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Research Symposium European Electricity Markets AER/CPB/ECN The Hague - September 2003 INNOVATIONS IN ELECTRICITY NETWORKS Rolf W.Künneke Faculty of Technology, Policy and Management Delft University of Technology P.O.Box 5015 2600 GA Delft The Netherlands Abstract This paper reflects on the incentives for innovation in electricity networks and the resulting re- quirements for future network structures. It appears that there are some significant empirical de- velopments that fundamentally challenge the existing structure of the present energy system. The liberalization of energy markets, innovative technological opportunities especially in the fields of ICT and power electronics, and changing political preferences towards environmental objectives provide strong incentives for system changes. From an analytical perspective, there is presently a mismatch between the technological governance of networks and the economic allo- cation process. It is argued that this mismatch needs to be resolved, in order to safeguard the sustainability of the energy system. 1. INTRODUCTION Networks are the backbones of the electricity system. They physically connect electricity pro- ducers and consumers and contribute to vital services such as load management, technical dis- patch, handling of emergencies, metering & control of energy and capacity according to speci- fied technical standards. Electricity networks developed in little more than 100 years from primitive local grids to complex international networks that interconnect numerous countries over great distances. For example in continental Europe, the ‘Union for the Co-ordination of Transmission of Electricity" (UCTE), coordinates the physical connection of the transmission networks of more than 20 countries, securing the energy supply of some 450 million people. Economies of scale and a greater technical reliability of the system were the most important drivers for this remarkable process of an ever-growing scale of network operation. Nowadays, customers in many industrialized countries enjoy a very reliable supply of electric energy and take it for granted. As a consequence, there is a high dependency on an undisturbed availability of electric energy. Traditionally electricity systems strongly depend on the capabilities of the high voltage trans- mission network to co-ordinate and facilitate a centralized electricity supply. In these systems electricity generation is concentrated in large-scale production units with a one-directional de- livery to the final customers. Innovations in these systems are predominantly directed towards a better utilization of the existing capacities. This technological evolution of the current system will not be addressed in this paper. However, the emphasis is on possible developments that re- sult in a fundamental change of existing network structures. It will be demonstrated that under the current conditions of competitive electricity markets, there is growing economic and techni- cal need for a radical change towards more decentralized energy systems that strongly rely on distributed generation and decentralized monitoring and control of networks.

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Page 1: Innovations in electricity networks - ECN - Your energy ... · INNOVATIONS IN ELECTRICITY NETWORKS Rolf W.Künneke ... What are the incentives for innovation in electricity networks

Research Symposium European Electricity Markets

AER/CPB/ECN The Hague - September 2003

INNOVATIONS IN ELECTRICITY NETWORKS

Rolf W.Künneke

Faculty of Technology, Policy and Management

Delft University of Technology

P.O.Box 5015

2600 GA Delft

The Netherlands

Abstract

This paper reflects on the incentives for innovation in electricity networks and the resulting re-

quirements for future network structures. It appears that there are some significant empirical de-

velopments that fundamentally challenge the existing structure of the present energy system.

The liberalization of energy markets, innovative technological opportunities especially in the

fields of ICT and power electronics, and changing political preferences towards environmental

objectives provide strong incentives for system changes. From an analytical perspective, there is

presently a mismatch between the technological governance of networks and the economic allo-

cation process. It is argued that this mismatch needs to be resolved, in order to safeguard the

sustainability of the energy system.

1. INTRODUCTION

Networks are the backbones of the electricity system. They physically connect electricity pro-

ducers and consumers and contribute to vital services such as load management, technical dis-

patch, handling of emergencies, metering & control of energy and capacity according to speci-

fied technical standards. Electricity networks developed in little more than 100 years from

primitive local grids to complex international networks that interconnect numerous countries

over great distances. For example in continental Europe, the ‘Union for the Co-ordination of

Transmission of Electricity" (UCTE), coordinates the physical connection of the transmission

networks of more than 20 countries, securing the energy supply of some 450 million people.

Economies of scale and a greater technical reliability of the system were the most important

drivers for this remarkable process of an ever-growing scale of network operation. Nowadays,

customers in many industrialized countries enjoy a very reliable supply of electric energy and

take it for granted. As a consequence, there is a high dependency on an undisturbed availability

of electric energy.

Traditionally electricity systems strongly depend on the capabilities of the high voltage trans-

mission network to co-ordinate and facilitate a centralized electricity supply. In these systems

electricity generation is concentrated in large-scale production units with a one-directional de-

livery to the final customers. Innovations in these systems are predominantly directed towards a

better utilization of the existing capacities. This technological evolution of the current system

will not be addressed in this paper. However, the emphasis is on possible developments that re-

sult in a fundamental change of existing network structures. It will be demonstrated that under

the current conditions of competitive electricity markets, there is growing economic and techni-

cal need for a radical change towards more decentralized energy systems that strongly rely on

distributed generation and decentralized monitoring and control of networks.

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Research Symposium European Electricity Markets

The Hague - September 2003 AER/CPB/ECN

In order to allow the development of such a system, fundamental technical and economic inno-

vations are needed. The overall research question of this paper can be summarized as follows:

What are the incentives for innovation in electricity networks and the resulting requirements for future network structures in competitive electricity markets?

The second paragraph summarizes some empirical developments that challenge the existing

network structures. Consequently paragraph 3 addresses the need for changing network struc-

tures from a theoretical perspective. It will be argued that there is a fundamental mismatch be-

tween the economic and technical governance in the electricity sector. This indicates a need for

innovations. Paragraph 4 discussed some requirements for future network structures that fit the

needs of competitive markets. Some concluding remarks are summarized in paragraph 5.

2. INCENTIVES FOR INNOVATION

In the past two decennia the energy industry was confronted with remarkable developments that

challenged its traditional technical structures. These challenges developed as a consequence of

changing market conditions1, shifting political preferences

2 and new technical opportunities

3.

Some prominent examples include:

• The increasing significance of distributed generation;

• Emerging demand for product differentiation and flexibility;

• Need for new investments in the energy system;

• Vulnerability and an expected decreasing reliability of the current system;

• Preference for sustainability and environmental protection.

As will be demonstrated below, these developments are more or less interrelated. This list of

examples is not exclusive, but only demonstrates the technological challenges the present elec-

tricity system is confronted with.

2.1 Distributed generation

Distributed generation certainly belongs to the most important drivers for innovations in net-

works. Distributed generation can be defined as .. “a power source connected directly to the dis-

tribution network or on the customer side of the meter”4. Typically these power plants are quite

small scale and in many cases primarily serve the needs of a predetermined group of customers.

Presently distributed generation (DG) is typically applied in greenhouses, industrial sites, hospi-

tals or commercial buildings. Because of its small size these production units are often not re-

quired to contribute to the system balance. The net code of The Netherlands, for instance, ex-

cludes generation units of less than 60 MW from the obligation to offer system balancing capac-

ity to the transmission system operator.

Distributed generation can be based on various technologies, ranging from diesel generators;

gas fueled combined heat- and power plants; small hydro power plants; wind turbines; solar

cells; to fuel cells. Interestingly, many environmentally friendly generation technologies fit into

this category. The use of renewable energy sources like wind- and solar energy is often most at-

tractive in combination with small scale local generation units. It is generally expected that fu-

ture energy systems have to rely more on those renewable energy sources. First, it helps to real-

1 The most outstanding change of market conditions in this period was the so-called liberalization of the

electricity sector. 2 In the EU countries more emphasis is put on environmental policy, specifically CO2 reduction. 3 This includes for example ICT technologies and power electronics. 4 Akkermann, et. al.

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Research Symposium European Electricity Markets

AER/CPB/ECN The Hague - September 2003

ize the ambitious environmental targets of many governments, like for example documented in

the Kyoto protocol on CO2 reduction. Second, the traditional energy sources like oil, gas, and

coal are steadily diminishing and need at least some replacement at the longer term. Another

important driver for the increasing use of distributed generation is its improving cost economics

Various DG technologies, like wind and CHP, are becoming increasingly competitive as com-

pared to the traditional means of large scale electricity generation. 5

A possibly increasing use of distributed generation has quite fundamental consequences for the

existing network structures. In order to elucidate this argument, it is necessary to explain some

important differences between distribution- and transmission networks.

In conventional electricity systems, distribution and transmission networks serve different pur-

poses. Transmission networks connect generation devices, balance load differences, enable a

bi-directional flow of energy, safeguard the overall system stability and power quality, and al-

low for various monitoring and control activities. Normally the technical integrity of energy

systems is safeguarded predominantly through the transmission system operators. In Europe,

transmission networks have a typical morphology as mashed design, which adds additional re-

dundancy to the system and thus improves its reliability.

On the other hand, distribution networks are designed to facilitate a unidirectional power flow

from high voltage transformers to the final consumer. The network morphology has a radial or

loop design, which results in little redundancy and thus a potentially higher sensitivity for sys-

tem faults. Typically there are only very limited metering or control devices that allow

influencing the use of the networks or the flow of energy. Because of this lack of active control

mechanisms, these systems are sometimes attributed as ‘passive networks’.6

Integrating distributed generation into these existing network structures leads to some funda-

mental technical problems. A recent study on the likely changes of network design as a result of

a significant application of distributed generation comes to the following conclusions:7

• Protection and islanded generation: Under current conditions, distributed generation can

only function properly in a technical stable distribution network. In order to be able to fully

exploit the advantages of DG, intelligent protection and controls need to be introduced that

allow DG generators to function even in de-energized networks.

• Generator and network communication systems: Distribution grids need to be transformed

into active networks that allow for harmonized system control and communication schemes

between various generators and final users.

• Voltage regulation: DG influences the voltage level in distribution networks. In order to

guarantee a certain power quality, new technical devices (so-called tap changers) have to be

implemented in the grid. It has to be considered whether existing networks can be operated

at a higher voltage level in order to meet the increasing capacity requirements.

• Network configuration: Since the role and function of distribution networks changes, the

present radial network structure does not suffice any more. A stronger interconnected sys-

tem is recommended. Operators should consider DG as part of an integral network design

approach.

• Ancillary services: More active and dynamic distribution networks need to facilitate various

unbundled ancillary services that support various DG technologies. The integration of DG into existing networks is technically very challenging. This is illustrated

by the numerous R&D programs that are developed all over the world to stimulate research in

this area.8

5 Kema , p. 42 ff. 6 Beddoes & Collinson. 7 Beddoes & Collinson.

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Research Symposium European Electricity Markets

The Hague - September 2003 AER/CPB/ECN

2.2 Emerging demand for product differentiation and flexibility

In the past years an interesting discussion developed about the possible need or desirability of

product differentiation even with respect to the delivery of electric energy. A study about the

economic value of load losses9 in The Netherlands reveals interesting differences between sec-

tors and regions in this country (figure 1). The study even analyzed the economic consequences

of lost load for the different regions of The Netherlands. Not surprisingly, areas with high eco-

nomic activities that are located in the western part of this country have the highest value of lost

load.

Figure 1: Value of lost load in The Netherlands10

Sector Value of lost load

(€/ Kwh)

Households 16,4

Agriculture 3,9

Energy industry 0,3

Industry 1,9

Building industry 33,1

Transport 12,4

Services 7,9

Government 33,5

Average 8,6

Figure 1 illustrates the differences in the willingness to pay for different groups of customers.

Under market conditions, this results in product differentiation and accordingly different prices.

As a consequence, economic efficiency increases, because customers with a higher valuation

will acquire more form this good or service. For the energy sector, product differentiation was

traditionally not an issue. In general, energy networks are only capable to deliver the same qual-

ity to all final customers. However, allowing for product differentiation in electricity networks,

not only offer new business opportunities, but also contribute to a more efficient technical utili-

zation of the energy system. Technical upgrades and the allocation of network capacity could be

attributed to customers and/ or service area’s according to the actual technical and economic

needs. Under the present conditions, this is not possible.

2.3 Need for new investments in the energy system

There is an increasing public concern about the increasing investment needs in energy systems,

both in generation and networks, and the probable incapability of the restructured energy busi-

ness to meet these needs.11

The recent blackout in the USA demonstrated that the networks in

this country are poorly maintained and urgently need significant investments. There are also

significant investment needs in networks in European countries. For example in The Nether-

lands, quite some investments date from the sixties of the past century. After 40 years, upgrades

or replacements are needed. Figure 2 illustrates the replacement needs for the next 40 years in

the electricity networks in The Netherlands.

8 For a recent overview of R&D in Japan,. USA and EU see for example Watson et. al. 9 Bijvoet et.al. 10 Bijvoet et.al., p. 46. 11 IEA 1999.

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Research Symposium European Electricity Markets

AER/CPB/ECN The Hague - September 2003

Figure 2: Replacement needs for electricity networks in The Netherlands12 (in number of components x 1.000)

There is also a significant need for capital expenditures in generation capacity (figure 3). In

OECD Europe, about 16% of GDP needs to be invested in new electricity plants between 1995

and 2020. In other regions of the world this investment need is even higher.

Figure 3: Capital expenditures on new generating plant (billion US $, 1990 values)13

Years/ Regions 1995-2000 2000-2010 2010-2020 1995-2020 % of GDP

1995-2020

OECD Europe 76 117 174 367 0,16

OECD North

America

54 99 155 308 0,14

OECD Pacific 45 99 155 308 0,41

FSU/ECE 25 153 210 388 0,75

China 97 253 385 735 0,37

Rest of the

world

167 409 509 1085 0,31

World 463 1181 1613 3257

% of GDP 0,28% 0,28% 0,29% 0,28%

An OECD report concludes that public resources are expected to be insufficient to meet these

enormous capital requirements. Hence, private sector involvement is needed, not only to raise

funds, but also to increase efficiency14

: ‘Private sector involvement brings not only financing, but also market oriented management skills, access to the latest technology, and usually quicker implementation than would be the case under public sector management.’ These investment

needs create opportunities for innovations in electricity generation and networks.

Since the restructuring of electricity markets, the risks attributed to new investments are signifi-

cantly higher than prior to the reform. Next to the contingencies of future markets, there is con-

siderable regulatory risk. There are still quite some disputes and uncertainties about the future

regulatory regimes that not only support the development of competitive electricity markets, but

also guarantee fundamental social services. In this environment, long-term investments with

substantial capital needs are difficult to realize. Under these conditions technologies with lower

investment needs and a short pay back period are more favorable. Besides, these technologies

might even allow for a greater flexibility and adaptability with respect to the demand and neces-

sities of the future. DG fits quite well to these requirements. This is certainly an important rea-

son for the growing preference of investors for small-scale technologies in the energy sector.

12 NRC Handelsblad 8-2-2003, p. 2 13 IEA, p.84 14 IEA, p. 85

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Research Symposium European Electricity Markets

The Hague - September 2003 AER/CPB/ECN

2.4 Vulnerability and a probable decreasing reliability of the current system

Electricity outages are news events, with the recent blackout in the eastern part of the USA as a

‘highlight’. There is a growing public concern about the reliability of the electricity infrastruc-

ture and the possibly insufficient incentives of the restructured markets for short- and long-term

investments. Investments in distributed generation and active networks offer new perspectives

to overcome these problems. Compared to the present system, a more direct relation between

cost and benefits can be expected. Individual investors might bear the costs, but they are also

able to reap the benefits, especially in times of a crisis.

There is also another dimension to the problem. After the terrorist attacks in the USA, Septem-

ber 11th 2001, very quickly the link was made to the vulnerability of electricity system. “Seen

through the eyes of a terrorist, building more fossil fuel power plants and nuclear reactors looks pretty naive. By contrast, distributed renewable energy systems, such as rooftop solar photovoltaic systems, small wind turbines, and fuel cells not dependent upon fossil fuel, sudden appear enlightened.”15

The US Department of Energy develops a growing interest in decentral-

ized electricity systems. However, in Europe this is not brought forward as a significant argu-

ment.

2.5 Preference for sustainability and environmental protection

As already mentioned earlier, many DG technologies support the preference for sustainability

and environmental protection. Politically this is an important argument to stimulate the devel-

opment of alternative electricity systems. At least in the EU it is widely accepted that there is an

urgent need for environmental protection. For this reason many countries promote the use of

renewable energy sources that are often attributed to DG.

3. THE NEED FOR CHANGING NETWORK STRUCTURES

The previous paragraph clearly demonstrates that there are quite some practical reasons to as-

sume that innovations in the electricity sector are necessary. Small scale electricity generation

receives quite some attention in literature and is certainly an important driver for changes in

network structures. There is however anther more generic reason to assume that innovation in

electricity networks is inevitable. At present, there is a striking mismatch between the technical

and the economic governance structures of the electricity system. As will be discussed in this

paragraph, changing network structures can contribute to solve this inconsistency and hence

contribute to the sustainable development of genuine competitive energy markets.

One of the vital aspects of the restructuring of the energy market was the introduction of compe-

tition in production and supply, while maintaining strongly regulated monopolistic networks.

Production and supply are considered as commercial activities that can be allocated by market

forces. However the network is perceived as a given technical structure that needs to be pre-

served even under these new circumstances. It is often argued that networks are natural mo-

nopolies that are needed to safeguard the technical integrity and reliability of the electricity sys-

tem. As a result regulatory regimes have to put a lot of effort in creating institutional arrange-

ments that serve the needs of a centralized technical control of networks, while allowing for

competition in production and supply. The reasoning in this paragraph is divided into three

steps. First the inconsistencies within the present system will be addressed. Second, very briefly

some technical opportunities for the development of new network structures are mentioned.

Third, a brief insight is given about the present state of redesigning electricity networks.

15 Asmus, p.75.

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Research Symposium European Electricity Markets

AER/CPB/ECN The Hague - September 2003

3.1 Inconsistencies within the present system

From an economic perspective, the allocation of goods or services within physical networks can

be characterized by four vital features:16

• Unit of decision making: i.e. individual, group or public authority;

• Mechanism of allocation: price, agreement, or directive;

• Dominant economic goal: individual profitability, collective profitability, or national public

interest;

• Degree of complementarity between network nodes and links, with as extreme cases: com-

plete independence or complete complementarity.

Based on these features, figure 4 compares the technical governance of networks with the eco-

nomic allocation of energy.

Figure 4: Technical governance of networks versus the economic allocation of energy

Technical governance Economic allocation

Unit of decision making Public or private authority Individual

Allocation mechanism Agreement or directive Price

Dominant objectives Public interests Individual profitability

Degree of complementarity High Low

• Unit of decision-making.

In the liberalized parts of the electricity markets (primarily production and supply) individ-

ual decisions are the basis for producing, trading or consuming electric energy. There are

ample of institutional arrangements to match supply and demand for electricity, including

bilateral contracts, power pools or even integrated firms. These mechanisms are all well

know from other sectors. However, the governance of technical structures of the electricity

sector has to comply with the physic of electricity. The network physically connects power

plants and loads (i.e. consumption), with frequently changing physical characteristics. The

network capacity is a function of the changing configuration between the power production

and loads. As a consequence the operational capacity of networks is variable with shifting

bottlenecks17

. In addition, real time balancing is required because electricity can not be

stored. These physical features require a public or private authority to safeguard the techni-

cal integrity of the system. Even on the longer term, individual end users have no economic

incentive to invest in the network capacity, because this has strong public good characteris-

tics. Accordingly, an authority is needed to take care of these long-term investments and

share the costs among the users. Although individual market parties can certainly make

claims on network use based on contractual arrangements and price signals, the final techni-

cal allocation needs to be taken care of by an authority, i.e. the system operator.

• Allocation mechanism.

The allocation of supply and demand is based on the price mechanism. For the technical al-

location of resources some regulatory agreement or directive is needed. Network access and

the technical terms of use are regulated by an authority, documented for example by a net-

work code and specific regulations for access and pricing.

• Dominant objectives.

There are also interesting differences with respect to the dominant objectives. Economic ac-

tors are assumed to serve their individual goals, whereas the technical operations of the

network have to serve national interests and/ or public service obligations, including reli-

ability, security of supply and affordability.

16 Arentsen & Künneke, p.543 refer to the first three characteristics. 17 See Budhraja, p.55, 56.

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Research Symposium European Electricity Markets

The Hague - September 2003 AER/CPB/ECN

• Degree of complementarity.

In a technical sense, the nodes and links of electricity networks are highly complementary.

They all need to be technically coordinated in a certain way in order to allow the transport

of electricity from producers to consumers. The price mechanism however, does not suffi-

ciently reflect this complementarity. Distance dependent transport costs might be allocated,

but this only partially reflects the technical system interdependencies. Under most ideal

market conditions, there is no complementarity at all.

As a conclusion it can be stated that in liberalized markets the technical governance of electric-

ity networks does not support the economic allocation process, and vice versa. This complicates

the technical operation of electricity networks and frustrates the development of proper eco-

nomic signals that support the functioning of markets. Some of the consequences for this mis-

match are discussed in the previous paragraph. It is beyond the scope of this paper to analyze

the various conflicting economic incentives and physics of electricity networks in detail. In this

respect certainly some research is warranted. Just as a reminder, it has to be mentioned that

there was no such fundamental difference between economic a technical governance in the tra-

ditional electricity market since both were mainly oriented towards hierarchical control mecha-

nisms.

3.2 Technical opportunities for new network structures

There are various technology drivers that enable the technical development of new network

structures.18

ICT technologies allow for new approaches to generate and coordinate information

that are far beyond the traditional centralized model. Power electronics provides among others,

interesting control and monitoring devices that enable the development of active or intelligent

networks. Micro-processor based electrotechnologies can contribute to precision advantages and

improve efficiency (smart technologies). The development of advanced materials offers a wide

range of new opportunities, for example with respect to energy storage, or the improvement of

devices for photovoltaic cells. Without going into further details, this clearly indicates that there

are technical opportunities to reshape existing electricity networks that support a stronger com-

pliance of technical and economic governance structures. However, these technical opportuni-

ties need to be further developed, as illustrated by the world wide R&D efforts in these fields.19

3.3 Present state of redesigning electricity networks

An inventory on recent studies and projects in the field of innovative network approaches 20

demonstrates that far most of the initiatives are in the phase of design and strategic orientation

and that there is only very little practical experience. Some practical experience is only available

in remote areas that are traditionally excluded from the centralized energy provision. However,

there are already some major suppliers that offer concrete products in this field, including ABB,

Siemens and Sandia. ABB offered micro grids for some years, but this was commercially not a

success. Apparently innovations in networks do not develop strait forward. Seemingly there are

significant barriers for these new technologies that need to be addressed.

18 Kema, p.27, 28. 19 See for example the research agenda on: Network integration of distributed generation, in the Dutch

IOP EMVT research program, www.senter.nl. 20 Künneke & Runhaar.

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Research Symposium European Electricity Markets

AER/CPB/ECN The Hague - September 2003

4. REQUIREMENTS FOR FUTURE NETWORK STRUCTURES

The analysis suggests that a sustainable energy system can only be achieved if the technical and

economic governance structures support each other. As there are presently quite some inconsis-

tencies between both, realignment seems to be unavoidable. In general, this realignment can

point into two different directions: a modification of either the economic allocation or the tech-

nical governance. The recent restructuring of the electricity market resulted in a fundamental

reform of the economic allocation, while the technical governance basically remained un-

changed. As two extreme cases, either the technical governance has to change according to the

new economic needs, or the economic allocation mechanism has to be realigned according to

the technical possibilities of the current energy system. A change of the economic allocation ac-

cording to the present technical governance will result in a structure that is most probably quite

similar to the traditional energy system. The analysis in this paper focuses on the other extreme,

i.e. the necessary changes with respect to the technical governance to support the economic al-

location mechanism in a liberalized electricity market.

Starting from this assumption, the desirable features of the technical governance can be derived

form the scheme in figure 4:

• Unit of decision making: individual;

• Allocation mechanism: price;

• Dominant objective: individual profitability;

• Degree of complementarity: low.

Translating these features into technological concepts of future distribution networks is not

straightforward. Again, there is a wide range of options that still has to be explored. The follow-

ing only serve as examples.

Decentralization of electricity production

Electricity networks might be abolished at all. Individual customers become self-reliant with re-

spect to electricty. They might either depend on other primary energy sources like natural gas or

hydrogen for the local production of electricity. As another option sustainable energy produc-

tion from wind or solar cells might cover most local needs.21

Self-reliant customers take indi-

vidual decisions about production and consumption of electricity, according to their individual

objectives. They are able to respond to possible price signals with respect to the allocation of

energy. Under these circumstances the technical complementarity will be low, because produc-

tion and consumption of electricity are physically at the same location. This is the most far

reaching case of a decentralized energy system.

Network intelligence

Networks might become more intelligent by developing inherent capabilities to operate within

secure technological margins while maintaining a maximum transport capacity. Under these

conditions no centralized system operator is necessary. An information system needs to be in

place that generates prices in accordance with the relative scarcity of network capacity. Under

most ideal circumstances, this information would be generated by an autonomous market proc-

ess. The use of networks is dependent on price signals and according to the individual utility or

profitability. In order to realize a lower degree of complementarity and to allow for economic

choice, it appears inevitable that customers have at least some access to individual power pro-

duction and/ or storage in combination with possibilities for demand side management.

21 Patterson.

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Research Symposium European Electricity Markets

The Hague - September 2003 AER/CPB/ECN

Network morphology

Like Internet, electricity networks can be operated in small, semi independent units that are in-

terconnected by a back bone. The ‘energy web’22

or the micro grid concept23

are examples for

this approach. ‘The MicroGrid structure assumes an aggregation of loads and microsources op-

erating as a single system providing both power and heat. The majority of the microsources

must be power electronic based to provide the required flexibility to insure controlled operation

as a single aggregated system. This control flexibility allows the MicroGrid to present itself to

the bulk power system as a single controlled unit, have plug and play simplicity for each micro-

source, and meet the customers’ local needs.’ This concept is based on an innovative network

morphology that consists of small semi-independent networks that are connected by a backbone.

Within these micro grids a limited number of producers and consumers combine their electricity

needs. Under these circumstances the unit of decision making is not strictly the individual, but a

small group of actors that strive to realize common objectives. The degree of complementarity

is certainly lower than under present conditions. The degree to which price signals can govern

the technical use of the systems depends on its inherent intelligence.

It appears that the above mentioned requirements for future network structures can be realized

by different technological concepts. Compared to the present system, one of the most vital chal-

lenges seems to be the technical decentralization and down-scaling of generation and network

operation.

5. CONCLUSIONS

This paper reflects on the incentives for innovation in electricity networks and the resulting re-

quirements for future network structures. It appears that there are some significant empirical de-

velopments that fundamentally challenge the existing structure of the present energy system.

The liberalization of energy markets, innovative technological opportunities especially in the

fields of ICT and power electronics, and changing political preferences towards environmental

objectives provide strong incentives for system changes. From an analytical perspective, there is

presently a mismatch between the technological governance of networks and the economic allo-

cation process. It is argued that this mismatch needs to be resolved, in order to safeguard the

sustainability of the energy system. The present economic restructuring of the energy markets

can only be sustained, if the technological structures are modified towards a strong decentraliza-

tion of the technical governance of networks and production capacity in combination with de-

mand side management.

This conclusion raises many questions for subsequent research. What are the opportunities for

change within the present system? The path dependency of the present energy system might

create barriers for the development of alternative systems, or even might prevent this. What are

the challenges for industry and regulation to deal with the above mentions developments? How

could a possible transition be facilitated? What is the possible time period in which such a tran-

sition could take place: twenty years from now or just two years? Referring to the experiences in

other infrastructures, especially ICT, some developments are evolving quite unexpectedly and in

an unanticipated pace. In the past the energy system was characterized by a high degree of sta-

ble technological development and solid economic growth. However, the above mentioned de-

velopments challenge this pattern quite fundamentally.

22 Bonnaville Power Authority, www.bpa.org. 23 Consortium for Electric reliability Technology Solutions.

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AER/CPB/ECN The Hague - September 2003

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Research Symposium European Electricity Markets The Hague - September 2003 AER/CPB/ECN