The document discusses the evolution of energy regulation over the past two centuries and outlines challenges for the future. It covers: 1) Old challenges of regulating infrastructure monopolies to ensure universal access and affordability. 2) First wave of new challenges in the 1990s of opening markets through incentive regulation and aligning market design with grid operation. 3) Latest challenges of aligning grids and markets with high renewable energy, and redefining regulation for the energy transition and digitalization including activating distributed energy resources and sector coupling.

1. Energy Regulation: towards 2050
Lima, Osinergmin
23 October 2019
Jean-Michel Glachant
Loyola de Palacio Chair Prof.
& Director Florence School of Regulation
European University Institute (Florence, Italy)

2. 2
Good old days
and… Public
Regulation’s
roots
You already know
me from
Yesterday…

3. Regulation:
What’s new…
& Beyond? ??
3
And Today:
Looking Ahead?

4. Regulation: 2 centuries story…
• 1- Old challenges (1840-today): Monopolies & Universal Access
a) From framing infrastructure monopolies to…
b) Guaranteeing Universal Access and Affordability
• 2- First wave of new challenges (1990-today): Opening Markets
a) Opening markets with “incentive regulation”…
b) and aligning Market Design(s) with Grid Operation & Tariffs
• 3- Latest wave of challenges (2015-50): Energy Transition & Digitalisation
a) Aligning Grids & Market design(s) with Massive (variable) Renewables
b) Redefining Regulation for “Disruptions” of Energy Transition & Digitalization
4

5. Fasten
your seat
belt:
Take-off!
5
Now please…

6. [I] Old challenges (1840-today)
I-1) 1840-1940: Framing infrastructure monopolies for Social Welfare
# Monopoly of essential infrastucture: a bridge on a river (1840)
# Utility for society is usage, then pricing. Monopoly price is not good for society.
# Society will frame monopoly price: fair price for users & owners. Which one?
Discriminatory Price?
Average Price?
Marginal Price? But Fixed costs?
Back to discrimination with 2nd Best Pricing…
6

7. [I] Old challenges (1840-today)
I-2) 1930-today: Guaranteeing Universal Access & Affordability
Issue becomes “Political economy”
~Investments: Where to put bridges? > if Everywhere > Universal Service
~Price discrimination: How to discriminate?> Why to? > Postal Stamp
~Quality of service: How to discriminate?> Why to? > Quality Standard
~Postal stamp is average pricing> Affordability issue > Add “Social tariffs”
Multiple Regimes for Universal Mass Markets (Regimes for Quality & Costs)
• (Low quality & cost Universal Public Service) + (Higher quality& cost private
sector) >> Typical for Health & Education
• “Golden Plate” Public Service >> ‘Averch & Johnson Effect’
• Differentiated Three tier (Service & Tariff) >> Typical TV chains or radios
= Basic (or) Advanced (or) Premium
7

8. [II] First wave of new challenges
Opening Markets
II-1) Opening wholesale markets with “Third Party Access” & “Incentive Regulation”
(Double unbundling) + (Incentive Regulation) substitute to Universal Public Service
* Unbundling of “Infrastructure facility”, from “final services”
Infrastructures is kept regulated with “Third Party Access”
> “Final services” go to open markets: (B2B= Wholesale) or (B2C = Retail)
** Unbundling of “Regulation”, from “Political economy”
To regulate this “industry unbundling” you need a (Regulator) fairly unbundled from
(Political economy) >> Independence of regulator
Like a judge, the indep. regulator tells the “Society Common Good” directly from her
civil servant chair

9. [II] First wave of new challenges
*** This Double Unbundling opens the way to “incentive regulation”
End of “Command & Control” with 5 tools: *Cost+ with ROR / *Price Cap / *Perf. Based
Regul / *Menu of contracts / *Yardstick Competition
>> “Modular” Regulation (US choose low incentives as ISO; UK high incentives TSO & DSO)

10. [II] First wave of new challenges
II-2) Aligning Market Design(s) with System Operation
Rules for Infrastructures interact <#> with “final services market”
<#> via “system operation”
* Trading “Electricity” is made of:
1-Trading Energy “day-Ahead” in wholesale market
2-Looking if grid can deliver that Energy traded > Network Capacity, congestion
3-Matching supply & consumption “Real Time”> Balancing with Power Reserve
** “Real” electricity transaction combines 3 goods: Energy + Network + Power
“Energy only” is only an “incomplete market”: it cannot guarantee delivery
<#>Nespresso: I bought the coffee capsule, whom to lend me the machine? And a
cup, please…<#>

11. [II] First wave of new challenges
***2 opposed Market Design(s) to combine Energy, Network, Power
• Typical US: Central Dispatch at Day Ahead & Real-time; with each grid node
capacity
• Typical EU: Self-Dispatch at Day Ahead; + zonal redispatch at Real-time
> EU added a “European layer” on the top of its many national zonal markets:
(Self-Dispatch at Day Ahead + guaranteed X-Border capacity between zones)
Plus (each zone balances and redispatch its markets at Real-time)
> Today to 2023, new EU rules
To add Regional open X-Border for each zonal “Balancing & Redispatch”

12. [II] First wave of new challenges
II-3) Aligning Grid Tariffs with “Incentive Regulation”
Rules for Infrastructures interact <> with “final services market” >> via “system
operation”
Grid Tariffs influence grid users’ behavior (Generators and Consumers):
*For connection, and siting: [Deep Costs] <vs> [Shallow Costs + Socialization]
**For injection and withdrawal: [Peak Charging] and [Fixed Costs]< vs>
[Volumetric Charges]
***Among grid users: [G component for Generation] <vs> [L component for
Load]; [Industry] <vs> [Services] <vs> [Households]
> A very unfinished business in the EU… so to speak

13. [III] Latest wave of new challenges
Energy Transition & Digitalization
III-1) Aligning Grids & Markets with Massive Renewables
EU going from 15% RES in 2015 to 50% in 2030… “slack” of power system gone
*Distribution Grids hosting RES: First level of power systems > System operation
(Congestion, Balancing) from Distribution <#> Coordination with TSO
**Wholesale Sequence of Markets: with massive variable generation > shifting
equilibrium closer to realtime >> Higher need of Flexibility (Flexibility products –
Flex Incentives – Flex Markets: centralized or decentralized?>
***Alternative model: China: Hierarchical Command & Control, with no
Regulator, no Sequence of Markets, no Merit Order, 2 levels of Political Economy
(Beijing & 34 Regions)
13

14. [III] Latest wave of new challenges
Energy Transition & Digitalization
III-2) Redefining Regulation for “Takeoff” of Energy Transition
Argentine Presidency 2018 G20 : Energy Transition(s) with multiple dimensions
*Grid investments for massive RES
# Grid for Wind Offshore? Extension of onshore grid monopoly? Or innovation
open to Offshore park developers? Germany 50 % more expensive than UK
# Distribution Grid? Extension of “Fit&Forget”? Or creation of FLEX mechanisms
or LT FLEX contracts? Germany: 3% RES peak erasure can lower grid
reinforcement costs up to 40%
**Generalisation with new regulatory regimes
# Discovery & Innovation <call for> Tests, Pilots >> “Sandboxes”
# Delivery of Multiple Outputs <calls for> more than Incentive Regulation for
Single Output >> “Performance-Based Regulation” can be better than “Price
Cap” (but much more demanding for the Regulator)
14

15. [III] Latest wave of new challenges
Energy Transition & Digitalization
***Digitalization permits activating “Retail-size” units
Uber, AirB&B: digital platforms creating trade relations between “Retail-size”
units [Akerlof 1970: direct Peer2Peer is impossible when quality is unknown]
#Aggregators: activate “Retail-size” unit consumptions, pack them for
Wholesale
#Distributed Generation create “Prosumers” (Retail-size producers) > Peer2Peer
permit them to trade with Retail-size buyers; Blockchains can help
#“Communities” can be Aggregators, and/or Prosumers, and go to Peer2Peer
** **Generalisation with new regulatory regimes
# (New York) Distribution Grids becoming Open Platforms (neutral Amazons)
# Peer2Peer “Two Tier” Regulatory Frame:
Empowerment of Individuals <On Top of> Universal Mass Regime
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16. [III] Latest wave of new challenges
Energy Transition & Digitalization
III-3) Redefining Regulation for “Higher Regimes” of Energy Transition
“Entry Regime” is “Greening Power Mix” - “Higher Regimes” are:
*Electrification of most of energy usages
# Transportation (with electrical mobility) # Heating & Cooling (hence all
buildings) # Heavy Industrial processes: ciment, steel, chemistry, etc.
**Digitalization of most of energy usages
#Smart Homes #Smart Devices >> Internet of Things, Big Data, Artificial
Intelligence
** **Generalisation with new regulatory regimes
# Activation Behind-the-Meter: smart consumers, communities, asset-fleet
managers
# Multi-level power systems (Transactive Energy)
# Sector Coupling: Power &Heat; Power &Gases; Power &Hydrogen; Power-to-X
16

17. Daniel…
Fasten
your seat
belt:
Take-off!
17
So many Regulatory Challenges…

18. Muchas Gracias…
for your attention
Email contact: jean-michel.glachant@eui.eu
Follow me on Twitter: @JMGlachant near to 57,000 tweets
My web site: http://www.fsr.eui.eu