Transcript Slide 1

Location, location, location
FSR Executive Seminar
Which network for which market design?
Martin Crouch
June 2014
Overview
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Unbundling networks from generation decisions implies a need to coordinate.
Economics: prices are a means to an end; the end is efficient outputs
The outputs come from decisions to build (or close), to operate
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Locational signals (prices) can inform generation (demand) decisions
What are the options?
Is there evidence to support the theory? How big is the prize?
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Can locational signals directly inform transmission investment decisions?
Regulation based on value rather than cost?
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Options for locational signals
• None
– single bidding zone, postage stamp pricing
• Transmission charges
– flow-based model
• Energy prices
– nodal
– zonal
• Other
– queues, non-price signals
– rewards for being constrained
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Arguments for bidding zones are well understood...
E.g. this slide presented at the Florence Forum.
Options
• Single price (postage stamp)
• Single energy price market and administered
transmission charging
• Multiple energy prices (market splitting)
– nodal
– zonal
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Do locational signals affect generation
investment?
CCGT build in England and Wales (illustrative)
1991-1994
1998-2002
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Are re-dispatch costs material?
Total balancing costs
Components
Source: National Audit Office report
based on Ofgem/National Grid data
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Transmission decisions
• Transmission decisions take account of projections about
generation and demand (including location)
• Difficult to predict: GB experience with “user commitment”,
auctions for gas transmission capacity
• On a European scale, market coupling gives us zonal prices
• Current price signals don’t (can’t) tell us where to build
transmission – timing mismatch
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Can we use future price signals?
• Why?
– regulation is an imperfect substitute for competition
– competition rewards value, regulation traditionally based on costs
– price differences tell us value => use the information
• We recognise:
– congestion rents ≠ value; but we could calculate value, could address
incentive to under-size
– keeping down cost of capital is key to value for money infrastructure
– if the developer captures full value, no value for consumers
(value>economic costs)
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Ofgem’s cap and floor proposals
(published 23 May, consultation open to 18 July 2014)
• Regulatory regime for interconnection
– moving regulation from costs to value
– structured process
• application window for groups of projects
• “needs case” assessment of socio-economic benefit of project
– in the current GB position, congestion rents taken as a proxy for fair
share of value, without over-complication
– still rely on costs for cap and floor, to keep cost of capital lower
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