Towards a new regulatory

framework for wind integration:

Main challenges

Jean-Michel Glachant TWENTIES Workshop

September 16, 2013, Florence

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3+1 Challenges for wind integration

1. How to ensure the integration of intermittent renewables

that are out of the market?

2. How to ensure an adequate development of flexible back-up

resources?

3. How to ensure an adequate development of the grid?

… but also a transverse challenge: RES integration

with/versus integrated European market?!

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(1) Integration of intermittent RES into the markets RES being out of the market

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

• Increasing gap between wholesale prices and consumer bills:

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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

… can a large share of the generation mix remain isolated from market prices (FIT + priority dispatch)?

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(1) Integration of intermittent RES into the markets How to bring RES back into the markets?

Making intermittent RES an active participant in power systems and electricity markets:

• … should RES revenues depend on market prices?

• … should RES be exposed to imbalances?

• … should RES bear the total cost related to their connection to the system?

Two main options:

• “Melting-pot” integration: Same rules for intermittent and dispatchable RES

• “Salad-bowl” integration: Rules adapted to the technical specificities of each technology

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• A whole set of alternative means of flexibility:

NB: What is needed is not capacity, but the ability to deliver energy when needed!

Market design needs to allow for business models exploiting alternative means of flexibility

The services which these alternative means of flexibility could provide to the system or individual stakeholders need to be adequately recognized and rewarded

(2) Development of back-up resources A whole set of alternative means of flexibility

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Flexible operation of generation

Energy storage Demand-side management

Grid & interconnection (as a vehicle for other flexibility resources)

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• A multidimensional problem:

• Exchanges are based on a set of institutionally-defined zones (time & space) and borders

• Trade-off: Simplifications & socialisation vs. cost-reflectivity

• As generation gets more variable, finer temporal and spatial granularity get more important:

• Any zone definition (>LMP) will not be adequate 100% of the time, as RES generation fluctuates

• The value of flexibility will only be fully reflected if time products are fine enough

• Not only in electricity markets, also gas markets!

• Price boundaries (cap & floor) will also drive the behaviour of participants at times of

scarcity/abundance if high/low enough.

One product

One price Time

Location

Balancing

time-unit

Zone definition

x x x

Time

Location

x x x

Three products

Up to three prices

(2) Development of back-up resources Need for adequate price-signals

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(2) Development of back-up resources Need for extra remuneration?

Typical missing money problem:

Can peak generators get their return from scarcity prices at times of high demand and low base-load/RES generation? Is there a need for capacity remuneration?

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Source: Matthes et al. (2012)

• Declining profits:

Existing power plants sell at lower prices for a smaller number of running hours

– Part of it being temporary: Overcapacity due to lower demand / RES development

– Part of it being structural: Systems with high share of intermittent RES with zero marginal cost

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(3) Development of the grid Challenging volume of investments needed

• … in order to connect new generators and to enforce the existing grid

A set of four regulatory challenges:

• Coordination among generators and grid operators

• Economic efficiency: Current regulation has been conceived to reduce costs for the same service. We now want to limit costs for a different service.

• Financial feasibility: Can grid operators/new players cope with the wave of investments – without impacting significantly the level of network tariffs?

• Cost/benefit allocation: How to allocate costs/benefits among generation and load, as well as among Member States?

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To conclude

The successful integration of intermittent RES requires

• Adaptations of electricity market design for intermittent RES / conventional generation / backup capacities

• An efficient use and allocation of transport capacity, as well as efficient grid expansion

RES integration with/versus integrated European market?!

• Patchwork of national regulatory frameworks adapted to local resources…

• … or harmonisation?

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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