Speech at EURELECTRIC conference "Power Market in Transition: Why do we need a new Market Design? " on 6 May, Renaissance Hotel, Brussels

1. Brussels – Eurelectric 6 May 2014
Jean-Michel Glachant
Florence School of Regulation
Regulation of electricity DSOs and
TSOs in a context of massive renewable
energy sources
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2. • Massive integration of intermittent renewable energy
sources (RES), mostly at local level.
Growing variation and uncertainty of flows in T&D
grids.
New needs and opportunities for technologies and
providers still not fully identified.
• BUT regulated entities do what they are asked to do!
Which regulatory frame in this new moving context?
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CONTEXT

3. • The need to rethink DSO regulation to:
- Accommodate a high share of distributed energy resources
- Manage actively complex and bi-directional flows
- Encourage innovation and provision of new services
• The need to rethink TSO regulation to:
- Handle a new control logic of a system with numerous
decentralized resources
- Manage variable and complex cross-border flows by building
and operating cross-border infrastructures
• Including the need to rethink the TSO/DSO border
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THE CHALLENGES

4. Smart regulation must deliver:
• New grid services, addressing
– Cost increase (higher system operation costs)
– Revenue decrease (as less energy is delivered)
– Lack of incentives to do better than the minimum
• Technology innovation, addressing:
– Gaps between long term benefits vs. short term costs
– Distributed benefits between grid users (e.g. smart meters)
• Grid user participation
BUT difficult to: define and measure outputs, as well as relate
inputs to outputs
Especially due to: time length difficulties, regional grids vs.
national regulation
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THE CHALLENGES (2)
Source: Meeus, Leonardo, et al. "“Smart Regulation for Smart Grids”." (2010)

5. 5
Rethinking DSOs regulation
1. Regulated DSO remuneration
2. Distribution network tarification
3. DSOs vis-à-vis the energy and power markets
4. DSOs vis-à-vis the TSO.
Generation
connected to T grid
TSO
DSO
DER and retail
markets
DSO as a network operator (and owner):  Get
remuneration, incentives to innovate and tarification right
DSO along the value chain:  Get the boundaries vis-à-vis the TSO as well as vis-à-vis the markets right
• Four areas of regulation need to be reviewed:
Source: THINK topic 12/ From distribution networks to smart distribution systems: Rethinking the regulation of European electricity DSOs

6. #1: Regulated DSO remuneration
• Reducing costs is not necessarily efficient anymore as new services can be
provided by DSOs
• Similarly, “black box” benchmarking approaches are not possible and must
take different services provision into account
• Regulation must take into account the changing CAPEX and OPEX
structure and allow DSOs to deal efficiently with potential tradeoffs
#2 Distribution network tarification
• Need to reflect the true connection costs of each load/generator
• In particular, if the value of the grid moves from delivering kWh to
providing more services, this must be reflected:
- e.g. volumetric charges (in kWh) combined with net metering are hidden
subsidies for distributed energy resources
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Rethinking DSOs regulation
Source: THINK topic 12/ From distribution networks to smart distribution systems: Rethinking the regulation of European electricity DSOs

7. #3: DSOs vis-à-vis the energy and power markets
• Need to define the roles, boundaries and responsibilities of DSOs:
• Need for stricter unbundling rules as more responsibilities are given to the
DSOs: what about storage? Demand-side management?
Rethinking DSOs regulation
Ownership/management
of metering equipment
Data handling EV charging
infrastructure
Different models –
regulated as well as
liberalized – have been
proposed:
UK vs. DE vs. IT DSO vs. Central Data
Hub vs. Data Access-
Point Manager
Smart Grid Task Force EG3
(2013)
DSO vs. Charging
Infrastructure Operator vs.
Independent e-Mobility
Provider
Eurelectric (2010)
Source: THINK topic 12/ From distribution networks to smart distribution systems: Rethinking the regulation of European electricity DSOs

8. #4: DSOs vis-à-vis the TSOs
• General responsibilities of network operators with respect to grid management do not
change
… but the set of tools available to perform the tasks is enriched by DER
• Some of the services DER can provide are relevant for either the TSO or the DSO
… whereas others might be of interest for both types of network operators
Regulation needs to guide DSO-TSO interactions, in particular in:
- TSO-DSO coordination
Hierarchy of decisions for system balancing
Protocol of DER committed for which operations, to whom, for which time-frame
- TSO-DSO differentiation
Via a careful product definition
(Time of delivery, geographic scope, technical features)
 Integrated T&D SOs or closely interacting TSO+DSOs?
Rethinking DSOs regulation
Source: THINK topic 12/ From distribution networks to smart distribution systems: Rethinking the regulation of European electricity DSOs

9. • In a rugged landscape, diversity of approaches matters.
E.g. Interaction between consumer preferences and demand response
contracts: consumers can be engaged to participate actively in demand
response if they have enough options that reflect their diversity.
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Need to keep the door open!
Contract
Preferences
Price Risk Volume risk Complexity
Autonomy/ Privacy
loss
Financial
compensation
TOU Low None Low None Limited
Dynamic pricing High None High None High potential
Fixed capping
contract
None Low High Limited Limited
Dynamic capping
contract
None High High Limited High potential
Direct load control None None None High High potential
Source: THINK topic 11/ Shift, Not Drift: Towards Active Demand Response and Beyond

10. Massive wave of investment unprecedented since.. a while!
Implies:
• Coordination of massive investments: How to coordinate
(cross-border) invest in complement/substitute TRSM & G
assets? @ EU level? Region? North Sea Off-Shore
• Economic efficiency of our regulatory frame: conceived to
reduce costs … not to handle a wave of investment and
innovation.
Can we replace “invest less for same set of services” with
“pay less for any invest. volume”?
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Rethinking TSOs regulation

11. Massive wave of investment also implies :
• Financial feasibility of an investment wave:
– Could TSOs borrow more? Have they already reached their debt
limits? Probably no more debt with current tariffs..
– Will grid users swallow (significant!) tariffs increase? Tariffs will
have to double by 2030 to achieve the TYNDP…
– Alternative financing models (shift to growth model, equity
injection) can lower the impact on tariffs, but not that much..
• Handling of (massive?) redistributive effects:
– National load, foreign load, national generation, foreign
generation…
– Is there such thing as a European welfare ?! Will CBA/CBCA be
sufficient ?
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Rethinking TSOs regulation
Source: Henriot (2013) Financing investment in the European electricity transmission network

12. • Need an early move of the TSOs to handle next decade intermittent
resources.
• But it is then difficult to avoid stranded assets: which ENTSO-E vision
will come true?
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Rethinking TSOs regulation

13. 13
Rethinking TSOs regulation
• The value of cross-border exchanges increases as the availability
of intermittent resources is not perfectly correlated across Europe.
• BUT:
– Which regulatory frame(s) for cross-border assets?
Specific risk requiring specific remuneration? Single European
scheme or ad-hoc schemes?
– No such thing as European generation adequacy.
National generation adequacy outlooks are established:
Without common methodology to estimate reliability
With different methodologies for interconnection availability
(including considering isolated systems!)
Without consistency with ENTSO-E top-down scenarios.

14. • Massive development of distributed variable energy resources
requires:
- A redefinition of the role of TSOs vis-à-vis DSOs
- A redefinition of the role of T&D system operators vis-à-
vis other stakeholders in the energy market
• The regulatory frame should allow efficient management of
trade-offs between: different technologies, national resources
vs. cross-border resources, CAPEX vs. OPEX, long term vs.
short term…
• Important to value the services provided by system operators
(not kWh anymore..)
• We do not know what will be the winning resource: important
not to kill innovation!
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To sum up…

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Thank you for your attention
Email contact: jean-michel.glachant@eui.eu
Follow me on Twitter: @JMGlachant
Read the Journal I am chief-editor of: EEEP
“Economics of Energy and Environmental Policy”
My web site: http://www.florence-school.eu