and price (the required premium). - The market is cleared as a simple auction and all of the accepted bids receive the premium that wassolicited by the marginal bid. 6.2 Investments in adequacy In terms of investment, it has been shown that Feed in Premium has been generally successful especially inSpain and Germany32 . This is because premium has proved to be better when combined with market signals increating the incentives for wind and solar plants to adjust according to the market conditions and help improveprediction of their output together with the management of maintenance operations. In terms of cost, thelocation and technologies will mostly influence the cost of wind and solar especially when geographicallydispersed. This means that the cost might not only be the cost of the generation, but also the cost ofreinforcement of the transmission lines. The implication of these designs on market architecture determinantsis shown in table 2 of the appendix and the reason for the support of Feed in premium for the Dutch can be seento be based on basically how RES-E producers (especially wind) are exposed to market signals in forwardmarkets, balancing markets, congestion and losses while not neglecting the pricing, connection and networktariff. The issue of having the right instruments that stimulate the right investment as the optimal cost is not theonly issue of adequacy when it comes to large penetration of renewable because the larger the share of therenewable generation, the higher the intermittency. In the case of wind, variability can be reduced byaggregation of wind turbines over a large geographic area. Predictability can be reduced by reducingforecasting to almost emulate real time and with closer spatial aggregation of generators while considering alarge geographical areas. The case of solar can be a little bit different as it is affected by diurnal and seasonalpatterns with the patterns occurring at midday and at summer that happens to be the time of peak demand ofelectricity. Nonetheless the issue of cloud speed and geographical area cannot be neglected. Thus in general,mitigation of variability can be by combination of spatial diversity, use of advance forecasting techniques,reduction of unit commitment planning timeframe (scheduling interval) and the use of capacity mechanism. The use of capacity mechanism is essential. The best approach is the one that takes care of variability ingeneration and demand that can be slow or fast , occurring from a non event or for contingency purposes andthis can be found in operating reserve sometimes called moth ball reserve. Following the analysis of Milliham etal33, the Dutch can be advised to have a variety of operating reserves. There is a need for a mix in thecharacteristics of the generators that used for operating reserve. For the ones that will be used for non event,there is a need for regulating reserve that will have a fast response and a load following reserve that will have aslow response. In terms of contingency reserves, the operating reserves that serve this purpose can befrequency responsive reserves that have fast response and supplemental reserve that have slow response. Inthe case of slow events, the ramping reserve is for fast response while the supplemental reserve is for the slowresponse. This operating reserve or mothball reserve are usually old plants that have a little time to bedecommissioned hence with little fixed cost ( maintenance cost ) and their associated variable cost. The use ofmothball reserve does not only offer the advantages of cheaper price but the variety that can be gotten fordifferent purposes. Another source of help in terms adequacy can be the demand response by the means of variant retailelectricity rate like the real time pricing and interruptible load agreement. The issue of real time price can be 32 33 See references 15
  17. 17. Egeruoh Chigoziri Cyrinus 201117663easily done since 2012 will see a lot of installation of smart meters that can enable this hence help in smoothingthe load.7 Market power The definition of market power for the electricity market in the Netherlands can only be coherent if thereis a general agreement on the definition of what is the relevant market and the way the regulator looks at themergers and acquisition in this relevant market. However, concentrating on the market alone can lead to a needfor the Dutch to reduce market power hence market power is defined based on production and capacity.Analysis of the market power is mostly performance and structural based, however emphasis is on measuringthe structure of bulk power and the conventional tool is the Herfindahl Hirschman index which is the sum ofthe squared market shares of every firm in the power market According to the 2011 Energiekamer report to the EU, there are approximately 25 with three quarters ofthe production controlled by the largest four. Interpreting the implication of this by the degree of concentrationshowed that the static HHI index is 1433 and the dynamic HHI index is 1810 as of 2010 when that data wasavailable. This means that there might not be market power in installed capacity but likely to be in theproduction capacity and this calls for a serious concern as market power comes in energy constraining and notcapacity withdrawal. The market structure of the Dutch electricity retail is dominated by three large suppliers that areincumbents, four relatively small companies and quite some numbers of small companies. Looking at themarket share by the concentration ratio of the incumbents (C3), as of 2011 their market share is above 80%which is not very healthy. However switching of retailers has been relatively active in the retail market. Eventhough there has been a lot of mergers and acquisition since full liberalization in 2004 in the Dutch electricitymarket allowing international penetration, there has been market power. This is because all the mergers andacquisition has been a large company that acquires large Dutch companies to become bigger. In terms ofvertical integration, there is above 60% production supply linkage which makes the entry of smaller companiesvery difficult. Energiekamer monitors the barrier to entry and competition issues in the Netherlands; however theyfocused on the monitor of the concentration over the years, not the establishment of market dominance. Withthis in mind, there might be an issue in the renewable energy generation. One of the issues is that because oftime limitation and resource availability, the bigger companies might be given more licenses to build renewablegeneration and this will impede the microstructure of the market. This is obvious, since if they build morerenewable and retire their older generations as mothball reserve, their market power increases. Thus itbecomes apparent that the Energiekamer while monitoring the concentration ratios in the market should try tomonitor dominance. The use of concentration ratios and HHI in generation should be applied in all mergers andacquisition to limit the market power both in the installed capacity and production capacity to limit pivotalsupplier. Hence it is important to use residual supply index to monitor the amount of powers given torenewable energy suppliers in order to control market power ex-ante. While competition should be monitoredex-post with Lerner’s index.8 Wholesale market design - refining the Dutch electricity market architecture Having a level playing ground, not only in the origin and destination of generated electricity but also asclose to real time as much as possible determines the level of competition wholesale prices and to maximizingsocial welfare and the Dutch has been in this business for long. This has been the main driver of constant movetowards the integration of the Dutch wholesale electricity market with the surrounding markets. In 2010 therewas coupling of the day-ahead market within the CWE-region. Not only that, there was also an integration ofthe CWE-market with the Nordic electricity market by means of a tight volume , introduction of the Elbasplatform for intraday trade on the Dutch-Belgian border and the integration of NorNed in this tight volumecoupling. This will surely promote the implicit trading method that they prefer, but the issue is how this couldmetamorphosis or degenerate in the light of large penetration of renewable with high intermittency. Taking care of the intermittency will mean tremendous changes to the current Dutch electricity market interms of rules of dispatch that will need creation of additional flexibility, backup services and storage facilities.There should be rules that will take care of when to use storage and the backup services. It should determine ifthe storage and backup services should be used as reserves in the peak period of in case of balancing. Also theuse of storage and backup electricity across the border will be a case that needs legislation that might beregional and this is essential for the Dutch because of the extent of market coupling that is going in. The 16
  18. 18. Egeruoh Chigoziri Cyrinus 201117663fundamental implication of this is that the rules that govern the wholesale market of the Dutch cannot beadjusted in isolation. All the same the organization of the Dutch market can be seen from the diagram belowwith each of the market defined by different rules. The Dutch market design changes and the associated riskthat will vary due to the penetration of the RES-E are summarized in table 3 of appendix.The issue of market design as earlier done in the RES-E section, shows that the most liquid market (intradaymarket) might need to change to a centralized system since decentralized system with low power traded in theAPX might not allow an optimized generation scheduling. The gate closure might change from four hours tosomewhat closer to hourly trading to allow better forecast of wind. The efficacy in market design willdetermine if TenneT will use dual or single balancing. This will also affect the power given to the TenneT inshort term and long term locational pricing. The lesser the short term locational market signal, the more likelyTenneT might tend towards redispatching to solve congestion problems. Moreover there might be a need to take care of the grid infrastructures will need an overhaul, to deal withcompletely new requirements. These will include “de-localizing” injection of wind production and facilitatingadditional flexibility on the demand side via “smart” grids. This challenge could mean a need to change thederivative market implying the need of a state-of-the art approach to risk assessment that will encompassportfolio management, asset optimization and investment evaluation. This sophisticated approach will bepossible if the Dutch wholesale market has a high level of transparency hence encouraging trading to be used asa major tool. Trading will be very essential in understanding the value of the flexibility needed to cope withintermittent renewable power production, and to adapt during a transition. A recommendable major step hasbeen adopted to do this in which the APX has lunched the exchange of the trading of biomass after developing areferenced price index for standardized wood pellets in 2008. This biomass exchange, developed in synergywith Port of Rotterdam, is launched in two phases with the first stage providing an opportunity to tradestandardized, non-cleared products where the physical settlement is arranged bilaterally by the counterpartiesand the second phase planned for 2012, entailing the implementation of clearing services for wood pelletscontracts, which will provide further financial security to market participant. This might need to be extended to an appropriate market design which will be essential in achieving a wellfunctioning wholesale market with price formation based on fundamentals. While moving in the direction of aharmonized regional market and European market design while keeping in mind, in particular during thistransition decade, that too many regulatory changes could be dangerously disruptive. One of the disruptiveregulatory changes might be the need to use smart meters to encourage demand side management that will beessential in reducing intermittency. The issue of utilization of the operating reserves and its charges dependson who acquires them. If operating reserves are moth ball reserves and are acquired by the TSO, then theremight be a need to charging that should be regulated in a manner that will be sustainable and encourageadequacy and firmness. This method will method might need the intermittent generators to pay. However, ifthe RES-E follows the program responsibility of the Dutch system and there is effective derivative market in therenewable, then this might not be possible as the derivative market can balance this. However, this will requirethat the mothball reserves enter the derivative markets also.9 Retail market design The Dutch electricity retail system is expected to have a change with the EU 2050 decarbonisation goal.Energy efficiency and conservation especially in terms of electricity conservation is on the on the increase andwill influence the retail market and the method of retailing. The driving forces include greenhouse gas concern,excessive use on-peak due to the absence of real-time pricing, the economic and political costs of expandingtransmission and generation capacity, and the energy paradox problem (a widespread belief that consumersfail to invest in privately cost-effective, energy-efficient technologies because of limits in information and 17
  19. 19. Egeruoh Chigoziri Cyrinus 201117663 bounded rationality). The implication of the energy paradox34 which is present in the characteristics of the Dutch energy usage, coupled with the density of the distribution networks is that energy efficiency cannot be addressed simply by adopting rules or institutions marginal prices expanding the use of smart meters, real- time price information, and automated controls that allow time-variant pricing and provide missing incentives to use energy more efficiently only. There is a need for a regulatory instrument that could aid this transition and stimulate it effectively while being assisted by demand side management (DSM). Thus there is a need for a multi instrument policy that will be very essential in blocking the energy leakage. 9.1 The Dutch electricity Retail Market in the face of total decarbonisation The first is to have a price control mechanism that will make the consumers aware of the price implication of their usage. This the Dutch has started by trying to install smart meters in 2012. However the intermittency in the generation can lead to high price excursions that might have a lot of social and political implications. Hence to help the smart metering, it is suggested for the Energiekamer to have a legal and regulatory framework that will support technology policies. These standards will entail standards in electrical equipment and installation in the building sector with minimum requirement standards. Then there is also a need for educational policies alongside all these. This is required to enable public awareness in the intermittency and implication of sustainable energy to encourage acceptance and it added benefits which is the freedom to plan what you use. However the most important aspect is to encourage DSM To design an effective DSM framework there is a need for a DSM policy that will seek to reduce customer energy bills in a cost-effective manner, reduce capital spending on new energy system infrastructure, encourage an optimal mix of energy supply and demand and minimize environmental and social impacts due to energy infrastructure and use. A little downward to retail, the subset of DSM that is very essential is the demand response (DR) which includes the activities to reduce or shift electricity use to improve electric grid reliability, manage electricity costs, and ensure that customers receive signals that encourage load reduction during times when the electricity grid is near the upper limit of its capacity. To stimulate the DR in the Dutch electricity retail, this can be done in two ways. Firstly through Emergency Load Response programs which are interventions aimed at avoiding shortfalls in energy supply. Usually, the Transmission System Operator (TSO) offers remuneration to particular categories of consumers amenable to planned and unplanned interruptions to their energy supply in order to prevent critical situations in network operations. Such consumers are generally industrial and large commercial operators, whose supply is interrupted when resources supplied by the TSO on the dispatching services market are insufficient to maintain the safe operation of the system. The second method is by Demand Side Bidding (DSB) which is a mechanism that enables consumers, either directly or through a broker (maybe their retailer), to participate in the electricity market or in the operation of the system through offers that cause changes in their normal consumption profile. This mechanism can be very helpful as it enables consumers to participate actively in the market and while giving them price signals that, by reflecting of actual costs, would result in a higher efficiency of the energy system. After developing the system, the next issue is the implementation system. The DSO should be accountable for DSM within its service territory, but not be required to implement program design, delivery, and evaluation because they will know the amount of reduction in infrastructure that results and they should measure the DSM program cost-effectiveness and DSM performance should be based on the Total Resource Cost ("TRC") test. The Energiekamer should have a central role in DSM policy development and regulatory oversight. The retailers should be responsible for the educational program and evaluation. Connection and transport Energy programmes and imbalances Supply of electric energy 9.2 Redesigning the Dutch retail market to fit the target. The picture by the side depicts what the Dutch retail market looks like. The respectivelegislations that guide the retail market are specified in black while the red represents the System Operator Generators (DG and RES_E withneeded legislations. The double arrowed lines, shows regulated contract if thick and unclear (TENNET) Conventional)contract if the line broken. The pink arrow shows a needed connection that has to be regulatedsince it is bold. For example, the lack of proper legislations in case of bankruptcy is Systeem codesresponsible for the XS energy calamity in Netherlands. Thus there will be a need to designlegislations that will specifically call out that is the supplier of last resort and the rules of the Program responsible Suppliergame. There might also be need for back up supplier of last resort that has to be specified in the Network parties (Supplier of last resort)system code. The program responsible party of last resort has to be specified in legislations and operator (Back up parties)the law should specify is DG and RES-E should be accountable for these. The suggestion is that Art 3.1.13non dispatchable DG and RES_E can be exempted systeem The need to include the DG’s and RES_E in the program responsibility is essential as this operator Code Need a legislation of programmight reduce market power and forecast and investment in forecast technologies to reduce Electricity act 1998, responsibility party of last resortintermittency. technical codes and Proper legislation in case of 34 Energy paradox see Linares in the reference travien codes Eligible bankruptcy customer 18 Contract status unclear Regulated contract Likely connection need