Governing Smart Grids - the Case for an Independent System Operator
Bremen Energy Working Paper No. 11, November 2011
Nele Friedrichsen
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Abstract
The next years should bring about a rapid transformation of the electricity sector towards high levels of renewable generation. Smart grids are seen as the silver bullet responding to the challenge of integrating renewables, managing flexibility, and keeping the costs down in distribution networks. Network unbundling on the other hand is essential for competition in the liberalized electricity industry. It forces independence of the networks and thereby eliminates concern that incumbent integrated (network) firms discriminate against new entrants. With smart grids the unbundling questions become relevant for distribution networks because active control in smart grids entails discrimination potentials. However, smart grids exhibit coordination needs for system efficiency and unbundling eliminates firm-internal coordination. An independent system operator seems to be an appropriate compromise solution. It eliminates discrimination incentives and serves coordination needs, thereby striking a balance between both competition and efficiency goals.
Improving Investment Coordination in Electricity Networks Through Smart Contracts
Bremen Energy Working Paper No. 10, September 2011
Christine Brandstätt, Gert Brunekreeft and Nele Friedrichsen
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Abstract
Smart contracts based on voluntary participation and optionality can be a low transaction cost solution to implement locational signals in distribution networks and thereby avoid network investment. This paper examines the efficiency properties of smart contracts. Based on a three-node example network we show that cases exist in which smart contracts can achieve a pareto-improvement compared to the status-quo even with voluntary participation. With the pareto improvement at least one party is better of under a smart contract without worsening the situation for anyone else. We note that this requirement is very restrictive and leaves significant potential for efficiency improvements by smart contracts untapped. We then discuss the implementation of smart contracts with incentive regulation. There are two main tasks for the regulator: allowing network operators flexibility to offer such contracts and incentivizing network operators to do so.
The Effect of Monopoly Regulation on the Timing of Investment
Bremen Energy Working Paper No. 09, May 2011
Jörg Borrmann and Gert Brunekreeft
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Abstract
This paper contributes a theoretical analysis of the effects of different types of regulation on the timing of monopoly investment in a setting with lumpy investment outlays. Concentrating on the case where investment increases the regulatory asset base, we distinguish between price-based regulation and cost-based regulation. Under cost-based regulation, investment triggers a change of regulated prices, whereas, under price-based regulation, investment does not affect them. To motivate investment, we focus on wear and tear leading to replacement investment and on demand growth resulting in expansion investment. Our main conclusion is that cost-based regulation accelerates investment compared to price-based regulation.
The Timing of Repeated and Unrepeated Monopoly Investment under Wear and Tear and Demand
Bremen Energy Working Paper No. 08, May 2011
Jörg Borrmann and Gert Brunekreeft
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Abstract
In an intertemporal model, we analyze the timing of irreversible and lumpy monopoly investment under certainty. There are two reasons for investing, i.e. wear and tear leading to replacement investment and demand growth leading to expansion investment. Both in a single investment setting and in a repeated investment setting, we find that a firm maximizing discounted social welfare invests earlier than an identical firm maximizing discounted profits. The investment date of an identical firm maximizing a discounted convex combination of social welfare and profits lies between these polar cases. All results apply both to replacement investment and to expansion investment.
Locational signals to reduce network investments in smart distribution grids: what works and what not?
Bremen Energy Working Paper No. 07, April 2011 (erschienen in Utilities Policy, 19(4), 2011, S. 244-254)
Christine Brandstätt, Gert Brunekreeft and Nele Friedrichsen
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Abstract
The increasing share of distributed generation causes massive network investment. Energy and network pricing can help to reduce the investment need. This paper examines and discusses different models for locational pricing in the distribution network. Locational energy pricing is largely ineffective when part of the feed-in would not be subject to market prices due to renewable support schemes. Locational network charging works well to guide investment, but does little for short term system operation, which is crucial in smart grids. Both such explicit schemes require a substantial system reform which impedes feasibility. With smart contracts we propose a hybrid form. They are developing in smart grids anyhow and will incorporate locational elements. System reform is only modest since responsibility for tariff setting stays with the network operator. The regulator’s task would be to incentivize the network operator for efficient network investment and allowing maximum flexibility.
Vertical Economies and the Costs of Separating Electricity Supply – A Review of Theoretical and Empirical Literature
Bremen Energy Working Paper No. 06, April 2011
Roland Meyer
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Abstract
Motivated by the European movement towards a separation of electricity networks from the competitive functions generation and supply this paper reviews theoretical and empirical literature on vertical synergies in electricity supply. In the analysis a clear distinction is made between four different unbundling options leading to different forms and magnitudes of synergy losses. Apart from coordination economies a main source of scope economies seems to result from a market risk effect if generation and retail are separated. Accordingly, the European policy of network unbundling (either transmission or distribution) results in synergy losses between 2 and 5 percent due to coordination losses, while an unbundling option that includes a separation between retail and generation, as observed in some U.S. states, may lead to a permanent cost increase of 15 percent and more due to a significant risk increase.
Regulation and Regulatory Risk in the Face of Large Transmission Investment
Bremen Energy Working Paper No. 05, February 2011
Gert Brunekreeft and Roland Meyer
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Abstract
Most transmission systems in Europe are currently in need of large network expansions, in particular to cope with increasing shares of load remote renewable energy sources. Given that the scope for further cost reductions is largely exhausted, we observe a paradigm shift into the direction of implementing more cost-pass-through elements into price-based regulation to strengthen the necessary investment incentives. Regulatory emphasis is shifting from costreductions to promoting investment. Obstacles to investments arise in particular from regulatory risk and efficiency risk. Addressing these topics, we recommend a move towards more cost-based approaches, with ex-ante investment approval and less reliance on ex-post benchmarking.
Large-scale integration of wind: Flexible Voluntary Curtailment Agreements under a Feed-in System with RES-E priority to avoid inefficiently negative power prices
Bremen Energy Working Paper No. 04, December 2010 (erschienen in Energy Policy, 39(6), 2011, S. 3732-3740.)
Christine Brandstätt, Gert Brunekreeft and Katy Jahnke
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Abstract
For the large-scale integration of electricity from renewable energy sources (RES-E), the German system seems to reach its limits. In 2009, the electricity wholesale market experienced serious negative prices at times of high wind and low demand. The feed-in system in Germany consists of a fixed feed-in price, a take-off obligation and a RES priority rule, and in practice only very restrictive use of RES-E curtailment. Exactly the latter is the problem. We argue that the overall performance of the system would improve seriously by lifting the restrictions on the use of voluntary curtailment agreements, while retaining the priority rule as such. Since generators of RES-E can only improve under this system reform, investment conditions improve, leading to higher installed RES-E capacity. This in turn implies that reduced wind output due to curtailment can actually be offset by higher wind output in all periods in which there is no problem.
Vertical unbundling, the coordination of investment, and network pricing
Bremen Energy Working Paper No. 03, August 2010
Gert Brunekreeft and Nele Friedrichsen
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Abstract
This paper provides a formal analysis on the investment coordination problem in a vertically separated electricity supply industry, although the analysis may apply also to other network industries. In an electricity system, the investment decisions of network and power plants need to be coordinated. In unbundled markets, firm-internal coordination no longer applies. We develop a formal approach to examine whether simple information exchange (“cheap talk”) could restore coordination. We adopt a three-stage profit-optimized investment model, with a (regulated) monopoly network and two asymmetrical Cournot-type generators. To analyse credibility of cheap talk we apply the concept of self-signalling in a game with incomplete information and positive spillovers. We show that cheap talk cannot generally solve the investment coordination problem and as a result separation may actually cause a costly coordination problem. We then examine locational network pricing as a coordination device to internalize the incentive problem.
Social cost benefit analysis of interconnector investment: A critical appraisal
Bremen Energy Working Paper No. 02, July 2010 (erschienen in Energy Policy, 39(6), 2011, S. 3096-3105.)
Michiel de Nooij
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Abstract
Some, like the European commission, claim that Europe needs more transmission capacity and interconnectors. This paper studies interconnector investment decisions from the perspective of a social cost benefit analysis (maximising total welfare in a country). For two European decisions to build an interconnector (NorNed and the East West Interconnector) the analysis underlying the decisions is discussed in detail, and will be compared with lessons from theory and decisions made in other jurisdictions (Nordel, California and Australia). The key findings are that (i) it is unclear how much demand for transmission capacity and interconnectors there actually is, and thus how large the benefits of investing will be. (ii) Both studies analyzed are not correct. Main criticism includes that they do not take the reaction of producers to new interconnection capacity into account; ignore part of the potential benefits of more competition; and make a strange assumption with respect to discounting. (iii) Decisions in Europe are taken very differently, leading to situations in which approval of an investment might depend on who has to approve. (iv) Therefore, it is unlikely that interconnector and transmission investment decisions in Europe currently are maximizing social welfare. Some lessons for future cost benefit analysis are drawn.
The Effect of Monopoly Regulation on the Timing of Investment
Bremen Energy Working Paper No. 01, February 2010
Jörg Borrmann and Gert Brunekreeft
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