Regulatory Challenges for the European Power Grid Industry

Regulatory challenges for

the European power grid

industry

Jean-Michel Glachant Future Power Grid Managers Programme

3rd October 2013, Florence

www.florence-school.eu

Context Fundamental changes in the power system

• Today’s generation mix split into two opposite sets of generators:

• Technological innovation allows for decentralization of the production-consumption loop

- Distributed generation… + active demand response and local energy storage

- “Smartening” of the grid and grid users

• Diverse national systems aiming to become an interconnected market

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Conventional generators

… bearing significantly increased uncertainty, and a foreseeable depressed future

Intermittent RES generators

… bearing no significant risk for capacity, volume or price

Need for a wave of investments as well as technological and operational innovation


4 (+1) Dimensions of regulatory intervention i.e. areas where regulatory change is expected

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Infrastructure planning

Grid operation

Infrastructure financing

Revenue regulation & tariff design

Existing regulatory frame has not been conceived to steer the wave of investments and innovation

National approaches… … or rationales for European solutions?


Infrastructure planning (1/2)

Addressing the cross-border effect of the national and interconnection infrastructure projects

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• Single Cost Benefit Analysis (CBA) method

will be used for selecting priority projects

• Proposal published by ENTSO-E end of 2012

• But still certain freedom for regional groups

to decide which effects to monetize and

how to monetize

1. How to select “projects of common interest”?


Infrastructure planning (2/2)

2. How to allocate cost among beneficiaries, Member States, …?

– Cross-Border Cost Allocation (CBCA) method to be concerted at European level recommendations currently developed by ACER

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• Ex-ante

• Ex-post

When?

• 50-50

• Proportional • Compensating

losers

To which extent?

• Project • Group of

projects

To what?

3. Should grid operators also be responsible for the planning of and investments into new types of infrastructure?

– E.g. advanced meters, electric vehicle charging infrastructure, etc.


Infrastructure financing (1/2)

• Significant investments needed for transmission network:

– TYNDP 2012: €104 billion over next 10 years for new projects (80% for RES integration)

– IEA: > 40% of existing network to be refurbished by 2035

Pace and volume of investments to increase significantly (investments over 5 years roughly equal to asset size in 2011)

• Large-scale investments in a context of low demand growth will impact tariffs

How to distribute the impact (and make it acceptable!) among:

– Conventional generators / intermittent RES / consumers / tax-payers

– Member States

– Different generations of network users

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Infrastructure financing (2/2)

• Not only a problem of volume

High up-front capital expenditures must be financed today by borrowing money and/or selling ownership

• TSOs already highly geared (60-70% debt)

Emitting debt will lead to a downgrade of TSOs credit profiles

• Three financing alternatives:

– Current owners injecting equity BUT difficult in a context of cash-strapped states and publicly-owned TSOs

– New investors injecting equity BUT requires opening ownership of infrastructures

– Financing growth by retaining dividends BUT facing reluctance of investors

How to design an attractive framework (keep risk low + adequate return) to attract investors?

How to design an unrestrictive framework open to new business-models?

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Revenue regulation and tariff design (1/2)

• How to account for new set of services, massive investments and innovation?

– Performance-based regulation?

– New set of KPIs?

– Longer regulatory periods to reduce risks?

• How to adequately incentivize grid users?

– Can a large share of grid users (e.g. RES-E) remain isolated from economic signals?

– Abandon “shallow” connection costs?

– Introduce locational and/or time signals?

– Substitute typical “light Generation charge / heavy Load charge” with “heavy G / light L”?

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Revenue regulation and tariff design (2/2)

• Current patchwork of national regulatory approaches

– Further convergence of regulatory practice?

– Some harmonization in grid tariff design?

– Can we deal with several thousand (sub-national) DSOs throughout Europe?

• Existing exemptions from grid tariffs for selected consumers

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Illegal state aid

(Lower energy bills for some companies give them a cost advantage over competitors in other EU countries)

Investigation launched by the EC

GERMAN CASE:

- Exemptions (or reductions) from grid fees, “EEG contribution”, electricity tax

- … for selected consumer groups (e.g. steelmaking, chemicals or cement industries)

Requirement to enable those energy-intensive companies to compete internationally

German Government’s reasoning


Grid operation (1/2)

Flows never stop at borders, neither does flexibility!

• How to provide efficient regulatory incentives to use the right range of flexibility instruments to operate the grid?

– Generation, storage, demand response, flow-control technology, etc.

– National or foreign

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Case of Orkney Islands (near Scottish mainland)

- Challenge: integrating more RES constrained by congestion on submarine cable

- Option 1: new submarine cable

- Option 2: active network management + procurement of congestion management services from third party energy storage providers


Grid operation (2/2)

Flows never stop at borders, neither does flexibility!

• How to provide efficient regulatory incentives to achieve the right scale of operational cooperation?

– Local imbalances or congestion calling for local solutions (e.g. smart grids/smart cities)

– Cross-border flows calling for regional cooperation to operate the grids (e.g.

European Network Codes)

– Local, national and regional levels are interdependent

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Case of CORESO (service provider for TSOs - e.g. Elia, 50Hertz, Terna, RTE, National Grid…)

- Challenge: unpredictable flows transcend national TSO grids

- Solution: CORESO provides grid-security analyses (and other services) on regional scale with input of national TSOs

www.florence-school.eu 12

Thank you for your attention Email contact: [email protected] Follow me on Twitter: @JMGlachant

Read the Journal I am chief-editor of: EEEP “Economics of Energy & Environmental Policy”

My web site: http://www.florence-school.eu

Regulatory Challenges for the European Power Grid Industry

Technology

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