Ignacio Pérez-Arriaga | Electricity Transmission Network

Ignacio Pérez-Arriaga | Electricity Transmission Network


hello I mean not vo Perry tárrega I’m a professor at camellias University in Madrid also professor at Massachusetts Institute of Technology in Boston the United States and the director of energy training at the Florence school of regulation the topic that we are going to cover today is the regulation of electricity transmission here you have the European transmission network as you can see is a very complex system with thousands of lines and thousands of nodes all being connected and well transmission is one of the activities that is necessary to provide electricity supply electricity and transmission is a provider of different services but the most important one and the only one that we are going to cover today is the transport of electricity from the generation plants to the major load centers and one of the questions that we are going to address today refer both to the national level and the regional one or the international one so when people are free to buy and sell electricity in a market and we have a market in Europe and people are able to trade freely and the questions that we want to solve to address are what these people these agents are using the transmission network so how much they should be charged for the use of this network there are losses in transmission so who pays for those losses the network sometimes becomes congested and then well who has priority in the use of the network the network will have to be reinforced so who is responsible for planning for making decisions about the reinforcements what are the business models that will have to be used in expanding the network and we have to address this issues both at national level here you have Spain one of the member states in the European Union and you have a generator you have a demand and they are using the network well we have to answer these questions for these two agents and we also have the international context in which you can see a generator in one of the member states in Poland and the demand in Portugal and then well the same idea they will be using the European Network and we have to answer these several questions so in order to address these issues my presentation today will cover first a background about the regulatory characterization of transmission then we will talk about a technical issue not all pricing that is necessary to understand what is going on in the networks and then briefly we will cover three laboratory topics that encompass all the issues that we want to address investment in these networks access or priority in the utilization and pricing or cost allocation well and the transmission network was not the very relevant activity in the provision of electricity under traditional regulation I mean on the cost of service regulation the regulation that was prevalent in most member states in Europe before the liberalisation process that took place during the 90s why well because transmission does not mean a large cost it’s typically the cost of transmission something like five to seven or eight percent of the total cost of electricity and it was an activity that was integrated with generation distribution retailing in the vertical integrated utilities but now that we have a market transmission becomes critical because it’s the meeting point of all the major aliens so we have the large generation plants will have the demand and in order to trade they have to use it as Mission network without adequate rules transmission it is impossible to organize this trade so this is why the regulation of technician is so important it is we have to realize that in the that transmission is a regulated activity because it has the characteristics of a natural monopoly and when we have a natural monopoly we cannot leave it to the market forces because the owners of those assets that activity could abuse the market power that they have the reason that transmission is a natural monopoly is that we have large economies of scale look at this slide that shows that a line of higher voltage the one that you have in the middle 765 kilo volts with one line you could transmit the same amount of electric power than three lines with double-secret in a lower voltage three forty five or six lines if the circuit is single if we would be talking about lines of a lower voltage like two hundred and twenty kilovolts maybe with that single line at seven sixty five would be replacing ten or twelve lines of lower voltage so it is clear that the higher the capacity of transmission of the lines and the higher the voltage the lower is the cost that we have per unit of transmitted energy well there are other reasons why this mission is a natural monopoly we cannot we should not because of environmental reasons duplicate the transmission lines and so competition is very difficult and the receive Constance’s and and well this is why transmission is has to be regulated as a regulated monopoly we are going to examine the effects of transmission and one is losses in the transmission lines and all the other facilities and the second one is congested in order to understand transmission losses let’s look at this example it’s the simplest possible transmission system that we can have we have two nodes in a transmission line in between them on the left you have a generator that has a low cost of five cents per kilowatt-hour and on the right you have a generator that is more expensive it is seven cents per kilowatt-hour and we have two demands in each one of the nodes one is 50 megawatts on one node and 50 megawatts in the other one well if we want to increase the demand in the node on the left or it is clear that the economic dispatch of generation in the system would be the generator on the left providing all the electricity because it steepest so the incremental cost in the node of the Left would be five cents per one more additional kilowatt hour the same thing would happen in the generator in the right what happens is that the line that is joining the two nodes has losses let’s assume that there is a loss factor of ten percent well that means that if we increase the demand in the node in the right by one then we will need to produce more because of the losses on the generator on the left so we’ll have to produce five I mean instead of one one point one kilowatt hours and that means that the incremental cost for the system instead of being five will be fine point five so that means that losses create differences in the prices in the different nodes well the other effect that I’m describing transmission is congested if the capacity of the line is limited and it is always limited 40 megawatt for instance then what happens is that they when we try to dispatch at minimum cost and system the flow coming from the node in the Left cannot be of the value of 50 as before because we have a constraint in the middle of 40 megawatts so the additional kilowatt hour in the north of day of the right will have to be met by the generator that is on that note at a cost of 7 cents so that means that when we have a congestion in the system we create what we call economic islands so different areas that have different prices that are separated from one another because of the congestion that happen in the middle well so we define normal prices as the short term marginal cost of energy with location or differentiation in the different in the different nodes and some systems use that and the electricity is priced differently in different nodes as you can see for instance in this power system in North America this encompasses several states in the north east of the US this is the system it is called PJM and the different colors indicate according to the scale that you have on the left the different values of the normal prices in different nodes on the contrary in Europe we have decided to make a simplification and have single prices in the different large areas so for Spain there will be a single price at a given moment for France there will be a single price for Portugal that would be a single price Exeter in some regions they have decided to divide into areas like in Italy where they have several different prices if there are congestions between the areas it is a simplification with respect to what is done in other parts of the world so the main regulatory issues that we are going to explore in transmission are represented in this figure so we have first the criteria that are needed to expand the system typically is to reduce cost and to increase the reliability of the system then that those criteria will guide the activity of planning the determination of what are the investments that have to be made to reinforce the network and this is intimately related to cost allocation why because the investments are made in order to benefit the agents in the system so it is logical that the agents in the system will have to compensate to pay for the costs of the osha investments then once we have it has been decided which are the the adequate investments to be made what remains is to determine the business models for those who are going to invest in the network and that well there are different different possibilities and different countries adopt different approaches to determine to specify the business models and then a problem that always exists is that people don’t like to see transmission lines in the countryside or near to where they live so the siting problem and that requires some Authority making final decisions about the trajectory of the lines is the remaining problem in operation of the power system there are other issues that we will not work we’ll discuss later that have to do with the operation of the system and therefore access or the problem of congestion and how to give priority to the different agents so now I’m going to address quickly the different regulatory topics the first one is investment and the objective of investment is to make sure that all the transmission facilities that meet some criterion are justified will be developed and according to some criteria of economic and quality of supply and they are built at optimal times and they are properly operated and maintained at minimum cost so for that we have alternative business models we are not going to go into details for these business models that to give you an idea that there are different approach so the simplest one and well more widely used is that the System Operator proposes because it’s the technical body that knows more about transmission proposes the plan to be made then that goes to the regulatory authorities who approved the plan and then the lines are either built by the system operator in some cases or assigned by competitive bidding the second approach is quite different in in this case that was me some company is given the responsibility of making the final decisions about the investments and they have they’re subject to some kind of grid code and the remuneration is based on some kind of price control regime for instance RPI – X this is less widely used but it’s another possibility a third one that is more market oriented is to lead to the market agents to make proposals about reinforcements in the network and well that those proposals go to the regulatory authority that opens a hearing a public hearing people discussed those investments and then those who are finally approved go to competitive bidding finally there is another approach which is a minority one but that should be allowed of course which is merchandise that means that entrepreneurs make the decision of building lines and trying to sell them at market price so selling electricity on one end and buying electricity on the other or convincing a group of agents to pay for the costs of business well as you can see in this figure that represents the European Network and it is provided by the association of the submission system operators and so e for electricity well the problem that is faced when we try to plan the transmission network in Europe is huge because of the dimensionality of the problem and also because of the uncertainty there are good resources of wind in the north part of Europe also in the North Sea also in the south we have hydro resources in the Alps in the mountains and also in the Scandinavian countries we have solar resources in the south and also in northern Africa but we don’t know how these resources are going to be developed and we have to develop big axes of reinforcement in the in the European Network this is one of the possible world maps of development of new submarine cables and transmission for the development of offshore grid offshore wind production in the North Sea as you can see that links different countries among them that will have to interface with the onshore transmission network and it will be very complex to a plan and very complex to decide who has to bear the costs of these investments access is the problem of sharing the capacity of the facilities when that capacity is limited and there are more requests to use this capacity than the what the system can sustain and well there are also problems or we have to have rules for a connexion authorization of connection of generators and demand to the grid but this is fairly simple the major problems exist with the management of the constraints when they happen in the system and there are different approaches again I will not go into any details but just to mention that what could be done is to use full normal pricing as it is done in several of the system operators in the United States you could divide the system into zones and only study the congestion between them this is done for instance between Spain and Portugal this is done in the different zones that Italy is divided for this purpose this is done also in Scandinavian countries so the simplification of novel pricing another possibility is to do three dispatch or counter trade so let the flows obey what the market has decided and then make adjustments to avoid violating any transmission constraints and finally it is possible to auction the transmission capacity before hand so the agents have the possibility of making sure that they can use the capacity of existing capacity of transmission to make their suctions the final topic is pricing pricing has to do with allocating the costs of transmission to the different agents that are using the network and it is important to have good pricing rules because those are those will provide the economic signals for the newcomers particularly new generators to locate in the right locations if we don’t have this location or signals the generators world will not it will be the same for them to locate in one place or another regarding the costs of transmission and they may locate in the wrong places so they that will make the transmission network to inquire into very high costs pricing has two components one is the energy prices for instance if we use energy prices novel prices with locational differentiation as in some systems in the in south america also in north america in the u.s. well that will provide some signals in the price of energy as I said before in Europe this is not used in most cases at member state level the other part which is going to concentrate on that is the allocation of Network costs so the users of the network have to pay for the costs of the network and well for that we have there is a common agreement that is taking longer than expected to to be reached and it is often ignored in many jurisdictions but the the convergence of regulators is towards these principles the first one is as I said before the beneficiaries of the transmission investments are the ones who have to pay for them because this is why the transmission is being the investment in transmission is being made to improve the conditions of generators and consumers the second rule which is not intuitive at all but it is it is soundly based on physical principles is that the transmission network charges should not depend on the commercial transactions that means that well if you have a generator in Germany that is selling electricity to a consumer in Portugal where that generator should pay for transmission should be the same as if that generator would be selling to another one consumer that is located 50 kilometers from the generator in Germany why well because they this is the these are the rules of electricity it doesn’t happen that the electricity coming from the generator goes to the consumer in Portugal just because they have signed a contract and so it is important to take that into account and this is something that has been accepted at European level and it is included in the regulations in Europe not so in the United States and that world creates problems as it was the case in Europe before we passed this regulation and we had the problem that is called pancaking so it is accumulation of tariffs when somebody’s trading from let’s say germany – portugal they will have to pay all the transmission charges in the intermediate member states the third rule that should be incorporated slowly gradually in the different jurisdictions but so far is not almost used anywhere is that the transmission charges particularly for generators should be computed exactly so that will provide true economic location of signals if the charges are we computed every year that will not provide a stable signal for locating the right places finally I will mention that there are challenges that exist that are starting to appear have been already they are really present in our systems and the question is whether the current compact of regulation will be able to cope with these new situations and the consensus is that well we will have to upgrade to change to improve the regulation that we we have at the moment in those challenges particularly come because of sustainability concerns because of energy policy that is promoting the deployment of large volumes of renewable generation of an intermittent nature like wind and solar and that will make us to revise to review the planning criteria who are the institutions responsible for making those planning decisions cost allocation procedures the business models in siting in with that I will finish my presentation thank you very much for your attention

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