Transcript ORGANIZATION OF ELECTRICITY TRANSMISSION IN VIEW OF …

ORGANIZATION OF ELECTRICITY TRANSMISSION
IN VIEW OF LONG TERM ENERGY POLICY GOALS
Dubravko Sabolić
HEP-Transmission System Operator, Llc.
The 20th Forum of the Croatian Energy Society (HED)
Zagreb, 18 Nov. 2011
1
Introduction
•
Structure of this presentation:
1. Literature review on the following aspects:
•
•
•
TSO institutional arrangements – comparison of the “canonic” models
from an economic point of view;
Critiques of the EC’s policy regarding the full ownership unbundling as
an ultimate policy goal;
Legal grounds for the EC’s policy, and legal aspects of antitrust
enforcement viewed (perhaps) as one of the tools used to foster a
gradual movement to a fully-unbundled European space in the future.
2. The most important strategic challenge in front of TSOs:
•
•
•
The power system has to accept large quantities of new renewable
generators in a relatively short time.
How can policy and politics help or harm the process?
What does the 3rd Package has to do with all this?
2
Literature on OU – Pollitt (2007a,b)
•
Compares social cost-benefit for five institutional solutions
across a number of aspects.
•
Conclusions:
Ease & efficiency
Effectsoverall
on market
Regarding
social cost-benefit, the OU is the best
solution.
Aspects
of
of
regulation
competition
Regarding
cost of capital in particular, divestiture fromprivatization
a considerably larger
organization may lead to a certain lost of credit rating.
–
He notes that the system operation in the jurisdictions with most successful
market development
been fullyTSO
independent
interests,
• Fullyhas
unbundled
(eq. to OU);from generationSecurity
Risk of voluntary
of
without exemptions
(New
Zeeland,
Victoria
&
South
Australia,
Chile,
Argentina,
• Legally unbundled TSO (eq. to ITO);
govt. intervention
supply
Nordic countries, UK, New York, Texas, PJM).
• Independent system operator (ISO);
–
Countries with slow and/or unsuccessful reforms have kept the system operation
• Hybrid
(both fully(e.g.
unbundled);
function partially
bundledISO+TO
with generation
California, Germany,
France).
Transaction
costs
• Vertically
integrated
(VIU). adequacy and lower cost
–
An apparent advantage
of ITO
in betterutility
investment
of
of
unbundling
capital may easily be diminished or nullified by difficulties in regulatory oversight.
Probability
of
–
Regarding
the regulatory efficiency, ITO and ISO are the most demanding options,
foreign takeover
while OU and VIU are least demanding.
Cost of
Synergy
&
focusing
–
Regulatotry
inefficiency
may
be
a
considerable
problem
in
jurisdictions where
Double margicapital
market institutions are still developing. effects
nalization
–
–
3
Literature on OU – “the French school”
•
Glachant and Rious (2007), and Leveque et al. (2009): a New
institutional economics approach, an attempt to rationalize the
debate on OU and the 3rd Package policy set.
A modular analysis (for three basic modules of TSOs) for all the 3rd
Package options, with five criteria to compare TSO organizations:
Conclusions:
•
•
Transaction
OU is the best solution where
a need tocost
ensure correct price signals for
savings
investments is dominant:
Incentive regulation
Advantages
• of
in jurisdictions where interconnections
with neighboring
systems are
implementation
wT
regional integration
good, while internal network still suffers from congestions.
BASIC
MODULES
TSOefficient coordination
–
ISO is the best solution
where
a needOF
forA an
•Short-run
network
externality mgmt.
wI
between
TSOs
is dominant:
wA neighboring
real-time
mgmt.)the internal network
• often where(dispatching,
interconnections
arecongestion
weak whereas
Long-run network externality mgmt.
is in a good• condition.
development)
–
EC has obviously(network
valued the
correct price signaling the most; hence the
•
Coordination
with
neighboring TSOs.
OU became a preferred policy option.
–
EC should strive to legally enforce a unified institutional form as soon as
wC
possible for the sake of
w better inter-TSO coordination.
Conflicts of
–
Non-discriminatory
network access
N
interests
w – different weights
4
Literature on OU – some German authors
• Brunekreeft (2008) performs a social cost-benefit analysis of the OU with an
emphasis on German TSOs. He makes no comparison between OU and other
institutional arrangements.
• Three groups of potential effects on welfare studied across several scenarios:
– effects on market competition;
– effects on interconnection investments;
– effects on costs caused by a loss of vertical synergies.
• He reports:
– In most scenarios the total welfare change is positive but relatively small.
– Effects on interconnection investments are surprisingly small (as large importers and
large exporters need interconnectors and do not have an interest to stop TSO in
constructing them).
– Vertical synergy losses are very small, too.
• An overall conclusion is that OU leads to an increase in social welfare.
• Bolle and Breitmoser (2006) compare OU and ITO and conclude that ITO leads
to lower final electricity prices (because the total costs of the system are lower
than in the OU case).
• However, their results were disputed e.g. by Pollitt (2007) as they were
grounded on an assumption that double marginalization is completely avoided
in ITO case, as opposed to the OU case, which is not realistic.
5
Literature on OU – Nardi (2009)
• An empirical analysis of the OU effects on transmission capacity
investments and quality of transmission network service.
• The groups of European countries:
– without any kind of unbundling;
– with just any kind of unbundling, comprising of two subgroups:
• with an ownership unbundling;
• with any other kind of unbundling.
• As regards total capacity investments (i.e. not only interconnection
ones), the OU seemed to be performing better than other
institutional arrangements.
• When it comes to quality of service, it turned out that the group of
countries with some form of unbundling perform better, and that
among them the OU operators perform slightly worse than the
others.
– However, these results were indicative and not statistically significant.
6
Literature on OU –
Van Cotten & Ortmann (2008)
• An interesting and quite witty piece of work I just had to put here.
• Econometric analysis between the Transparency International’s CPI
(Corruption Perception Index) and ownership unbundling level
(modeled as a five level variable), for the EU countries.
• The main statistical conclusion:
– lower degree of unbundling goes with lower CPI (i.e. higher perception of
corruption in a society).
• Some further results:
– newer EU member states have lower unbundling degree (and CPI, too, see
above);
– higher GDP per capita goes with lower unbundling degree.
• Methodological problems (as I see them):
– The CPI usage in international context with fairly different cultures may be
problematic.
– The funny ‘GDPpc – unbundling’ relation may be affected by the fact that
just a few large and high-GDPpc countries (like Germany and France) had
lower levels of unbundling at the time.
7
Literature on OU – ownership changes
and financial considerations
• Knyazeva, Knyazeva and Stiglitz (2009) investigate influence of
ownership changes on accessibility of external financing:
– they basically analyze international telecom industry from 1987 to 1999;
– plausibility was checked by analyzing a multi-sector sample of European
privatization deals from 1989 to 2006.
• This is an extremely important topic for OU debate rationalization
since an alleged detrimental effects of TSO divestiture on its
financial position (and somewhat less detrimental, but still
present, effects on the former VIU’s position) were among the
most prominent arguments of ownership unbundling haters
throughout the EU.
• This work is relevant for the power industry, too, since the
questions of ownership change and access to external financial
sources are by no means specific neither for telecom, nor any
other particular industry.
8
Literature on OU – ownership changes and
financial considerations – conclusions
• Full privatization is more likely to happen in:
– industries with weak performances;
– states with a non-French origin of legal system;
– in larger and wealthier states;
• Access to bank crediting has an important positive impact on future profits,
investments and growth.
• Performance changes around the year of ownership change are not very sensitive
to past financing limitations of public sector.
• Later privatization (i.e. longer active pre-privatization preparations) lead to better
future performances due to an effect of “learning” an optimal privatization
design in given circumstances.
• Maturity of capital market in a given state matters.
• Newly privatized companies carry higher information asymmetry risks (i.e. they
have less reputation, being less known to the players on capital markets). 
Since costs of equity are more sensitive to information asymmetry, bank loans are
normally cheaper, so that an access to them can be essential.
• Performances of privatized companies are not significantly better nor worse than
of the ones that remained under state ownership.
9
Literature on OU – ownership changes and
financial considerations – main messages
• Ownership change (divestiture and/or privatization) is not all that
important, so that arguments either pro or contra ownership
unbundling motivated by alleged detrimental effects of it are not
plausible as such.
• The privatization v. state-ownership discussions cannot help in
forming decisive criteria to judge for or against ownership
unbundling, either.
• The key factor that does matter is how a newly divested TSO (that
is, if OU were decided on) would be able to raise funds to support
its investment activities.
– Since it is apparently not too important whether a company is eventually
owned by private or public entities, a general level of capital market
maturity can play certain role (and perhaps influence decision making
processes in any given jurisdiction).
• Of course, there can be more state-specific moments potentially
important for this issue. It is important to stay rational when
deliberating the decisions, though.
10
Literature on OU – Critics of the EC
• There is a number of authors who dispute the EC’s right to draft
such legislation as the 3rd Package is.
• Thomas (2007a,b,c)
– analyzes semantics of the EC policy papers, working documents, press
releases and draft legislative documents that preceded the 3rd Package,
– trying to prove that the EC had not sufficiently investigated and attested the
grounds for such a profound political action.
• His point is that the Commission had not proved sufficiently an
existence of public interest high enough to justify state
intervention into the rights of private ownership and free capital
movement by ordering TSO divestment.
• Yet, this is obviously a big blunder because policy and politics do
not need any proofs.
• Thus, such critiques are nothing but infertile discussions.
11
Literature on OU – constitutional dilemmas
• There are more constructive works discussing basic legal issues,
though.
• Pielow and Ehlers (2008) study constitutional grounds for
obligatory ownership unbundling in Germany, France and
Netherlands.
• They address the issue of fundamental rights of free ownership
and movement of capital, yet they never dispute the right of the
EC to take a legislative initiative even when it aims at limiting
certain basic rights and freedoms.
• Individual countries may have constitutional obstacles that prima
facie do not allow for obligatory OU.
• However, such obstacles can be pragmatically circumvented.
• An example: privatization of Gaz de France, 2004:
– The French Constitution of 1958 requires public services to be provided by
publicly owned companies, but it does not stipulate exactly which are these
services.  This enabled a pragmatic solution to be found without a need
to update the Constitution.
12
Literature on OU – EU antitrust law
• Willis and Hughes (2008); Diathesopoulos (2010).
• Ownership unbundling issues from the standpoint of antitrust law,
policy and jurisprudence.
• Some important highlights from these articles:
– The EC does have an indisputable right to order ownership unbundling in
individual antitrust cases, (including non-merger ones), as a proportionately
measured structural remedy, on the basis of a thorough economic analysis.
– The EC will likely be able of defeating any legal challenge based on alleged
infringements of either:
•the European Convention on Human Rights
(Protocol 1, Art. 1 – the right of peaceful enjoyment of possession);
•the Art. 1 of the EC Treaty – principle of subsidiarity; or
•the Art. 295 of the EC Treaty – national property rights,
provided that the unbundling remedy was measured in a proportion to
the EC antitrust law breach in question.
13
Literature on OU – EU antitrust law, cont.
• The Commission has already won a number of cases before
European courts where it commanded divestitures as structural
remedies under the Art. 82 (abuse of dominant position) of the
Treaty.
• Moreover, there were a number of the Commission’s actions
under Art. 81 (anti-competitive agreements and concerted
practices) of the Treaty, where it approved firms’ commitments to
so-called voluntary measures.
– The companies sometimes commit to such measures to avoid expensive,
long lasting and risky litigations.
– The most famous example: the two EC v. E.ON antitrust cases of 2008:
•Wholesale market manipulation by withholding  voluntary divestment
of 5.000 MW of generation plants;
•Favoring affiliated generation plants while procuring system reserves 
voluntary divestment of the transmission system operator (with assets).
• Thus, the antitrust law enforcement powers may be viewed as a
pretty powerful policy tool in the Commission’s hands.
14
So, can an optimal TSO model be idetified?
• In my mind, there is not a very clear and firm conclusion that would
come from the economic/legal science on the optimality of either of
the three institutional settings from the 3rd Package’s menu carte.
• However, the economists mostly assume that all the agents do their
jobs in an efficient way, which my be contested from both
theoretical and empirical grounds.
– For instance, there is a number of theoretical and empirical studies
establishing an inherent inefficiency of regulators (e.g. Stigler and Friedland
(1962), Stigler (1972), Peltzman (1976), Ugur (2009), and many others).
– Apparently, the models that are critically dependent on regulatory control
may prove to be inefficient not because they were badly constructed as such,
but because of regulatory failure.
– Having that in mind, should the policy goal (nondiscriminatory network
access) be sincere, the OU would obviously gain an advantage before other
solutions, especially the ITO one.
• Thus, the basic assumptions in economic analyses would have to be
changed so to include regulatory imperfectness into the models.
15
So, can an optimal TSO model be idetified?
• Further,
– real-life TSO business within the surrounding industry is probably much to
complex to be simulated by simplistic economic models;
– inherited features may exert a strong influence on today’s situation and
starting strategic position in the dawn of the reform.
• So, since the economic science had not been able to provide a firm
and indisputable answer, the problem has been easily moved to a
political arena.
• It was a political will, expressed through a political process within
the EU, that enabled laying down the law saying that the Europe
wants TSOs to become fully independent on the rest of the
industry.
• However, still potent countervailing political groups succeeded in
softening the language of the law and producing reserve solutions.
• The very organizational form of TSO business may prove to be less
problematic than a political unwillingness of European countries to
form larger regional independent system operators.
16
Key strategic challenges
• The electricity system has to go greener.
• Transmission business will have to change not only in the technical
dimension, but in the business one, too, to keep up with a range of
rather newish challenges, such as:
– ever increasing quantity of new large renewable sources with substantial
intermittency;
– a need to connect generators located often in new areas where grids have
not been sufficiently developed, yet;
– a growing proportion of distributed generation connected to lower voltage
levels, when it becomes collectively large enough to disturb the grand-scale
system operation.
• Thus, the systems must be upgraded both in the
– physical domain; and in the
– domain of the system operation philosophy.
• The networks must not pose (unnecessary) barriers to the power
system greenification.
17
Key strategic challenges
• There’s a lot of technological challenges here, but more
importantly,
– the industry organization and market infrastructure will have to
change even more dramatically.
• For example: Today’s introduction of new green generation is
supported by ample public subsidies.
– This is OK since there is an imbalance in total levelized costs of electricity
generated by classical plants on the one hand, and renewable ones on the
other.
– The pollution-related externalities have been systematically neglected ever
since the first polluting generator was built.
– Therefore, classical technologies still have a substantial competitive
advantage at least as regards investment costs.
– However, the state subsidies MUST be abandoned one day soon because
the RENEWABLE SOURCES MUST BECOME NORMAL AGENTS on the
electricity marketplace. They MUST be subjected to the same market
mechanisms as anybody else.
– To achieve that, they must become truly competitive.
18
Key strategic challenges
• Apparently, one of the biggest problems (not necessary for every
TSO, though) in adoption of new intermittent sources of energy is
a lack of the plants technologically capable of providing ancillary
services needed to physically balance the system.
• Balancing of the power system, when it is organized as a free
electricity market, occurs on at least two levels:
– Adjusting misbalances of forward contracts on a real-time (spot)
market.
– The remaining misbalance, after the real-time market closure, must be
removed by regulation in “true” real time.
• TSOs are virtually the sole users of ancillary services, yet, they
usually do not own the providing facilities.
• Since TSOs have to be unbundled from generation, they
themselves realistically cannot play a leading role in investments
in system flexibility.
19
Key strategic challenges
• Thus, flexible generation investments must come out as a result of
market-driven processes.
• Another form of “hidden” subsidies for new green generation is
sparing them from market- and system-related obligations applied
to all other participants.
– E.g. the Directive 2009/28/EC gave a de facto advantage to
renewable sources in grid access, subject to system operation
security constraints.
– Lower level pieces of legislation may introduce further special rights.
E.g. in Croatia, renewable sources which are entitled to subsidies are
spared from balance responsibility. They must only pay 10% of
subsidies received to the TSO on the account of balancing, no matter
what the actual economic value of misbalance introduced by them
was.
– In this way a situation where the renewable generators do not have
any financial incentive to take care of balancing is created. They can
just ignore the problem knowing there will be no consequences,
whatsoever.
20
Key strategic challenges
• Regarding the need for ancillary services to
balance intermittent sources such as wind,
situation may vary across the European space:
– In regions with steady winds, where intermittency is
milder and slower, additional requirements may not be
too high.
– In regions with wild and unsteady winds they can,
however, be quite high.
– Unfortunately, prognosis tools, which can relax the
need for expensive regulation to some extent, work
better in a steady wind environment, where they are
less needed.
– Therefore, there are regions in Europe where ancillary
service capacity shortages may have a strong impact on
the pace of greenification.
21
Key strategic challenges
•
How to cope with the balancing issue?
1. Assess the needs and build flexible generation plants.
•
In other words – LET MARKET FORCES DO THEIR JOB.
2. Try to use prognosis tools as much as possible for they are
way cheaper and greener than new flexible generators.
•
•
•
•
However, to make it happen, the intermittent renewables MUST
assume balance responsibility, i.e. they MUST start paying for
misbalances they introduce so that they have incentives to invest in
better production planning.
But then, to be able to control costs of it, they MUST participate in
the real-time wholesale markets to balance as much as they can
before regulation services must step in. (There are quite a few places
in Europe where there still are no power exchanges, though.)
TSOs must also work on generation predictability.
Renewable generators MUST once become
22
normal market participants.
Key strategic challenges
•
How to cope with the balancing issue? – cont.
3. Try to bring in some demand management,
•
although presently, it can count for up to some 10% of the total
needs at the best.
4. Cooperate with other TSOs and integrate into
wider geographical markets.
•
•
•
SYSTEM OPERATION itself has positive externalities: the more control
areas join in, the more efficient use of ancillary services available
inside the great area.
However, POLITICAL CONSTRAINTS are fairly tight in Europe. It is still
hard to expect that USA’s multi-state system operation could develop
in Europe shortly.
EC’s Regulation 1228/2003 and its descendant 714/2009 made crossborder ancillary services trading virtually impossible as they forbid
capacity reservations. Thus, only dispatchable services are tradable
over national borders.
23
Key strategic challenges
• More on balancing issues:
– What about distributed generation once it grows above certain
level?
– Will DSOs have to balance their areas or will the total
generation be balanced by TSOs?
– Imagine for example a country with almost every rooftop
covered with a photovoltaic:
• How will this biggish renewable generation system behave?
• Imagine a country with a territory comprised of three significantly
different weather zones:
At least sometimes, all those photovoltaics together may behave as
three rather large and almost independent intermittent power plants.
– Remember:
• technical balancing using regulation capacities should be preceded by
real-time market balancing;
• usage of ancillary services is more efficient in larger control areas.
– etc... A number of further questions may be opened...
24
Key strategic challenges
• Upgrading the networks:
– New renewable sources of electricity may be situated in areas
where there is not much population and/or historically
inherited transmission networks.
– Territories with quality wind or with much sun may be distant
from the ones where the population rests and networks had
been built.
– Some system operators identify this problem as the most
important for them.
– Nevertheless, it is only about how many Euros must be spent
to build new high voltage power lines.
– However costly it might be, it is a well known activity for all the
TSOs. So, the biggest problem here is how to raise money to
finance it, or in other words, how to raise transmission tariffs
25
to a sufficient level.
Key strategic challenges
• My PERSONAL belief is that one day a further SPECIALIZATION OF
WORK will probably have to occur in the electricity sector, and that
basic modules of the TSO/DSO business will probably have to be
vested with different specialized entities:
• network functions (TRANSCOs and DISCOs):
– maintaining power lines, transformers, and other “tangible” stuff;
– ensuring a certain level of quality of service.
• system operation (ISO companies):
– real-time market operation (not necessarily by TSOs – other
independent agents may step in as well);
– providing system services (maintaining frequency and voltage, etc.) 
dealing with increased intermittency of generation belongs here;
– managing short-term congestion (by dispatching) and long-term
congestion (by system development and investments);
– inter-TSO co-operation in all the aspects listed above.
• Otherwise, the sector may end up in a situation where everyone
26
does everything, and that cannot possibly be good.
Key strategic challenges
• In a word, despite many political difficulties, a necessity to
introduce green sources on a large scale will eventually push
Europe to what they do in the USA:
– wire businesses will do wire business;
– there’ll be large regional ISOs managing the systems;
– which in turn would foster market integration and enable better
transmission of price signals towards market players.
• However, this will take some time, I believe at least two decades.
• Meanwhile, the EU’s policy towards system operators will continue
to pressure the states to divest TSOs:
– law making as a principal policy tool;
– antitrust campaigns as an efficient auxiliary tool.
• The EC energy policy goals are nowadays primarily influenced by a
growing political and public awareness of problems with polution
and the future of energy supply.
• The recent policy goals regarding TSOs, expressed through the 3rd
Package, were somehow formulated as if the law makers had that
in mind.
27
Conclusions
• THE most challenging issue in front of the TSO industry is running
the system with a big and ever growing share of inherently
intermittent generators.
• THAT is what is essentially still pretty UNKNOWN to us.
• We will still be expected to keep network availability on the same
level and even enhance it.
• We will not be tolerated for having multiple blackouts a year.
• We will not be tolerated to ban intermittent renewable sources
penetration, either, because nobody really cares they’re
intermittent. (Intermittency? Is that some kind of exotic bird?)
• Therefore, the philosophy of doing our business will have to adapt
very rapidly because society already has big expectations.
• The electricity transmission functions have always been deemed a
ubiquitous invisible infrastructure of the society, and they will
have to go on just like this.
28