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Exploring New Regulatory Worlds in Era of Digitalization & Decentralization

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KARPSAC 10 December 2017 Riyadh, Saudi Arabia

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Exploring New Regulatory Worlds in Era of Digitalization & Decentralization

  1. 1. Exploring New Regulatory Worlds in EraExploring New Regulatory Worlds in Era of Digitalizationof Digitalization & Decentralization (V2)& Decentralization (V2) KARPSAC 10 December 2017KARPSAC 10 December 2017 Riyadh, Saudi ArabiaRiyadh, Saudi Arabia Jean-Michel GlachantJean-Michel Glachant Loyola de Palacio Chair Director Florence School of Regulation European University Institute (Florence, Italy)
  2. 2. 3 step story: Step 1 Digitalization & Decentralization did start 25 years ago with: Half-hourly meters, CCGTs, Third-Party Access, & Wholesale PXs. Both are now furiously accelerating. •XXth Century Double Unbundling: Unbundling of industry structures & unbundling of rules production did create a “modular world” 1- Unbundling of industry between “Grids”, “System”, “Market”, & “Markets Players” (-NB: US vs US vs EU- ). Power Industry becomes “modular” (car industry; computer industry) 2- Unbundling of regulation with “Indep. Regulators” (Grids issues), & “Self-Regulation” (for System Operation & Market Design) -NB: US vs US vs EU- Regulation too becomes “modular” (ideal-type is computer “Plug & Play”; not for cars) 3- This new world favoured by both decentralization (new Technology: CCGT; up to 5 times smaller) & digitalization (hourly meters; ICT: for grids, for new Market algorithms & settlement process) 2
  3. 3. I now assume that Andrea & Fereidoon will develop more “New Market Design” & “New Business Models” Therefore I will look more towards “New Regulatory Models”
  4. 4. 3 step story: 2nd Step • XXI Century Waves of innovations: all assets become “modular & digitalized”; consumers self- transform into playing users; distribution grids become interactive 1- “Efficient” scale for generation down to size of individual consumers (kW PV for households; MW Wind for B2B). Cost of PV at $2000/3000 kW. Cost of battery storage already at $200 kWh for 1MW size. 2- Digitalization down to single unit of generation and of consumption. Digitalization extended to all types of grids and devices. 3- Distribution grids to become interactive (but centralized) systems or interactive (common rules) platforms 4- Digitalization to permit individual units of generation and of consumption to be matched, aggregated, disaggregated, and settled on open or private platforms (think Blockchains; already used in Germany for Renewables Community Services) Users can create “network increasing value” by using more & more dynamic services (think sharing 1MW storage with astute algrorithm) 4
  5. 5. 2nd step leading to “Regulation Innovation” Authorities may create new Level of regulation (going beyond transmission grids & wholesale markets) surfing on innovation waves; à la New York “Platform Debate” – European Commission “Demand Empowerment”) because Costs & Benefits of services & infrastructures are become dynamic > Costs have high transaction costs component (access to information & to credible commitments) ~ Designing, adapting rules is key to strong lowering of costs > Benefits have high “users play” component (positive network externality) ~ Inducing, following, facilitating play by users is key to evolution of benefits 5
  6. 6. Demanding transformation for regulators • To organize with self-regulation in Forum </> Platforms of regulation for innovations Regulators can act by creating “Open Regulation Forum” which can become real “Reflexive Governance Platforms”. It requires: *Regulators with high skills ~kind of managers in “innovation wave facilitation” **Regulators with legitimacy to do so ~such regulation is loosely defined by law, difficult to review by courts • >> Low likelihood?
  7. 7. A blocking factor: De-socializing? •Consumers able exiting regulation: Empowerment by technology innovations (as PV & batteries) to exit grid regulation---------------------------------------------------------------------------------------------------- ----- •With PV: consumers can escape grid as monopoly access to energy generation = Empowerment by technology innovation; ~$2500 kW of PV for non-residential consumers or “blocks” of consumers •With battery: consumers can escape grid as monopoly access to system balancing flexibility = Empowerment by technology innovations; ~$200 kWh of storage from 1MW •Consumers can compare decentralized technology innovations to system connection costs: key role given to consumer tariffs formula 7
  8. 8. FLORENCE SCHOOL “DISTRI.BREXIT” RESEARCH FRAME Schittekatte tests 3 network tariff structures to recover costs: 1/ Volumetric network charges with net-metering: (Elec. withdrawn) – (Elec. Injected) # Grid offers free of charge the balancing of PV generation 2/ Volumetric network charges without net-metering: (Elec. withdrawn) + (Elec. Injected) # Grid is paid for balancing PV generation > Role for battery 3/ Capacity-based network charges: {+ or –} capacity at peak # Role for battery Schittekatte benchmarks using 2 metrics: a.) Weighted average annual system cost ~ proxy for efficiency b.) Increase of individual contributions paid by grid users ~ proxy for equity And 2 matrices with each 4 states of the world: 1/ Technology matrix: cost level of solar PV & cost level of batteries 2/ System context matrix: wholesale price level & network cost level 8
  9. 9. 9 TECHNOLOGY MATRIX: RESULTS WITH 50 % “POTENTIAL” PROSUMERS High technology costs Low technology costs Investment cost solar PV 4400 €/kWpeak (LCOE: 0.20 €/kWh) 2200 €/kWpeak (LCOE: 0.10 €/kWh) Investment cost batteries 500 €/kWh (C-rate of 1) 250 €/kWh (C-rate of 1) Proportion default network charges in consumer bill 40 % (770 €/year) Proportion default commodity costs in consumer bill 60% (1155 €/year) Default electricity cost consumer 1925 €/year “The Past” “Today” “The Future”“But no sun…”
  10. 10. 10 SYSTEM MATRIX: RESULTS WITH 50 % OF PROSUMERS High wholesale electricity price Low wholesale electricity price Wholesale electricity cost 0.20 €/kWh 0.10 €/kWh High sunk cost Low sunk cost High sunk cost Low sunk cost Proportion default network charges in consumer bill 60 % (2310 €) 20 % (385 €) 60 % (1155 €) 20 % (195 €) Proportion default commodity costs in consumer bill 40 % (1540 €) 80 % (1540 €) 40 % (770 €) 80 % (770 €) Default electricity cost consumer 3850 €/year 1925 €/year 1925 €/year 965 €/year Investment cost solar PV 3300 €/kWpeak (LCOE: 0.15 €/kWh) Investment cost batteries 375 €/kWh (C-rate of 1) Decentralisation Paradise: no incentive to “push back” “EU Today?” “EU islands?” “EU Yesterday?”
  11. 11. 11 MIT Study did show last year that current wave of innovations calls for a carefully “small spot” (time & location) recalibration of all regulation for distribution networks BUT Today Distribution grids are the last “miles” of “universal service”, “postal stamp”, “social tariff”, etc. Blockade? New York?
  12. 12. 12 Table 1: Summary of market and grid dimensions of inter-TSO and DSO-TSO cooperation Green System state Amber system state Red system state Marketcooperation Inter-TSO Day-ahead market operation with capacity allocation • NEMOs with market coupling function • Competition rules for Power exchanges (PX) Flexibility market operation with forward capacity allocation • TSO-BSP model => Allocation of forward capacity rights to BSP • TSO-TSO model => Multilateral inter-TSO Common Merit Order No market action DSO-TSO Day-ahead market operation with capacity allocation • Requires definition of borders where capacity could be allocated • Operation of PX/NEMO could be extended to DSO level Flexibility market operation with forward capacity allocation • TSO-FSP model => - Current model, DSO validates, weak form of cooperation - Depending on where structural congestions are, FCA could be required in the future. • TSO-DSO model => Joint procurement flexibility services - Pilots projects looking into it - Also requires implicit allocation of forward capacity, were there are structural congestions No Market action Florence School research (Hamdush & Meeus) Options for DSOs-TSO new System cooperation
  13. 13. 13 Gridcooperation Inter-TSO Day-ahead capacity calculation • Common regional calculation methodology • Coordinated capacity calculator (CCC) Forward capacity calculation • TSO-BSP model => Calculate the capacity to be explicitly allocated to BSPs • TSO-TSO model => Calculation of capacity to be implicitly allocated • Both models => - Validated FCA sent to Coordinated capacity calculator (CCC) - Common regional calculation methodology Firmness of allocated border capacity • High compensation, if not force majeure • Minimum compensation, if force majeure DSO-TSO Day-ahead border capacity calculation • Cooperation for border capacity calculation - Requires defining borders where structural congestion is located • Joint or hierarchical capacity calculation are options Forward capacity calculation • SCA, reducing grid reinforcement cost & reserves (practiced) • FSP selling its services to TSO could be required to reserve and nominate border capacity; either on the D-T or UD-D border or both borders. Firmness of allocated border capacity • Compensation could be foreseen in case firmness of allocated capacity is not maintained. • This requires capacity allocation in defined borders (not the case today) Florence School research (Hamdush & Meeus) Options for DSOs-TSO new System cooperation (End)
  14. 14. 3 step story: 3d Step If public authorities cannot tackle the waves of innovation with a new and open regulatory platform. Evolution of regulation can take other forms. •Five “worlds of regulation”: alternative Governance(s) of “innovation waves in a modular industry” (New Assets Modularity) + (new Entrepreneurs) + (new Users) > to spread into 5 alternative “Regulatory Worlds”? 1-Forums (already seen) Four Alternatives: ~2-Innovation Zoos ~3-Communities ~4-Garage Cow-Boys ~5-Big e-Sisters 14
  15. 15. Alternative world (1) ~- Innovation Zoo (Sandboxes for Innovation) Old infrastructures & companies stay in place. No big entry by new comers. Old infrastructures go digital step by step. In a frame set by regulators. Ad Hoc “extra candies” for a few R&D experiments & pilots + “Menu of incentive contracts” for deployment. If strong involvement of users is needed >> Go to Community? If flow of radical innovation creation unstoppable>> Go to Garage Cow-boys? If strong innovation management &financing involved>> Go to Big e-Sisters? 15
  16. 16. Alternative world (2) ~- Community (Do it in your own club) Users create new governance by combining service & infrastructure usages innovation with their own demand adaptation. Issue with scalability (deployment beyond 1 community) Issue with coordination (local niches) Issue with Grand’Pa Public Service consumers (demand is embedded into service production & infrastructure usage. “Pure consumers” have no right in Community) Issue with dynamic innovation (rights of users exiting one community for different one) 16
  17. 17. Alternative world (3) ~- Garage Cow-boy (I am a handsome lonesome cowboy) Old infrastructures & old companies are neutralized by aggressively smart regulation as “open platforms” (New York dream). Flow of radical innovation creation can only come from individual “strongly inventive” pioneers -triggering adoption by users, then increasing value, etc. Issue with scalability (deployment beyond 1 garage) Issue with coordination (between local garages) Issue with Grand’Pa Public Service consumers (value of innovation is embedded into users adoption of innovation. “Pure consumers” have no right there) Issue with privacy & security: How users data & privacy is protected? How integrity is maintained & pirates are barred of hacking?17
  18. 18. Regulation vanishes • Vanishing: authorities do not transform their own job into managing “Reflexive Governance Platforms”; then *Innovative industry can go to fully self-regulating (private rules, private standards, private contracting, private punishments, etc.) up to full vertical reintegration by creation of new & private digital infrastructures Old Power industry can be taken-over by digital platforms & Internet G.A.F.A **Passive Consumers & Grand’Pa Public Service disappear from interplay with industry. ***Only active users (with generation & storage assets) still strategically interact, then are taken into account. Users strongly motivated by niches of “value creation”, can create own “Users Communities” bargaining with industry and/or creating “Community club niches” - plugged as add-ons to general industry modularity 18
  19. 19. Alternative world (4) ~- Big e-Sisters: big self-regulation in private ordering set by companies producing, managing & financing flow of radical innovation as long as they control creation of new digital infrastructures & platforms, and the interactions with production of new services Big e-Sisters can deliver: ~scalability (deployment) ~coordination (infrastructure / services) ~hosting of “Pure consumers” after enough “Active enough Users” have created enough value (to their companies’ standards) ~Up: to Universal Service, Postal Stamp, No Charge Issue with privacy: individual “big data” is their gold mine (keeping “independent service providers” prisoners of strategic moves & day-to-day data flows) Issue with market power: Big e-sisters, in B2B, strategically control access to services; in B2C they take enormous share of value created (today already $1000Bn treasery in …cash)
  20. 20. How to conclude such amount of novelties? #Is GrandPa really dying? And when? # To be seen in 2022? 20
  21. 21. www.florence-school.eu 21 Thank you for your attention Email contact: jean-michel.glachant@eui.eu Follow me on Twitter: @JMGlachant > 35 000+ tweets My web site: http://www.florence-school.eu

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