regulatory challenges in developed markets...•interconnection •market integration increased vres...

Edith Bayer

Senior Associate

The Regulatory Assistance Project (RAP)®

Rue de la Science 23

B-1040 Brussels

Belgium

+32 2 789 3011

[email protected]

raponline.org

20 July 2017

15th ERRA Summer School: Introduction to Regulation

Regulatory challenges in developed markets

Regulatory Assistance Project (RAP)® 2

1. The challenge of delivering flexibility

2. The California ”Duck”

3. Market design: delivering reliability at least cost

4. Regional integration

Outline of presentation

1 The flexibility challenge

Regulatory Assistance Project (RAP)®

“Liberalization” Market integration Environmental protection

Move towards competitive wholesale and retail markets

Wholesale market integration

Air quality regulations

“Unbundling” Linking balancing areas GHG regulations/pricing

Third party access Transmission projects of “common interest”

Land/water regulations

5

~1980s - today

Even the longest-standing

competitive markets

continue to evolve

Need to adjust to avoid

roadblocks as technologies

and policies change

Liberalization ≠ deregulation

– regulations necessary

The road to ”liberalization”


New opportunities and challenges

Integrating variable renewables

Active customers

Electrification of transport and heat

Legacy of high-emitting, inflexible resources


Role of regulation

How do we align markets and system operations with these

new opportunities and challenges?


Flexibility is key

Sou

rce:

Ad

apte

d f

rom

Th

e P

ow

er o

f Tr

an

sfo

rma

tio

n (

IEA

, 20

14

)


Flexibility ≠ balancing services

• Variable RES changes the dynamics of the power system • More rapid frequency changes require more, faster

reserves• Smaller plants may reduce need for contingency

reserves…• …But possibilities for “common mode failure” (ex. Calm

wind period over large geographic area)• Many other considerations

• Significantly increases 30-minute to multi-hour ramping reserve requirements (energy market timescales – how much depends on the size of the balancing area)


Sources of flexibility


2 Case Study – the California “duck”


The California “duck”


What is a “duck curve”?

Teaching the Duck to Fly

Requesting Permission for Take-Off

Energy efficiency

Peak-oriented RES

Manage water pumping

Electric H2O heaters

Large air conditioners w/ storage

Tariff design

Electricity storage in key locations

Demand response

Inter-regional powerexchanges


Ten Strategies to Align Loads ⬌ Resources

1. Targeted energy efficiency

2. Peak-oriented renewables

3. Manage water pumping

4. Grid-integrated water heating

5. Storage air-conditioning

6. Tariff design

7. Electricity storage in key locations

8. Demand response

9. Inter-regional exchanges

10. Retire inflexible older generating units

17

Not every strategy will be applicable to every utility.


End Result

18


3 Challenges in electricity markets


What is the role of markets?

Can markets deliver sufficient investment to

meet established expectations for reliable

electric services?

Energy-only?

Deliver reliability at least cost

Capacity

Administrative interventions –Price caps, high

reserve margins…


Many approaches to setting reliability

standard

- Clear, objective standard

- Assessed over largest practical

footprint

- Account for all cost-effective

resources of capacity

- Transparency and public

engagement essential (and

often lacking) 21

Reliability

Keita Kuroki, https://flic.kr/p/iufich


Generation = 1 of many flex options

Source: IEA Energy Technology Perspectives 2014

CSP = concentrated solar powerVRE = variable renewable energy


Is the market driving investment in the right mix of capabilities?


• Capacity market

• Annual auctionsPJM

• No capacity market

• Administrative reserve shortage pricing mechanism

ERCOT (Texas)

• No reserve shortage pricing

• Co-optimization of energy & reservesAustralia NEM

Conclusions:• All three markets have attracted new investment• Stable markets for 10+ years• Transparent, independent market operation and price formation• Market-driven replacement of inflexible baseload generation with flexible new

dispatchable resources

Different market designs have delivered reliability


”Reliability” never means reliability at any cost

Source: The Brattle Group, Estimating the Economically Optimal Reserve Margin in ERCOT, prepared for the Public Utility Commission of Texas2014, http://www.brattle.com/system/news/pdfs/000/000/613/original/Estimating_the_Economically_Optimal_Reserve_Margin_in_ERCOT.pdf?1391445083


Delivering reliability at least cost

CRM = Capacity Remuneration Mechanism

Source: RAP, from published system operator data


These are just a few of the many options

27

Range of administrative “reliability” interventions

Energy only market

Reserve shortage pricing

Strategic reserve

Capacity market


Map of where CRMs introduced in US and EU

Sou

rce:

AC

ER M

arke

t M

on

ito

rin

g R

epo

rt 2

01

5 -

KEY

INSI

GH

TS A

ND

REC

OM

MEN

DA

TIO

NS


Capacity markets in the US

Source: FERC, https://www.ferc.gov/industries/electric/indus-act/rto.asp


Tailoring solutions to address the problem

Common problems

"Missing money" (market prices not driving investment to support new and existing resources) – what are the underlying causes?

Need for more resource capabilities – what’s needed, more MW or something more?

Lack of trust that the market will deliver – too much admin intervention can undermine the market

Need for grid reinforcements – may want to combine with non-network alternatives (energy efficiency/demand response)


Real causes of insufficient price signals for

investment:

• Price caps well below the value of lost load

• High reserve margins, leading to surpluses

• Failure to reflect marginal costs of all actions in

scarcity events (ex. balancing market prices

based on average prices)

• Surplus capacity (that may not be delivering

needed operational capabilities)31

“Missing money”


Resource capabilities

• Mid-merit & peak generators

• DSR

• Interconnection

• Market integration

Increased vRES

• Poland as an example

• Increase DSR programs

• Solar PV in load centers

• Network solutions

Increased summer peak

demand

• France as an example

• Time-of-use tariffs+

• Electric hot water heatersBaseload - night

valleys

Baselo

ad is seld

om

the b

est so

lutio

n to

the p

rob

lem an

d it’s

often

the

wo

rst solu

tion

.


LOLE = “loss of load expectation” expressed in hours/year

LOLE =Levelized cost of

marginal resource

33

Reserve margins – ex LOLE

VOLL (value of lost load)

LOLE

Reserve margin

Source: Idenification of Appropriate Generation and System Adequacy Standards for the Internal Electricity Market, European Commission. DataFrom National Grid, UK.


“Value of lost load”

34

VOLL

Estimation in cost/MWh of the maximum electricity

price that customers are willing to pay to avoid

being curtailed due to inadequate available

generation:

• Varies by customer class

• Varies by methodology applied

• Generally, very high price – much higher than

typical price caps


VOLL estimatesworldwide (USD/MWh)

• 9K - 92K $/MWhSystem-

wide

• 0.1K - 18K $/MWhResidential

• 8K - 77K $/MWhLarge C&I

• 3K - 42K $/MWhSmall C&I

Source: European Commmission, Identification of Appropriate Generation andSystem Adequacy Standards for the Internal Electricity Market, 2016. https://ec.europa.eu/energy/sites/ener/files/documents/Generation%20adequacy%20Final%20Report_for%20publication.pdf


Capacity surplus in Europe


• Capacity markets distorting prices &

competition – raising prices for consumers

• Resource adequacy methodologies based on

MS assessments; lack of regional/EU wide

assessment

• EU has over-capacity

• Market distortions limiting signals needed to

stimulate investment in flex & DSR

37

Concerns expressed in the Winter package


Motivation – challenge of integrating vRES

38

Some proposals to strengthen market design in Europe

• Rules on aggregators

• Right to a smart meter & dynamic tariff

• "Prosumer" rules

• EU-wide resource adequacy assessment

• Limit CRMs to need

• Incentive regulation for DSOs

• Focus on "innovative"

• solutions

• Markets to reflect real value of energy

• Prices capped only at VOLL

• Develop short-term markets Markets that

deliver flexibility

Regulation of network

companies

Enabling demand-side

resources

Recognizing capacity

surplus in much of Europe


4 Challenges of integration


Sources of flexibility


Total Reserve Requirement Duration for EIM

Regulation Requirement Duration for EIM

Benefits of regional governance arrangementsEIM = Energy Imbalance Market (Western US)

Source: U.S. National Renewable Energy Laboratory, “Flexibility Reserve Reductions from an Energy Imbalance Market with High Levels of Wind Energy in the Western Interconnection” (http://www.nrel.gov/docs/fy12osti/52330.pdf)


”Bigger” + “faster” markets


Europe – range of annual cost savings in integration scenarios relative to baseline, RES market scenario, 2030

Booz&Co, Benefits of an Integrated European Energy Market, https://ec.europa.eu/energy/sites/ener/files/documents/20130902_energy_integration_benefits.pdf


1 hr-5 min

44

Regional markets and operationsYears/months Day ahead 0:00

Forward market with day-ahead

Intra-day

BalancingMar

ket

tim

efra

me

sT

cap

acit

y al

loca

tio

n

Network codeForward Capacity Allocation (FA)

Codes/guidelinesCapacity Allocation and Congestion Manag.Electricity transmission System Operation

Balancing Guideline

Time


System/market operations

What should the role be of:

• State/country entities (TSO’s, regulators, state/national governments, markets)

• Regional entities (regional/EU regulators, regional system operators, regional markets)

Market operations

System operations

Transmission planning/

investment

Resource adequacy

assessment


EU – evolving governance structure

Member-States

National governments

National regulators

TSOs*

Power Exchanges

Regional

Regional cooperation frameworks

Regional Security Coordinators

Markets/NEMOs

Pan-EU

EU Commission, Parliament,

Council

ACER, Agency for Cooperation of

Regulators

ENTSO-E (TSOs)

NEMO – Nominated Electricity Market Operator; TSO – Transmission System Operator* Other alternatives for transmission unbundling include Independent Transmission Operators and Independent System Operators

Introduced or further developed under 3rd Energy

Package


Status of market integration

Day-ahead market

Intraday market

Balancing market


Integration of system operations

TSO coordination

(RSCs)

TSO coordination + some centralized functions (Regional Operational Centers, ROCs)

Power pools –greater coordination of markets + system operations

Regional Independent System Operators

European-wide Independent System Operator

Current EU proposalROCs

Less integrated

More integrated

ROC – Regional Operational Center; RSC – Regional Security Center; TSO – Transmission System Operator

NordPool (Europe)Northwest Power Pool (US)EIM (emerging) (Western US)

PJM, ISO NE, MISO, SPP (US)


EU – evolving governance structure

Member-States

National governments

National regulators

TSOs*

Power Exchanges

Regional

Regional cooperation frameworks

Regional Operational

Centers (ROCs)

Markets/NEMOs

Pan-EU

EU Commission, Parliament,

Council

ACER, Agency for Cooperation of

Regulators

ENTSO-E (TSOs)

NEMO – Nominated Electricity Market Operator; TSO – Transmission System Operator* Other alternatives for transmission unbundling include Independent Transmission Operators and Independent System Operators

Introduced or further developed under 3rd Energy

Package

Proposed –“Clean Energy for All”

package


Regionalization

RSCs

•TSO cooperation

•Operational planning security analysis

•Coordinated capacity calculation

•Outage planning coordination

•Short/medium adequacy forecasts

• Individual & common grid model delivery

ROCs

•Decisionmaking capability

•Regional entity

•Regional sizing of reserve and balance requirements

•System adequacy forecasts (near-term)

•Calculate maximum entry capacity for external generation

ROC – Regional Operational Center; RSC – Regional Security Coordinator


Unscheduled flows:€1 B annual welfare losses

ACER Market Monitoring Report, 2015http://www.acer.europa.eu/official_documents/acts_of_the_agency/publication/acer_market_monitoring_report_2015.pdf


Approach to resource adequacy

Mid/long-term (10 years – 1

year)

Seasonal (6 months)

Short-term (1 week to day-

ahead)

• ENTSO-E

• ENTSO-E

• ROCs

ROCs - Regional Operational Centers, proposed


Pandora’s Box

of

Resource

Adequacy 28 Member State Resource Adequacy Assessments

Different methodologies

- DSR - Interconnectors

EU RA Assessments in practice

VOLL – Value of Lost Load; EENS – Expected Energy Not Served; LOLE – Loss of Load Expectation; LOLP – Loss of Load ProbabilityDSR – Demand-side resources


Adequacy assessments today


1. Market design and regional integration are central to ensuring low-cost reliable electricity systems with increasing penetration of renewables.

2. The California ”Duck” demonstrates the value of demand side management in particular to cost-effective integration of vRES.

3. Markets must send price signals that reflect the value of different resource capabilities. Different designs can work. But for any market, removing distortions, enabling participation of demand-side resources, and opening to cross-border trade are key.

4. Reliability is essential, but reliability at the lowest reasonable cost is a matter of capabilities, not capacity.

5. Regional integration poses significant governance challenges, but the benefits are clear. 56

Summary


RAP, Electricity Regulation in the US: A Guide

RAP, Teaching the “Duck” to Fly, Second Edition

RAP, Hitting the Mark on Missing Money: How to Ensure

Reliability at Least Cost to Consumers

IEA, The Power of Transformation – Wind, Sun and the

Economics of Flexible Power Systems

57

Further reading

http://www.raponline.org/knowledge-center/electricity-regulation-in-the-us-a-guide-2/

http://www.raponline.org/knowledge-center/teaching-the-duck-to-fly-second-edition/

http://www.raponline.org/knowledge-center/hitting-mark-missing-money-ensure-reliability-least-cost-consumers/

http://www.iea.org/publications/freepublications/publication/the-power-of-transformation---wind-sun-and-the-economics-of-flexible-power-systems.html

Edith Bayer

Senior Associate

The Regulatory Assistance Project (RAP)®

+32 2 789 3011

[email protected]

raponline.org

Rue de la Science 23

B-1040 Brussels

Belgium

About RAPThe Regulatory Assistance Project (RAP)® is an

independent, non-partisan, non-governmental

organization dedicated to accelerating the transition

to a clean, reliable, and efficient energy future.

Learn more about our work at raponline.org

http://www.raponline.org/

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