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Digest of the

This digest was prepared by：

Jean-Michel Glachant, Florence School of Regulation

Nicolò Rossetto, Florence School of Regulation

with generous support from the authors of the Handbook on Electricity Markets.

LEGAL DISCLAIMER

Chapter 1 and the book cover are included here in this digest with the permission from Edward Elgar Publishing

Ltd. The information and views set out in this report are those of the author(s) and do not necessarily reflect

the official opinion of the European Union. No guarantee can be given by the European Union for the accuracy

of the data included in this study. The European Union or any person acting on their behalf cannot be held

responsible for the use which may be made of the information contained therein.

English editing: Helen Farrell, Chinese editing: Chi Jieqiao

FOREWORD

The record-breaking temperatures seen in the summer of 2022 have shown the impact of

global warming. Whether in Europe or China, no one can escape it.

Decarbonisation is the only way forward: future electricity generation will have to come to a

large extent from renewable energy with the remaining share coming from other low-carbon

sources. The tremendous growth of renewable electricity capacity is fundamentally changing

global electricity systems and presents power grids with enormous challenges. In the past

decade, China has emerged as a global renewable energy champion, ranking rst for both

investment in and production of renewable energy. In 2021, renewable power plants made up

more than 1 000 GW of China’s 2 200 GW installed power capacity, in a mix of solar, wind and

hydropower. With the new round of power market reforms in 2015, the coal-red power tari

reform in October 2021 and the announcement in January 2022 that a national unied power

market system is to be established, momentum is building for the creation of an electricity

market in China.

China’s power market designers and policy makers are now grappling with the problem of how

to integrate intermittent renewable energy eectively under China’s socio-technical system.

It is a good moment to nd out about the experiences of other power markets throughout the

world that have confronted similar issues. What market measures have helped to minimise

power curtailment, blackouts, and stranded assets?

The publication of the Handbook on Electricity Markets in November 2021 could not have

come at a better moment. Edited by Jean-Michel Glachant, Director of the Florence School

of Regulation, Paul L. Joskow, Massachusetts Institute of Technology, and Michael G. Pollitt,

University of Cambridge, it includes contributions from the most brilliant thinkers and experts

in the eld of electricity markets.

The EU-China Energy Cooperation Platform has commissioned an EU-funded Digest of the

Handbook so that its key points are available to busy decision-makers. Jean-Michel Glachant

and Nicolò Rossetto of the Florence School of Regulation have condensed its contents, in

consultation with its numerous expert contributors. An edition of the Digest is available for

distribution in China, alongside an international edition in both Chinese and English. The China

edition includes an extra chapter, ‘Takeaways from the Handbook on Electricity Markets in

China,’ by Michael G. Pollitt.

In commissioning the Digest, ECECP hopes to ensure that the wealth of information in the

handbook can reach the widest possible readership, and so share ndings that could help to

ease the global transition to a carbon-free economy.

Dr Flora Kan

Team Leader of the EU-China Energy Cooperation Platform

/85

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DigestoftheThisdigestwaspreparedby：Jean-MichelGlachant,FlorenceSchoolofRegulationNicolòRossetto,FlorenceSchoolofRegulationwithgeneroussupportfromtheauthorsoftheHandbookonElectricityMarkets.LEGALDISCLAIMERChapter1andthebookcoverareincludedhereinthisdigestwiththepermissionfromEdwardElgarPublishingLtd.Theinformationandviewssetoutinthisreportarethoseoftheauthor(s)anddonotnecessarilyreflecttheofficialopinionoftheEuropeanUnion.NoguaranteecanbegivenbytheEuropeanUnionfortheaccuracyofthedataincludedinthisstudy.TheEuropeanUnionoranypersonactingontheirbehalfcannotbeheldresponsiblefortheusewhichmaybemadeoftheinformationcontainedtherein.©2022EuropeanUnion.Allrightsreserved.Englishediting:HelenFarrell,Chineseediting:ChiJieqiaoFOREWORDTherecord-breakingtemperaturesseeninthesummerof2022haveshowntheimpactofglobalwarming.WhetherinEuropeorChina,noonecanescapeit.Decarbonisationistheonlywayforward:futureelectricitygenerationwillhavetocometoalargeextentfromrenewableenergywiththeremainingsharecomingfromotherlow-carbonsources.Thetremendousgrowthofrenewableelectricitycapacityisfundamentallychangingglobalelectricitysystemsandpresentspowergridswithenormouschallenges.Inthepastdecade,Chinahasemergedasaglobalrenewableenergychampion,rankingfirstforbothinvestmentinandproductionofrenewableenergy.In2021,renewablepowerplantsmadeupmorethan1000GWofChina’s2200GWinstalledpowercapacity,inamixofsolar,windandhydropower.Withthenewroundofpowermarketreformsin2015,thecoal-firedpowertariffreforminOctober2021andtheannouncementinJanuary2022thatanationalunifiedpowermarketsystemistobeestablished,momentumisbuildingforthecreationofanelectricitymarketinChina.China’spowermarketdesignersandpolicymakersarenowgrapplingwiththeproblemofhowtointegrateintermittentrenewableenergyeffectivelyunderChina’ssocio-technicalsystem.Itisagoodmomenttofindoutabouttheexperiencesofotherpowermarketsthroughouttheworldthathaveconfrontedsimilarissues.Whatmarketmeasureshavehelpedtominimisepowercurtailment,blackouts,andstrandedassets?ThepublicationoftheHandbookonElectricityMarketsinNovember2021couldnothavecomeatabettermoment.EditedbyJean-MichelGlachant,DirectoroftheFlorenceSchoolofRegulation,PaulL.Joskow,MassachusettsInstituteofTechnology,andMichaelG.Pollitt,UniversityofCambridge,itincludescontributionsfromthemostbrilliantthinkersandexpertsinthefieldofelectricitymarkets.TheEU-ChinaEnergyCooperationPlatformhascommissionedanEU-fundedDigestoftheHandbooksothatitskeypointsareavailabletobusydecision-makers.Jean-MichelGlachantandNicolòRossettooftheFlorenceSchoolofRegulationhavecondenseditscontents,inconsultationwithitsnumerousexpertcontributors.AneditionoftheDigestisavailablefordistributioninChina,alongsideaninternationaleditioninbothChineseandEnglish.TheChinaeditionincludesanextrachapter,‘TakeawaysfromtheHandbookonElectricityMarketsinChina,’byMichaelG.Pollitt.IncommissioningtheDigest,ECECPhopestoensurethatthewealthofinformationinthehandbookcanreachthewidestpossiblereadership,andsosharefindingsthatcouldhelptoeasetheglobaltransitiontoacarbon-freeeconomy.DrFloraKanTeamLeaderoftheEU-ChinaEnergyCooperationPlatformCONTENTSGlossaryCHAPTER1.IntroductiontotheHandbookonElectricityMarketPARTITakingStock:TheLegacy2PARTIIAdaptingtoNewTechnologiesandNewPolicyPriorities6CHAPTER2.StrengthsandWeaknessesofTraditionalArrangementsforElectricitySupply1.TraditionalArrangements122.RestructuredAlternatives123.TheHistoricalRegime124.TheEmergingRegime135.SomeTentativeConclusions14CHAPTER3.OptimalWholesalePricingandInvestmentinGeneration:TheBasics1.PricingaNon-StorableGoodwithVariableDemand152.OptimalPricinginaSimpleSetting163.AMoreRealisticStory164.OptimalPricingNeededMoreThanEver17CHAPTER4.WholesaleElectricityMarketDesign1.MatchBetweenMarketMechanismandActualSystemOperation192.MechanismstoEnsureLong-TermResourceAdequacy203.ManagingandMitigatingSystem-WideandLocalMarketPower204.ActiveInvolvementofFinalDemandintheWholesaleMarket21CHAPTER5.TheEvolutionofCompetitiveRetailElectricityMarkets1.HowtoOpenRetailMarkets?222.HowtoHandleSomeOngoingIssueswithRetailCompetition?233.HowtoPreparefortheNewEraofHybridMarkets,ProsumersandElectrificationofEnergyEnd-Uses?24CHAPTER6.StrengthsandWeaknessesoftheBritishMarketModel1.ElectricityRestructuringinGreatBritain252.ANever-EndingReformProcess253.LessonsLearned26CHAPTER7.StrengthsandWeaknessesofthePJMMarketModel1.BriefHistoryofthePJMWholesalePowerPool282.TransitiontoOpenAccessandNon-Discrimination283.ElectricityMarketsandEconomicDispatch294.PriceFormationandMarketDesignChallenges295.Conclusion30CHAPTER8.ERCOT:Success(SoFar)andLessonsLearned1.OverviewofERCOT312.ChallengesofCreatingaSelf-SustainingPowerMarket323.HowTexasAddressedtheChallenges32CHAPTER9.Australia’sNationalElectricityMarket:StrengthsandWeaknessesoftheReformExperience1.Generation352.TransmissionandDistribution373.Retail374.StrengthsoftheReform385.WeaknessesoftheReform38CHAPTER10.StrengthsandWeaknessesoftheNordicMarketModel1.AMulti-NationalMarketwithMulti-PartnerGovernance402.HybridArchitectureandZonalPricing403.LowPriceandAmbitiousClimateGoals41CHAPTER11.TheEvolutionoftheEuropeanModelforElectricityMarkets1.LiberalisationofNationalMarketswithOpenBorders422.TowardanIntegratedEUElectricityMarket,viaEULegalPackagesandCommonGridCodes423.HybridisationofMarketstoReconcilePublicPolicyObjectivesandPlanningwithCompetitiveMarkets43CHAPTER12.NewTechnologiesontheSupplySide1.EvaluationofthePortfolioofNewTechnologies452.TheEconomicsofRenewableTechnologies463.System-FriendlyRenewableEnergyDeployment46CHAPTER13.NewTechnologiesontheDemandSide1.WhyandHowConsumersandDemandareChanging?472.HowistheTransitionofCustomersandDemandEnabledbyNewIntermediaries?483.WhataretheImplicationsoftheTransformationofCustomersandDemand?48CHAPTER14.ToolsandPoliciestoPromoteDecarbonisationoftheElectricitySector1.Price-BasedMechanisms492.Technology-SpecificMechanisms503.EnergyEfficiency514.PolicyInteractions51CHAPTER15.ShiftingSupplyasWellasDemand:TheNewEconomicsofElectricitywithHighRenewables1.HowdoRenewablesAffectPriceSetting522.WhatdoSystemOperatorsHavetodotoAccommodateRenewables533.HowdoesElectricityStorageChangePriceSetting53CHAPTER16.TheFutureDesignoftheElectricityMarket1.AnEvolvingElectricitySystem552.ManyPossibleDesigns553.TwoAlternativeViews56CHAPTER17.NewBusinessModelsintheElectricitySector1.NewAssetsandNewRevenueStreamsforGreeningElectricity582.NewProductCharacteristicsforTargetedCustomers593.BetweenNewAssetsandNewProductCharacteristics:ChallengesfortheRegulatedGrids59CHAPTER18.ElectrifyingTransport:IssuesandOpportunities1.Break-EvenCosts612.EnergyDemandEffects623.ForegoneFuelTaxRevenues624.Conclusion62CHAPTER19.ElectrificationofResidentialandCommercialHeating1.ElectrificationStillatanEarlyStage642.FourChallengestoElectrification65CHAPTER20.HarnessingthePowerofIntegrationtoAchieveUniversalElectricityAccess:TheCasefortheIntegratedDistributionFramework1.AccesstoElectricityandtheDistributionSegmentofthePowerSector662.ValueofIntegration:AdoptingaHolisticViewoftheElectrificationChallenge673.TheIntegratedDistributionFramework(IDF)67CHAPTER21.ReformingChina’sElectricityIndustry:NationalAspirations,BureaucraticEmpiresLocalInterests,LocalInterests1.TheRoleofPoliticsandPublicPolicy692.ThreePhasesofElectricityReform703.TheLongRoadTowardsElectricityMarkets714.Conclusion71CHAPTER22.TheEvolutionofElectricitySectorsinAfrica:OngoingObstaclesandEmergingOpportunitiestoReachUniversalTargets1.Africa’sPowerSectorChallenges722.AdvancementsinInvestmentsinGeneration,TransmissionandAccess723.ProgressinPowerSectorReforms734.PotentialforaNewWaveofReformsPropelledbyRapidandDisruptiveInnovation74TermDescriptionACERAgencyfortheCooperationofEnergyRegulatorsAEMCAustralianEnergyMarketCommissionAEMOAustralianEnergyMarketOperatorAERAustralianEnergyRegulatorbblbarrelBBSCEDLMPbid-based-security-constrained-economic-dispatch-with-locational-marginal-pricesBEVbatteryelectricvehicleCAISOCaliforniaIndependentSystemOperatorCCGTcombinedcyclegasturbineCCScarboncaptureandstorageCEGBCentralElectricityGeneratingBoardCfDcontractfordifferenceCPSCarbonPriceSupportCSGChinaSouthernGridDGdistributedgenerationEMDEemergingmarketsanddevelopingeconomiesEMRElectricityMarketReformENTSO-EEuropeanNetworkofTransmissionSystemOperatorsforElectricityEPRIElectricPowerResearchInstituteERCOTElectricReliabilityCouncilofTexasESIelectricitysupplyindustryEUPHEMIAPan-EuropeanHybridElectricityMarketIntegrationAlgorithmEVelectricvehicleFCASFrequencyControlAncillaryServiceFERCFederalEnergyRegulatoryCommissionFiTfeed-intariffFTRfinancialtransmissionrightGBGreatBritainHzHertzICEVinternalcombustionenginevehicleIDFintegrateddistributionframeworkIEAInternationalEnergyAgencyIOUinvestor-ownedutilityIPPindependentpowerproducerISOindependentsystemoperatorLDVlight-dutyvehicleGlossaryTermDescriptionLMPlocationalmarginalpricingLMPMlocalmarketpowermitigationLNGliquefiednaturalgasM&AmergersandacquisitionsMCPmarket-clearingpriceMITMassachusettsInstituteofTechnologyMWmegawattMWhmegawatt-hourNDRCChina’sNationalDevelopmentandReformCommissionNEANationalEnergyAdministrationNEMNationalElectricityMarketNETANewElectricityTradingArrangementsO&MoperationandmaintenanceOECDOrganisationforEconomicCooperationandDevelopmentOFTOOffshoreTransmissionOwnerORDCoperatingreservedemandcurvePHEVplug-inhybridelectricvehiclesPJMPennsylvania-NewJersey-MarylandPPApowerpurchaseagreementPUCTPublicUtilityCommissionofTexasPVphotovoltaicsRESrenewableenergysupplyRPSrenewableportfoliostandardsRTOregionaltransmissionorganizationSASACState-ownedAssetSupervisionandAdministrationCommissionSEMSingleElectricityMarketSGCCStateGridCompanyofChinaSPCStatePowerCorporationT&DtransmissionanddistributionTSOtransmissionsystemoperatorVoLLvalueoflostloadVREvariablerenewableenergyWACCweightedaveragecostofcapital1CHAPTER1.IntroductiontotheHandbookonElectricityMarketJean-MichelGlachant,PaulL.JoskowandMichaelG.PollittTheelectricpowerindustriesinallcountrieshavechangedenormouslyovertheroughly140-yearhistoryofcentralstationgeneration/transmission/distributionsystemssupplyingelectricitytothepublic.Theevolutionhasreflectedtechnologicalchangeonboththesupplyanddemandsides,exploitationofeconomiesofscale,environmentalandotherpolicyconstraints,organizationalandregulatoryinnovation,interestgrouppoliticsandideology.1Thishandbookfocusesonthelatestsetofinstitutionalchangestoelectricpowersectorsaroundtheworldthataregenerallycapturedbythephrasesrestructuring,competition,decarbonizationandregulatoryreform.Thecontemporaryrestructuringoftheelectricpowerindustryhasinvolved:(1)theseparationorunbundlingofthepreviously(typically)verticallyintegrated—throughcommonownershiporregulatedlong-termcontracts—generation,transmission,distributionandretailsupplysegmentsoftheindustry;(2)thedeconcentrationofandfreeentryintothegenerationsegment;(3)thereorganizationofthetransmission/systemoperationssegment;and(4)theseparationofthephysicaldistribution(delivery)segmentfromthefinancialarrangementsforretailsupplyofenergy.Theserestructuringinitiativeshavebeendesignedtoenablecompetitionbetweengeneratorstosupplyenergy,ancillaryservicesandcapacityinwholesalemarketsandtoopenretailsupplytocompetition.Regulatoryreformhasbeenfocusedonactionstofacilitatetheefficientevolutionofcompetition,toimprovetheperformanceoftheremainingregulatedmonopolysegmentsoftheindustryand,mostrecently,tointegrateefficientlyintermittentwindandsolargenerationalongwithelectricitystorage,aselectricpowersystemsrespondtoconstraintsongreenhousegasemissions.Governmentpoliciesandregulationhavebeenparticularlyimportantindirectingthedesignofwholesalemarkets,definingtheobligationsandbehaviouroftransmissionownersandsystemoperators,improvingtheperformanceofregulatorymechanismsthatspecifyhowtransmissionanddistributionsystemownersandsystemoperatorsarecompensated,andguardingagainstanti-competitivebehaviourinthenewlycompetitivewholesalemarketsandretailsupplysegments.Policiesdesignedtodecarbonizetheelectricitysectorbyreplacingfossil-fuelgenerationwithzero-carbonresources,primarilyaddingintermittentwindandsolargenerationalongwithstorage,havecreatedanewsetofissuesforsystemoperation,wholesalemarketdesign,retailratedesign,theinvestmentframeworkforwind,solarandstorage,reliabilityandotherconsiderations.Electricpowersystemsbuiltarounddispatchable,primarilythermalgenerationwithcapacityconstraintsarenowevolvingtomanagesystems1.Forgoodhistoriesofearlydevelopmentsinelectricitysupply,demand,organizationandregulationforseveralcountries,seeCaronandCardot(1991),Hughes(1983)andKlein(2008).2withintermittentwindandsolargenerationatscale,energystorageandhighlevelsofspotmarketpricevolatilityaszeromarginaloperatingcostintermittentresourcespenetratethesesystems.Deepdecarbonizationistransformingelectricpowersystemsfromcapacity-constrainedsystemstoenergy-constrainedsystems.Thistransitionrequiresaggressivecarbonemissionsconstraintswithnetworkreliabilitycriteria.Differentcountries,andevenstatesandprovinceswithincountries,haveapproachedthisbasicrestructuringprogrammeindifferentways.ThefirstmajorinitiativeoccurredinEnglandandWalesstartingin1989.2RestructuringandcompetitioninitiativesintheUS,Canada,Australia,theEUandothercountriesproceededinthelate1990sandearly2000s.Inmostcases,earlyreformshavebeenfollowedwithadditionaldesignandregulatorychangesinresponsetoproblemsthatemergedduringthereformprocess,lessonslearned,newenvironmentalpolicies,especiallypoliciestorespondtoclimatechange,andtheevolutionofgenerationsupplyandstoragetechnologiescompatiblewiththeseenvironmentalgoals(wind,solar,storage,systemoperationsandcomputingcapabilities,energyefficiencyanddemandresponse).Whilethebasicarchitectureofrestructuringissimilaracrosscountries,statesandprovinces,therearesignificantdifferencesinthedetails.Andtherearesomecountriesandregionsthathavenotrestructuredatallandcontinuetorelyontraditionalarrangements(e.g.,largepartsoftheUSandCanada).Thishandbookbringstogetherawealthofexpertisetolookatboththecurrentlegacystateofpowermarketsaroundtheworld(inPartI)andhowthosepowermarketscanandshouldadapttonewlowandzero-carbongenerationtechnologies,energystorageandthepolicyprioritiesthataredrivingtheiradoption(inPartII).Intherestofthisintroduction,webrieflysummarizesomeofthekeyissuescoveredinthe21chaptersthatfollowthisone.PartITakingStock:TheLegacyChapter2byRichardSchmalenseediscussesthestrengthsandweaknessesofthetraditionalinstitutionalarrangements,outlinedabove,astheyemergedfollowingtheFirstWorldWar.Thechapteralsoidentifiessomeofthechallengestowholesaleandretailmarketsandretailpricingassociatedwithdeepdecarbonizationofelectricitysupplyandtheassociatedrelianceonintermittentwindandsolargenerationandenergystorageasdispatchablefossil-fuelgenerationisreplaced.Thehandbookthenturnstowholesaleandretailmarketdesign,strengthsandweaknessesofdifferentapproaches,andadaptationsovertimeinseveraldifferentcountriesandregions.Therearemanysimilaritiesbetweenthesemarketmodels,butalsosomeimportantdifferences.Themarketmodelshaveallevolvedinresponsetolessonslearnedfromexperienceandtochangesinpublicpolicies.WhilePartIofthehandbookdoesnotcoverthemarketmodelsadoptedinallcountriesandregions,therangeofwholesaleandretailmarketdesigndifferencesandadaptationsto2.Chile,whichunbundledgeneration,transmissionanddistributionin1982,issometimesidentifiedasthefirstsystemtoadoptthesereforms.However,whileChilerestructuredandunbundledgeneration,transmissionanddistribution,itssystemremainedhighlyregulatedwithrelativelylittlerealcompetition.TheElectricityActof1982hasbeenamendedthreetimes(1999,2004and2005)aftermajorelectricityshortages.3imperfectionsandpublicpolicychangescapturemostofthevariationsthatweseearoundtheworld.Chapter3byPaulJoskowandThomas-OlivierLéautierpresentsthebasictheoryofoptimalinvestmentandpricingatthebulkpowerorwholesalelevelforsystemscomprisedprimarilyofdispatchablefossil-fuelledandnuclearthermalgeneratingcapacity.ThistheorycanbetracedbacktotheworkofMarcelBoiteux,RalphTurveyandothersinthe1950sand1960s.Thatworkfocusedonoptimalinvestmentandoptimalpricingforacentrallyplannedmonopolywithdispatchablethermalgenerationatwhatwewouldnowcallthewholesalelevel.3However,thisbasictheoryformedthebasisfortheinitialdesignofcompetitivewholesalemarkets,essentiallyassumingadualitybetweenoptimalinvestmentandpricinginacentrallyplannedsystemwithpriceformationandinvestmentincompetitivewholesalemarkets.WhetherandhowthisbasictheoryanditsapplicationtowholesalemarketdesignmustberevisedtoaccountfordeepdecarbonizationoftheelectricitysectorwithhighlevelsofintermittentwindandsolargenerationandstorageisthefocusofPartIIofthishandbook.Chapter4byFrankWolakdiscussesthekeydesignfeaturesofsuccessfulwholesaleelectricitymarketsingeneral.Theseinclude:(1)matchingthewholesalemarketdesignandresultinggeneratordispatchandcongestionmanagementtothephysicalattributesofelectricpowersystems;(2)marketandregulatorymechanismstogoverntheincentivesforentryandexitofgeneratorsconsistentwithachievinglong-termgenerationresourceadequacycriteria;(3)horizontalmarketpowerconcernsandmitigationmechanisms;and(4)mechanismstointegratedemandresponseintowholesalemarkets.Thechapteralsodiscussesissuesthatariseinsmallmarketsanddevelopingcountrycontexts.Itconcludeswithabriefdiscussionofmarketdesignissuesassociatedwiththeintegrationofgrid-scaleanddistributedrenewables,mainlywindandsolar.Chapter5byStephenLittlechilddiscussesthedevelopmentofcompetitiveretailsupplymarkets.Theunbundlingofphysicaldeliveryservices(distribution)fromthecontractualarrangementsdefininghowindependentintermediariescancompetetoarrangeforandarecompensatedfortheelectricityconsumedbyretailcustomersistrulyaninnovationthatdepartsfromthehistoricalresponsibilitiesoflocaldistributioncompaniesbothtodeliverelectricityandarrangeforitssupply(andbepaidfortheminreturn).Retailcompetitionhasbeenespeciallyvaluableforlargercustomerswithintervalmeters,demandmanagementcapabilitiesandsomeonsitegeneration.Competitiveelectricityretailsupplierscanoffercontractsthatgivethesecustomersbetterpricesignalsandcanintegrateretailconsumptionandloadmanagementdecisionswithwholesalemarkets.Retailcompetitionforresidentialandsmallcommercialcustomershasbeenmorecontroversial,thoughthismaychangeassmartmeters,real-timepricing,smartgridenhancementsandindividualcustomerutilizationsettlementsprotocols(ratherthanloadprofiles)aremorewidelydeployed.Thechapterstartsbydiscussingearlythinkingaboutrestructuringandcompetitionduringthe1980s.Itgoesontoanalysethecreationofretailmarketsaroundtheworldduringthe1990sandearly2000s.Theconcernsaboutandinterventionsinretailsupply3.Optimalschedulingandthederivationofshadowpricesforwaterstoredbehinddamsinhydroelectricstationsweredevelopedinparallel.4marketsduringthe2010sarepresentednext.Finally,Littlechildquestionswhethertheconcernsarejustifiedandaskswhatmighthappeninthefuture.Thehandbookthenmovesontoin-depthdiscussionsofthedetailsofwholesalemarketdesignsinspecificcountriesorsub-regionsofcountries,theirstrengthsandweaknesses,andtheirevolutioninresponsetoweaknessesandchangesinpublicpolicies.Chapter6byDavidNewberydiscussesthemarketmodelinitiallyadoptedinEnglandandWalesandhowithaschangedovertime.Thechapterprovidesbackgroundinformationonthepre-restructuring(postFirstWorldWar)electricitysectorinEnglandandWalesandthemotivationsforprivatizationandrestructuringforcompetition.Thechapterthenturnstoadiscussionofthepost-restructuringownershipstructureofgeneration,thedesignofthenewwholesalemarketandthehorizontalmarketpowerproblemsthatemerged.Dissatisfactionwiththeperformanceoftheinitialindustrystructureandmarketdesignledtodeconcentrationofgenerationownershipandmajorchangesinwholesalemarketdesign,transformingtheinitialmarketintoanenergy-onlymarketwithoutcapacitypayments,theso-calledNewElectricityTradingArrangements(NETA).Wethenlearnwhyandhowcapacitymarketsandgovernment-mandatedprocurementofcarbon-freeresourcespursuanttolong-termpurchasedpoweragreementswerereintroducedtosupportresourceadequacygoalsand,moreimportantly,decarbonizationgoals.Thechapterconcludeswiththoughtsontheintegrationofcarbon-freegenerationresourcesandpotentialfuturereforms.Chapter7byWilliamHogandiscussesthemarketmodeladoptedbyPJMInterconnectionintheUS.PJMcoversallorportionsof13USstateslocatedeastoftheMississippiRiver.PJMisaregionaltransmissionorganization(RTO),thoughintheUScontextitmakessensetouseRTOandISO(independentsystemoperator)interchangeably.PJMmanageswholesaleenergy,ancillaryservicesandcapacitymarketsformostoftheinvestor-ownedutilities,generatorsandtransmissionownersinthisregion.UnlikeinmostEuropeancountries,theday-aheadmarketsarefullyintegratedwithday-of-marketsandreal-timeoperations.Thesemarketsarealsofullyintegratedwiththemanagementoftransmissionconstraintsbyrelyingonasecurity-constrainedbid-basedeconomicdispatchauctionmarketdesignforenergyandancillaryservicesdispatchandprices.Thismechanismyieldslocational(nodal)pricesthatvaryfromlocationtolocationwhentransmissionconstraintsarebinding.ThechapterstartswithahistoryofPJM(originallyjustNewJerseyandPennsylvania),goingbacktoitsrootsinthe1920sasacentrally-dispatchedpowerpool,tothereformsduringthe1990sandtheultimatecreationofthebasicwholesalemarketframeworkthatdefinesPJMtoday.ThechaptergoesontodiscussmanyofthedetailsofthePJMmarketmodel,whosebasicversionhaslargelybeenadoptedbytheotherISOs/RTOsintheUS.Interestingly,PJMincludesstatesthathavefullyrestructuredtorelyoncompetitivewholesaleandretailcompetitionaswellasstatesthatcontinuetorelyonverticallyintegratedmonopolies.Chapter8byRossBaldick,ShmuelOren,EricSchubertandKennethAndersondiscussesthemarketmodelintheElectricReliabilityCouncilofTexas(ERCOT),whichcoversmostofTexas.ThechapterplacestherestructuringprogrammeinERCOTinafascinatinghistorical,politicalandideologicalcontext.UnlikePJM,ERCOTisasingle-stateISO.NorisERCOTsubjecttoFederalEnergyRegulatoryCommission(FERC)jurisdictionbutrathertothejurisdictionofthePublicUtilityCommissionofTexas(PUCT).Asaresult,statepolicies,ISOpoliciesandmarketdesignfeaturescanbe5harmonizedmoreeasilythaninmulti-stateISOs,whereeachstateisastakeholderandfederalandstatepolicies,especiallyregardingeffortstodecarbonizetheelectricitysector,oftendiffer.ERCOTmodelalsoreflectsadeepcommitmenttocompetitionintheelectricitysectorbyTexaspolicymakers.ThechapterreviewstherestructuringprocessinERCOT,thegoalsforwholesaleandretailmarkets,theevolutionofthedesignofbothandbringsusuptodateoncurrentissues.Today,ERCOTwholesalemarketshavemanysimilaritiestotheotherISO/RTOmarketsintheUS.However,thereisanimportantdifferenceregardinghowERCOThandlesresourceadequacy.UnliketheotherISO/RTOmarkets,ERCOTdoesnothaveacapacitymarketoruseacentralizedmarkettoallocatecapacityobligations.4Itdoesnotestablishforwardcapacityreserverequirements.Rather,ERCOTisan‘energy-only’market,thoughthissimplephrasecanbemisleading.ERCOTmodelrecognizesthatforanelectricitymarkettoachieveanefficientlong-runequilibriumandtoachieveassociatedresourceadequacygoals,energypricesmustbeallowedtorisetoveryhighlevelstoreflectthevalueoflostloadascapacityconstraintsbegintobindandthemarketmustrationscarcecapacity.Todothat,ERCOTintroducedanadministrativelydeterminedoperatingreservedemandcurve(ORDC)andassociatedprotocolstomanagegeneratingcapacityscarcitywithapricemechanism.TheORDCisinturnbasedonassumptionsaboutthevalueoflostload,lossofloadprobabilitiesandothervariables.InERCOT,energypricescanriseto9000$/MWh,thepresumptivevalueoflostload.Onthecontrary,theotherISOsdefinecapacityneedsanduseacapacitymarkettoallocateresponsibilitiesforpayingfortheneededgeneratingcapacityordemandresponse.Thesemarketshavepricecapsinresponsetoconcernsaboutmarketpowerinenergyandancillaryservicessupplymarkets.Thepricecapsareintherangeof1000–2500$/MWh.Thechapterdescribesnicelyhowthesemarketdesignfeaturesevolvedandhowtheyworktoday.Texasalsohasabundantwindandsolarresourcesandwindgeneration‘inparticular’grewearlyandrapidly.ThechapterilluminateshowERCOThasmanagedtheinfluxofintermittentgeneration,aswellasapragmaticapplicationofcentralplanningcombinedwithcompetitivetenderstochooseandselecttransmissionprojectstorelievecongestionbetweenthemajorwindgenerationregionandloadregions.Chapter9byPaulSimshauserdiscussestheAustralianmarketmodel.ThechapterconsidersthedesignfeaturesoftheNationalElectricityMarket(NEM),retailcompetition,incentiveregulationfortransmissionanddistribution,theregulatoryframeworkandadaptationstotherapidexpansionofintermittentrenewableenergy.Unlikethemarketsthathavebeendiscussedsofar,theNEMhasnoorganizedday-aheadmarket,thoughover-the-countertradescanbearrangeddayaheadandfuturescontractscanbeboughtandsoldaswell.Therearenoformalcapacityobligationsandnocapacitymarket.Accordingly,theNEMisareal-timeenergy-onlymarketwithahighpricecap(AU$15000/MWhin2020).Thechaptergoesontodiscussthechallengestoefficientlyintegrateintermittentrenewableenergysuppliesand,moregenerally,toalignelectricitymarketswithclimatechangepolicies.Recentreforms,theirstrengthsandweaknessesareanalysed.Chapter10byChloéLeCoqandSebastianSchwenendiscussestheNordicpowermarketthatcomprisesthenationalmarketsoftheScandinaviancountries.Thismarketalsoincludestradingarrangementswithothercountrieswithinterconnections4.CaliforniaIndependentSystemOperator(CAISO)isanotherexceptionsinceithasreliedonamurkyresourceadequacyrequirementprotocolthatrequiresload-servingentitiestomeetresourceadequacycriteriaspecifiedbytheCaliforniaPublicUtilitiesCommission.6(Germany,theUK,theNetherlandsandtheBalticcountries).ThechapterdiscussestheevolutionanddesignfeaturesofNordPool,focusingontradingarrangementsbetweenthecountriesthatarepartoftheNordicmarketandtheharmonizationofdifferencesbetweennationalmarkets.ThechapterconcludeswithdiscussionsoftheadaptationoftheNordicmarkettodecarbonizationgoalsandsecurityofsupplyissues.Chapter11byFabienRoquesdiscussesthemarketmodelsadoptedinEUcountries.ThereisnosinglemarketmodelthatcoversallthecountriesintheEUor,moreprecisely,theEuropeaninternalmarketforelectricity.Rather,thereareasetofnationalmarketswithvaryingdesignfeaturesthatfollowEUguidanceoncertainattributes.ThechapterexplainsthattheEuropeanmodelforelectricitymarketshasbeenshapedbysuccessivelawsandpolicyreforms.Thesehavedrivenadegreeofconvergenceinthedesignsofthevariousnational(andregional)marketsbasedonEUcompetitionprinciplesfortheelectricitysector.Beginninginthe1990s,thefocushasbeenoncreatinganintegratedEuropeanmarketthatsupportsefficientcross-bordertradeandcompetition.UnliketheUS,wheretheRTO/ISOmarketshave‘centralized’day-aheadmarkets,day-of-marketsandintegratedcongestionmanagementyieldinglocationalpricedifferences,EUmarketstypicallyhavedecentralizedday-aheadmarketsandtransmissioncongestionmanagement.Thechapterthenemphasizeshowpolicyprioritieschangedinthe2000swiththeemergenceofclimatechangeandsecurityofsupplyconcerns.Thesechangingpolicyprioritieshavelednationalmarketstoadopttheirownrules,reversingthecoordinationtrend.Europeanelectricitymarketshaveevolvedtowardhybridmarketswithanumberofnewfeatures,including:(1)supportmechanismsforcleantechnologies;(2)capacitymechanismstoaddresssecurityofsupplyconcerns;and(3)newplanningprocessestocoordinategenerationandgriddevelopment.PARTIIAdaptingtoNewTechnologiesandNewPolicyPrioritiesPartIIshiftsthefocusfromthecurrentorganizationoftheelectricitysupplysectortopotentialfuturedevelopments.Itdoesthisbydiscussingthepromisingnewtechnologiesthatareemergingandindeedscalinguponthesupplyanddemandside(Chapters12and13),thenearandfurthertermimpactsofrenewablesanddecarbonizationonthedesignoftheelectricitymarketanditscompanies(Chapters14–17),thepotentialforelectrificationoftransportandheating(Chapters18and19)andtheissuesfacingtheelectricitysectorbeyondtheOrganisationforEconomicCooperationandDevelopment(OECD)countries(Chapters20–22).Theelectricitysystemhasbeenundergoingaremarkabletechnologytransitionsince2000.Largesubsidiestobothresearchanddevelopment,andtostrategicroll-out,haveresultedinmorethanhalfofallnewcapacityadditionsgloballybyMWandbyvaluebeinginrenewableelectricityinrecentyears.5Thisisbeginningtochangethenatureofelectricitygenerationfrombeingcharacterizedbysynchronousfossil-fuelgeneration(fromcoal,oilandnaturalgas)toonewherebothdispatchablerenewable(forinstance,biomass)andincreasinglyintermittentrenewable(forinstance,windandsolar)generationdominateadditionsofgenerationinOECDcountries.5.SeeREN21(2019,p.33).7ThenatureofthesegenerationtechnologiesisdiscussedinChapter12byNilsMayandKarstenNeuhoff.Theydiscusstheremarkabledeclineinthecostofbothwindandsolargeneratingcapacity,whichhasseenthesetechnologiesreachcostparitywithfossilfuels(especiallywithcarbonpricing)inmanyjurisdictions,includinginthedevelopingworld.MayandNeuhoffanalysetheprospectsforonshoreandoffshorewind,solarphotovoltaics(PV)andconcentratedsolarpower,biomass,geothermaltechnologies,andwaveandtidalpowerwithintheelectricitysystem.Theynotethatchallengesremainifthesetechnologiesaretorisetodominatetheelectricitysystem.Theseincludelocaloppositiontothesitingoffacilities,theirintermittency(acrossthedayandtheseason)andtheirhighupfrontfinancingcosts.However,thereisgoodreasontobeoptimisticofcontinuingtechnologicalprogressandsuccessfulroll-out,especiallywherethisiscombinedwithmarketexpansion,demandflexibilityandstorage.Sincetheoilcrisisofthe1970s,energyconservationandefficiencyhavebeenapolicypriorityinmanyjurisdictions.Recentdevelopmentswithrenewablesonthesupplysidehasrefocusedattentionondemandsidetechnologiestonotonlyreducedemand(relativetobusinessasusual)butalsotomakeitmoreflexible.ThisisthefocusofChapter13byFereidoonSioshansi.AnnualandpeakelectricitydemandarenowbelowpeaklevelsinmanyOECDcountries,partlybecauseofslowerindustrialdemandgrowth,theimpactofmoreenergy-efficientappliances,low-energylightingandmorerecentlythediffusionofprosumers—thatis,consumersthatself-generate(partof)theelectricitytheyconsumebytypicallyinstallingrooftopsolar.Sioshansidiscusseshowselfgeneration,risingnumbersofelectricvehicles(EV)anddistributedbatteriescouldaddfurther—oftenbehindthemeter—flexibilitytotheelectricitysystemandallowittobettermatchdemandtointermittentelectricitysupply.Hedocumentsseveralnascenttechnologiessuchasgroundsourceheatpumpsandremotedigitalcontroltechnologies,whichofferpromisingsourcesoflocalenergyandsupplyanddemandmatching.Whilethetimingofanymasstake-upofdemand-sidetechnologiesremainshighlyuncertain,itisclearthatindenselypopulatedcities,suchtechnologiesseemmuchlesslikelytobesignificantthaninmoresparselypopulatedregionswhereprosumagers—thatis,prosumerswiththeirownstorage—mightmakeeconomicsense.Next,theattentionturnstofuturechangestothemarketcontextinwhichelectricitysystemswillbeoperating.Amajordriverofnewtechnologiesinelectricityarepoliciesthatexplicitlyorimplicitlypromotedecarbonizationofthesector.ThisisthesubjectofChapter14byKathryneCleary,CarolynFischerandKarenPalmer.Theauthorsintroduceandcomparearangeofpoliciesthatgovernmentshavebeenusingtopromotedecarbonization.Theseincludecarbontaxationandtradingmechanisms,renewablessubsidiesandportfoliostandards,energyefficiencymeasuresandpoliciestargetingnuclearandcoal.Astheauthorspointout,thesepolicieshaveverydifferentlevelsofefficacyiftheultimategoalisdecarbonization(earlyphase-outofexistingnuclearpowerplantsbypro-renewablesgovernments,forinstance,isapro-carbonpolicy).Often,governmentsenactarangeofpoliciessimultaneouslythatconflictwithoneanotherandwouldbenefitfrompolicyrationalization(cap-and-tradeplusrenewablessubsidycanresult,forexample,inmoreexpensivedecarbonizationthanisnecessary).TheauthorsconcludethatputtingapriceonCO2emissionsremainsthemostefficaciouspolicyfordecarbonization,whilerecognizingthatothermarketfailuressuchasthosearisingfrommyopiamayjustifypoliciestohelpinvestmentsincapital-intensiverenewablesandenergyefficiency.8Whatimpactwillrenewableshaveontheoperationofelectricitymarkets?Thenearer-termeffectsofthisarediscussedinChapter15byRichardGreen.Greenanalyseshowtheriseinrenewableenergysupply(RES)willaffectelectricitymarketdesign.First,contextisimportant.WhilesomejurisdictionshaveseenlargerisesintheirRESshareintotalproduction,globallylow-carbonelectricitysupplyisdominatedbyhydroandnuclear.Biomassisalsosignificant.However,itistheriseofintermittentRESthatposesnewchallengesfortheelectricitysystembyshiftingsupplytowhenthewindandthesunareavailable.Risingintermittentsupplywillimpactpricesthatwillencouragedemandtobemoreflexible.Inturn,thiswillprovideincentivesforelectricalenergystorageinvestmentsandfurtherinvestmentsintransmissioninterconnectioncapacity.GreensuggeststhatinthemediumtermthereisplentyofscopefortheexistingmarketdesigntoaccommodaterisingRESsharesinmanyjurisdictions.Marketdesignforelectricitymarketsisnotjustaboutmatchingaggregateelectricalenergysupplyanddemand,itisaboutmaintainingpowerqualityateverynodeinrealtimeaswell.Thus,powermarketsmustalsoprocurevoltageandconstraintmanagementservices.ThisisthefocusofChapter16byMichaelPollitt,whodiscussestheextenttowhichincreasinglydistributedelectricitygenerationfromintermittentRESandlocallyflexibleelectricitydemand(inthepresenceofstorageandEVs)canbeaccommodatedwithinthetwobenchmarkmarketdesignsthatwecurrentlyseeinEuropeandintheUS(asexemplifiedbyPJM).Hediscussestwocontrastingvisionsofthefuture(drawingonideasfromFredSchweppeandRonaldCoase,respectively):onewheremoreuseismadeofspotgranularpowerpricesatthenodalordevicelevel;andonewherethesystemoperatormakesmoreuseoflonger-termflexiblecontrolcontracts.ReflectingontheexperienceofthepricingandrationingoftheInternet,hesuggeststhatatveryhighlevelsofintermittentRES,anewfuturemarketdesignthatcombinespricesignalswithnon-pricerationingofintermittentrenewablesthatmatchdevicedemandinpriorityorderwouldseemtobemoreacceptablewithinmanyregulatorysystemsthanpureprice-basedrationing.Thefutureoftheelectricitysupplyindustryisnotjustafunctionoftechnologyormarketdesignbutisalsoimportantlydeterminedbythesuccessofthebusinessmodelsthatthecompanieswithinitadopt.ThefutureofvariouselectricitybusinessmodelsisthefocusofChapter17byJean-MichelGlachant.Glachantunpacksanddistinguishesarangeofdifferentbusinessmodelswithinboththecompetitiveandregulatedpartsoftheelectricitysupplysector.Theseincludethebusinessmodelsbeingpursuedbygeneratorsinonshoreandoffshorewind(forthemanyandforthefew),solarPVatutilityscaleandonrooftops.Thesenewbusinessmodelsalsoinvolveaggregatorsmovingfromretailintowholesalemarkets,peer-to-peerbypassingofconventionalutilitiesandtheemergenceofbehind-the-meterterritories.Inthischangingenvironment,gridcompaniesarefacingregulatorypressurestoadapttheirbusinessmodels.Theseincludetheneedtofocusonthecost-effectivenessofgridcapacityadditionsandstrongrevenueincentivesforqualityofservice.Theauthorarguesthatthisfundamentallychangestheirbusinessmodelfrom‘fit-and-forget’assetownerstocompaniesengagedinseekingasset-lightinnovations.Whataretheprospectsfortheelectrificationoftransport?ThissubjectisaddressedinChapter18byBentleyClinton,ChristopherKnittelandKonstantinosMetaxoglou.Transportconsumesaconsiderableamountoftheworld’sfossilfuelsandmuchofsurfacetransportcouldintheorybeelectrified.Theauthorsfocusontheprospects9forelectricvehicles.Passengercarsrepresent50percentofsurfacetransportvehicleenergydemandandrecenttechnologicaldevelopmentshaveseenatake-offinsalesofbatteryelectricvehicles(BEV)andplug-inhybridelectricvehicles(PHEV).EVshavesubstantialchallengestoovercomesuchasthecurrentpriceofthebatteries(around$200perkWhstoragein2019),theirrangeandthetimetakentochargethem.Theauthorsshowthatmanyelectricitysystemscouldlikelycopewith100percentpenetrationofBEVsinthetimeframeoverwhichsuchariseinpenetrationislikely(to2040)butthatEVlifecycleeconomicsremainschallengingoverthenexttenyears.Beyondpassengercars,electrificationofbusesandtrucksremainsatleastasdifficultinpartduetothemuchhigherbatterycapacityrequired.Akeyissueraisedbytransportelectrificationistheneedtoreplacethelosttransportfueltaxrevenue.Whataretheprospectsfortheelectrificationofresidentialandcommercialheatingandcooling?ThisistheissuediscussedinChapter19byMathildeFajardyandDavidReiner.Theauthorsoutlinethescaleoftheheatingchallenge.Currentglobalnon-electrifiedheatingdemandistwiceasmuchascurrentelectricitydemand:thus,theelectrificationofheatingwouldsignificantlyincreasethedemandforelectricity.Worsethanthis,peakheatingdemandcanbefivetimeshigherthanpeakelectricitydemand.Technologiesdoexisttodecarbonizeheatingandcooling,includingelectricheatpumps,districtheating,PV,greenhydrogenfromrenewablesviaelectrolysisorwithbluehydrogenfromnaturalgaswithcarboncaptureandsequestration,andtheuseofbiomassandbiomethane.Onthedemandside,buildingenergyefficiencyandheatingandcoolingapplianceefficiencycanbeincreased.However,noneoftheseroutestodecarbonizationarecheaporquicktoimplement.Theauthorsconcludebyshowingthatallmajorpossibleopportunitiescomewithassociatedchallenges(forexample,moreuseofpeakloadpricingtoencourageenergyconsumptionshiftingandstorageposeschallengesinpublicacceptabilitygivenenergypovertyconcerns).WegoontoexaminetheissuesfacingtheelectricitysectorbeyondOECDcountries.Chapter20byIgnacioPérez-Arriaga,DivyamNagpal,GrégoireJacquotandRobertStonerfocusesattentionontheproblemofhowtoachieveuniversalaccesstoelectricity.Despiteextensiveeffortstoimproveelectricityaccess,840millionoftheworld’spopulationlackedaccesstoelectricityin2017.Theauthorsarguethatthekeytopromotingelectricityaccessistoempowerlocaldistributiongrids,viawhattheycallanintegrateddistributionframework(IDF).Thechapternotesthattraditionalgridextension,mini-gridsandstand-aloneelectricitysystemscanallplayaroleinprovidingaccess.TheIDFapproachisallaboutensuringthattheappropriatemixofaccessprovision(andassociatedrevenuerecoverymechanisms)isemployedwithinalocaldistributioncompanyareatoachieveneartotalelectricityaccess,especiallywhentheunservedareinincreasinglydifficult-to-reachareas.CountriessuchasSierraLeoneandUgandaaresuccessfullyextendingaccessinthisway.TheauthorsconcludebysuggestingthattheIDFapproachcanimproveonthecurrentprojection(in2019)that650millionpeoplewillstillbewithoutaccesstoelectricityin2030.Chinahasemergedastheworld’selectricitysuper-power.In2019,morethan27percentoftheworld’selectricitywasproducedinChina,onlyslightlylessthantheUSandEuropecombined.China’selectricitysectorhasgrownspectacularlysince2004,butitremainsastate-ownedandheavilyregulatedsector.Chapter21byXuYi-chongdiscussestherecenthistoryoftheChineseelectricityindustryanditsprospectsforreform.Theshort-livedStatePowerCorporation(SPC)wasbrokenupin2002toformtwogridcompanies–StateGridCompanyofChina(SGCC)andChinaSouthern10Grid(CSG)–fivegenerationcompaniesandfourpowerservicecompanies.Whilebothfinalpricesandgeneratorpricesremainedheavilyregulatedfollowingthe2002reform,therewerestrongincentivestobuildnewassetsforbothgeneratorsandgridcompanies.Thisunderpinnedtherapidgrowthofthesector.By2015,thissystemhadgivenrisetohighcostsandhighprices,causingthegovernmenttoembarkonanewroundofreform,introducingpilotprovincialwholesaleelectricitymarketsandlargereductionsintheregulatedprices.Recently,Chinahasalsosoughttointernationalizeitselectricitysectorbybuyingupoverseaselectricutilitiesandbybuildingpowerplantsabroad,inlinewithits‘OneBelt,OneRoad’initiative.TheauthorconcludesthatthecurrentcontradictionbetweenChina’sdesiretoparticipateinglobalelectricitymarketsanditsslownessincreatingadomesticelectricitymarketisafunctionofChina’suniquehistoryandtheconsiderableinfluenceoftheChineseCommunistPartywithinthestate-ownedelectricitysystem.ThefinalchapterfocusesonAfrica,whereoverhalfthepopulationlacksaccesstoelectricityandconsumptionpercapitaisverylow(althoughelectricityproductionandconsumptionvaryenormouslybetweencountries).Chapter22byVivienFoster,AntonEberhardandGabrielleDysondiscussestheprospectsfortheelectricitysectoracrossAfrica.Thechapterbeginsbynotingthatthingshavebeenchanginginthefinalyearsofthedecadeto2020:Chineseinvestmentinthepowersectorhasbeensignificant(inlinewiththepreviouschapter)andtheprospectsforsolarpowerhaveimprovedenormously.Nonetheless,therearestillgreatopportunitiestoimproveregionalpowerpoolsviamoreextensivetransmissioninterconnection,inparttoexploitthehugeregionalRESpotential;inaddition,accesstoelectricityisonaveragestillratherlow–itwasaround60percentin2017–becausemanychoosenottoconnecttothegridduetocost,unreliabilityandlackofdemand.Althoughsomecountrieshaveshownnotableimprovements–Kenyawentfromanaccessrateof22percentto75percentbetween2010and2018–thelackofeffectivepowersectorreformoftenrepresentsakeybarriertodevelopment.Alackofcompetition,privateownershipandindustryrestructuringpersistsinmanycountries,leadingtolowprices(forthoseluckyenoughtoreceiveon-gridelectricity),under-investmentandpoorqualityofservice.Theauthorssuggestthatlow-costrenewabletechnologiescombinedwithinnovativebusinessmodelsmightallowpoorlyservedAfricancountriestoavoidtheneedforexpensivecentralizedgridexpansions,spurringelectrificationdespite(orindeed,becauseof)alackofreform.Together,thechaptersofthehandbookofferaglobaltourofanindustryonwhichmuchoftheworld’shopesfordecarbonizingtheglobalenergysystemdepend.Weareverygratefultoourauthorsforwritingtheirchaptersspecificallyforthisbookandhopetheireffortsprovidefoodforthoughtandinspirationforwhatmightbepossiblebywayofpowermarketdevelopmentsinthecomingyears.11References1.Caron,F.andF.Cardot(1991),Histoiredel’électricitéenFrance:1881–1918,Paris:Fayard.2.Hughes,T.P.(1983),NetworksofPower:ElectrificationinWesternSociety1880–1930,Baltimore,MD:JohnsHopkinsUniversityPress.3.Klein,M.(2008),ThePowerMakers:Steam,ElectricityandtheMenWhoInventedModernAmerica,NewYork:BloomsburyPress.4.REN21(2019),RenewablesGlobalStatusReport2019,Paris:REN21Secretariat.12CHAPTER2.StrengthsandWeaknessesofTraditionalArrangementsforElectricitySupplyRichardSchmalenseeThischapterprovidesabroad-brushcomparisonofperformanceundertraditionalarrangementsforelectricitysupplywiththosethatemergedafterthewaveofrestructuringthatbeganinthe1990s,inwhichcompetitionplayedamuchmoreimportantrole.ItplacesanemphasisoncomparisonswithintheUS,wherebothtraditionalandrestructuredarrangementsexist.Itconsidersboththehistoricalregime,inwhichalmostallgenerationcapacityisdispatchable,and,morebriefly,theemergingregime,inwhichvariablerenewableenergy(VRE),particularlywindandsolargeneration,isdominant.1.TraditionalArrangementsBeforerestructuring,electricitysupplyindustries(ESIs)differedsubstantiallybetweenandevenwithinnations.IntheUS,theESIwasdominatedbyverticallyintegrated,regulated,investor-ownedutilities.Tradesinelectricenergydidoccur,butnotinorganisedmarkets.2.RestructuredAlternativesAllrestructuredESIshavecreatedformalwholesalepowermarkets.Whilemarketsprovidestrongincentivesforefficiency,theymayprovidemorescopefortheexerciseofmarketpower.Most(andperhapsall)restructuredESIshaveimposedseparationbetweentheownershipofgenerationplantsandtheoperationoftransmissionfacilities.Transmissionsystemsaregenerallyplannedandmanagedbynon-profitentities.Ownershipofgeneratingplantswasoftenrestructuredhorizontallyaswellintheinterestofeffectivewholesalemarketcompetition.Indistribution,thedeliveryfunction–i.e.,theconstructionandoperationofthephysicalnetwork–isuniversallyperformedeitherbyaregulatedinvestor-ownedutilityorapublicenterprise,whilethesupplyofelectricityhasbeenunbundledfromdeliveryandopenedtoalternativevendorsinsomeareas.3.TheHistoricalRegimeRestructuringinthehistoricalregimeessentiallyinvolvedattemptingtousecompetition,ratherthanregulationorpublicownership,toimprovetheperformanceofwell-understoodsystems.Itturnedouttobemuchmorecomplexthanmanyhadexpected.13a)GenerationOperationsStrongevidenceindicatesthatderegulationpluscompetitionservedtoreducegenerators’operatingcosts.Thedevelopmentoforganisedwholesalepowermarketsseemstohavedramaticallyincreasedboththevolumeofandgainsfromtrade.AllwholesalemarketsintheUS(thoughnotintheEU)havemovedtonodalpricingsystemswithconsiderablebenefits.Therehavebeensignificantexercisesofmarketpowerinsomewholesalemarkets,particularlyintheearlydaysofrestructuring.AllUSwholesalepowermarketsarenowmonitoredforsignificantcompetitiveproblems,andmarketpowerisnotgenerallyconsideredamajorissue.Whileitseemslikelythatgapsbetweenwholesaleelectricitypricesandmarginalcostsarelargerthanunderregulationorpublicownership,itisatleastplausiblethatrestructuringhas,onbalance,loweredwholesaleelectricityprices.b)GenerationCapacityInthefaceofconcernsaboutmarketpower,allUSmarketsimposedcapsonwholesaleprices.Thisreducedincentivesforinvestmentandledtoreliabilityconcerns.Inresponse,mostorganisedmarketshaveestablishedmarketsforcapacityorrelatedmechanismstosupplementenergymarketrevenues.Thesemechanisms,whichareoftenmodified,restontheadministrativedeterminationofcapacityrequirements,asintraditionalarrangements.c)RetailPricingTraditionally,regulatedandpublicly-ownedelectricutilitieschargedretailpricesthatwereconstantovertime,andintheUSgenerallyinvolvedonlynominalfixedcharges.Mostcustomershadnochoiceofretailsupplier.Afterrestructuring,almosthalfofUSstatesadoptedsomeformofretailcompetition.However,manysubsequentlyrestrictedorabandonedcompetition.Retailcompetitionhasnotalwaysworkedwellforresidentialcustomers.Movementtowardmoreefficienttime-of-usepricinghasbeenmainlyconfinedtolargecustomers.4.TheEmergingRegimeWhilerestructuringoriginallyinvolvedattemptstoimprovetheperformanceofwell-understoodsystems,undertheemergingregimebothtraditionalandrestructuredinstitutionshavebeentaskedwithtransforminghistorical-regimeESIsintoVRE-dominatedsystemsforwhichthereisnooperatingexperience.ESIswithtraditionalarrangementsnowneedtoworkwiththeirregulatorstosolvethetechnicalproblemsposedbyVREgeneration.RestructuredESIsandtheirregulatorswillalsoneedtomodifythedetailedmarketdesignscreatedforthehistoricalregimeanddevelopefficientsolutionstothenewproblemsoftheemergingregime.AcomparisonoftwojurisdictionscommittedtoaggressivedecarbonisationandwhereVREalreadyrepresentsanimportantshareofthegenerationmixcanbeusefultoillustratethesimilaritiesandthedifferencesinthechallengesposedbythetransitiontotheemergingregime.LetusthentakethecaseoftraditionalpublicutilityregulationinHawaiiandthecaseofCalifornia’srestructuredelectricitysystem.14a)GenerationOperationsCaliforniautilitieshavebeenrequiredtobuyspecifiedquantitiesofbatterystorage,butgeneralrulestoenablestoragetoparticipateinwholesalemarketsremainaworkinprogress.TheverticallyintegratedHawaiianutilityhasnotbeenrequiredtoacquirebatterystorage,anditsregulatorhasnothadtodevelopgeneralrulesforitsuse.Instead,theutilityhasbeenabletogetsolar-plus-storagefacilitiesapprovedonaproject-by-projectbasis.b)GenerationCapacityCapacitymarketdesignsassociatedwiththehistoricalregimewillneedsignificantchangestocopewithhigh-VREsystemswithstorage.Californiahasaddedspecificrequirementsforthreetypesofflexiblecapacity.TheHawaiiutilityanditsregulatorareengagedinadetailedlong-runplanningprocess,whichguidesproject-by-projectinvestmentdecisions.c)RetailPricingBecauseofgreaterwholesale-levelvolatilityintheemergingregime,bothCaliforniaandHawaiiwouldbenefitsubstantiallybytransitioningawayfromflatper-kWhrates,butneitherhasmovedaggressivelyinthisdirection.NeitherCalifornianorHawaiihasretailcompetitionforsmallcustomersinplace.5.SomeTentativeConclusionsOverall,restructuringseemsgenerallytohaveproducedpositive–butnotdramatic–netbenefitsinthehistoricalregime.Generationcostshavebeenreduced,anditseemsunlikelythatthosegainshavebeenerasedbyagreaterexerciseofmarketpower.Administrativesupervisionplaysasignificantroleintheprovisionofgenerationcapacity,asitdidundertraditionalarrangements,andcapacitymechanismsseemtohavereducedreliabilityriskstotolerablelevels.However,restructuringhasnotledtomoreefficientretailpricingformostsmallcustomers,thoughlargecommercialandindustrialcustomersseemtohavehadincreasingaccesstotariffsthatreflectsystemconditions.Inprinciple,traditionalsystemsmaybemoreagileinthetransitiontotheemergingregime,sinceutilitiesandtheirregulatorscanengageinlong-termplanningandcase-specificdecision-makingwithoutneedingtodevisecomplexnewgeneralrules.Ofcourse,theinformationadvantageofutilitiesovertheirregulatorsislikelytobesubstantialduringthetransition.Regulationisrarelyagileinpracticeandthelackofcompetitiveconstraintsmayleadtohigherthannecessaryrates.15CHAPTER3.OptimalWholesalePricingandInvestmentinGeneration:TheBasicsPaulL.JoskowandThomas-OlivierLéautierThischapterpresentsthebasicmicroeconomictheoryunderlyingtheformationandthestructureofefficientwholesalepowerpricesandoptimalinvestmentindispatchablegeneratingcapacity1.Thepresentationisdesignedtobeaccessibletonon-economistsinterestedinunderstandingthebasiceconomicsofelectricitysupplyanddemand.Thechapterusesexamplesandgraphicsratherthanmathematicstoarticulatetherelevantmicroeconomicprinciples.Thechapteralsoprovidesatheoreticallinkbetweenthe‘oldworld’ofverticallyintegratedregulatedelectricitymonopoliesandthe‘newworld’,basedonverticalandhorizontalrestructuringtosupportcompetitivewholesalemarkets.1.PricingaNon-StorableGoodwithVariableDemandOverthelasttwodecades,manycountrieshavemovedtorestructuretheirelectricpowersectorstoreplaceinvestment,operationandpricingofelectricgenerationservicesthroughinternal,oftennon-transparent,regulatedmonopoly‘hierarchies’withtransparentunregulatedcompetitivewholesalemarketmechanisms.Theconceptualbasisforthedesignoforganisedwholesaleelectricitymarketsduringthelate1990sandearly2000scanbetraceddirectlytothemid-twentiethcenturyeconomic-engineeringliteratureonoptimaldispatchofandoptimalinvestmentindispatchablegeneratingfacilitiesandtheassociateddevelopmentofmarginalcostpricingprinciplesforgenerationservices.Whilethesemodelsweredevelopedtoapplytopre-restructuringverticallyintegratedelectricutilitymonopoliessubjecttosomekindofregulation,includinggovernmentownership,thesemodelsofgenerationdispatch,marginalcostpricingandinvestmenthavealsoguidedthedesignofdecentralisedwholesalemarkets.Thatis,thebasicmicroeconomicprinciplesdevelopedtofacilitateefficientdecisionsregardinginvestment,generationdispatchandoptimalpricingofgenerationserviceshavenotchanged.Instead,theymustnowbeappliedtothedesignofwholesalemarketsratherthanservingasguidestoelectricutilitymanagementandregulatorsgoverningthebehaviourofverticallyintegratedelectricpowermonopolies.Oneofthekeyinsightsfromthemicroeconomicsofelectricityproductionisthatthestructureofwholesalepowerpricesissimilartothatofothernon-storablegoodsforwhichdemandvariessignificantlyacrosstime,suchashotelroomsorplanetickets:thepriceissetclosetothevariablecostofproductionwhencapacityexceedsdemand,whileitissetbythevalueforthemarginalunitconsumedwhendemandisexactlyequaltocapacity.Forexample,thepriceforaroomatthebeachonCapeCodisclosetothecostofclean-upinthewinterandgoesmuchhigherinthesummer.1Extensionsofthesemodelstointegrateintermittentornon-controllablegeneratingcapacityandelectricitystoragearediscussedinChapter2,15and16ofthishandbook.SeealsoLéautier(2019)Chapter8,Joskow(2019),Newberyetal.(2018)andthereferencestheycite.16Thisparticularpricestructureiscalled‘peak-loadpricing’inthepowerindustry.Themaindifferencebetweenelectricpowerandothernon-storablegoodsisthemagnitudeofthepeakprice:thesummerpricemaybethreetofourtimesthewinterpriceforaroomatthebeach,whilethepeakpriceforpowermaybe50oreven100timestheoff-peakprice2.Thus,whileelectricitysupplyanddemandhaveanumberofuniqueattributes,wecanfindanalogiesinmarketsformanyothergoodsandservices.2.OptimalPricinginaSimpleSettingThischapterbeginswithaverysimplemodeltoillustratethepeakloadpricingresults:priceresponsivedemandandasinglegeneratingtechnology.Despiteitssimplicity,themodelyieldsimportantinsightsintooptimalshort-runandlong-runpricing,optimalgenerationdispatchandoptimalinvestmentinlong-runequilibrium.Sincepriceisequaltothevariablecostfortheoff-peakhours,whencapacityexceedsdemand,operatingprofitisequaltozerointhesehours:alltheoperatingprofitisrealisedduringtheon-peakhours,whendemandisequaltocapacity.Thesearetypicallytwopercentofthetotalhoursinthepowerindustry,amuchlowerfractionthaninothercomparableindustries.Inthelong-runequilibrium,freeentryimpliesthattheexpectedoperatingprofitpermegawatt(MW)ofinstalledcapacityisequaltothefixedcostofthiscapacity:amortisedcapitalcostforthetechnology(depreciation,returnoninvestment,taxes,etc.)plusfixedoperationandmaintenancecosts(O&M).Thisfreeentryconditionprovidesausefulbenchmarkandshouldbemetonaverageoverthelifeofassets.3.AMoreRealisticStoryTheremainderofthischapterthenintroducesanumberofmorerealisticfeaturesthatalsoplayanimportantroleinthedesignofwholesalemarkets.Theseincludetheintroductionofnon-priceresponsivedemand,animportantconsiderationifconsumersarenotfacedwithwholesalespotpricesduetometeringorpoliticalconstraints,multiplegeneratingtechnologies,transmissioncongestionandsecurityofsupplyconsiderations.Whileeachofthesefeaturesaddsmorerealismtoourstory,theydonotfundamentallyalterthepeak-loadpricinglogic.Consideringnon-priceresponsiveconsumersimpliesthatdemanddoesnotadjustnaturallytoinstalledcapacity.Instead,thesystemoperatorcurtailsexcessdemandwhendemandexceedscapacityandsetsthepricetotheValueofLostLoad(VoLL).Ifdemandisperfectlyinelastic(i.e.,doesnotrespondtopricesatall),operatingprofitispositiveonlyduringcurtailmenthours.ExpectedoperatingprofitperMWofinstalledcapacityisequaltotheVoLLminusthevariableproductioncosttimestheexpectednumberofcurtailmenthours.Whenconsideringmultipletechnologiesorderedbyincreasingmarginalcosts:2.Anadditionaldifferencebetweenthewholesalespotpriceforpowerandtheretailpriceforhotelroomsorplaneseatsisthathotelsandairlinesarealsoabletopricediscriminateamongusers:twopassengersseatednexttooneanothermayhavepaidvastlydifferentpricesfortheirseat.Thistypeofpricediscriminationdoesnotexistinwholesalespotmarketsforelectricitywhere‘thelawofoneprice’holdsatanypointintime.Amorepreciseformulationoftheabovestatementswouldbe‘theminimumpriceforaroominthewinterisclosetothecostofclean-up’.17•Theelectricitypriceissetbythevariablecostofthelastmegawatt-hour(MWh)producedwhencapacityexceedsdemand,andissetbythevalueoftheMWhconsumedwhendemandequalscapacity.Withmultipletechnologies,thisstoryrepeatsitselfforthecumulativecapacitiesuptoeachtechnology.Operatingprofitforanytechnologyispositiveonlywhenthistechnologyproducesatcapacity.•Thefreeentryconditionimpliesthateachtechnology’soperatingprofitperMWispreciselyequaltoitsfixedcost.Thepeak-loadpricinglogiccanbeextendedtothetransmissionnetworkincaseofcongestion:whentheflowonatransmissionlineislowerthanitscapacity,thepriceoftransmissionserviceisequaltothevariablecostoftransmittingpower,whichisequaltozeroinafirst-orderapproximation.Whentheflowonthelineisequaltoitscapacity,theimplicitpriceoftransmissionserviceisthedifferenceinpowerpricesattheline’sextremities.4.OptimalPricingNeededMoreThanEverAsthestructureofpowersystemsevolves,onefundamentalpricingprinciplecontinuestoprevail.Thisistheroleofpricesthatvarywidelywithvariationsinsupplyanddemand.Producerscapturetheirhighestprofitswhenconsumersdesperatelyneedelectricpowertoheat(orcool)theirhouses.Thisislikelytobeevenmorecriticalforproducingmarketrevenuessufficienttocoverthetotalcostsofnewzero-carbongeneratingtechnologies,astheshort-runmarginalcostsofwindandsolarareessentiallyzero.Ifthemarketpriceiszero,nonetrevenuesareproducedtocovergenerators’capitalcosts.Thus,scarcitypricing–incidentsofveryhighpricesnecessarytoclearthemarket–mustplayamoreimportantroleinthefuturetosatisfygenerators’balancedbudgetconstraints.Economistsarguethatthisoutcomeisperfectlyacceptable;infact,itisoptimal.Consumersandtheirelectedrepresentativeshaveadifferentopinion.Theyarguethatprofiteeringfromconsumers’needisamoral,henceunacceptable.Resolvingthistensionisessentialtothefutureofthepowerindustry.Consumers(someatleast)andpolicymakersarelookingforwardtothedecentralisationofthepowerindustry:consumersequippedwithgreenanddecentralisedgenerationandstorage(anelectriccarintheirgarage)willbeactiveparticipantsinthepowermarkets.Howdowecoordinatethedecisionsofmillionsofeconomicagents?Pricesreflectingthevalueofpowerateveryinstantandeverylocationseemthemostnaturalapproach.Thisrequirespolicymakersandconsumerstoreconcilethemselveswithpossiblyextremelyhighpricesatsomeinstancesinsomelocations.Otherwise,thedecentralisationoftheelectricitysystemwillproveanelusivegoal.18References1.Joskow,P.L.(2019),‘ChallengesforWholesaleElectricityMarketswithIntermittentRenewableGenerationatScale:TheU.S.Experience’,OxfordReviewofEconomicPolicy,35(2),291-331.2.Léautier,ThomasOlivier(2019),ImperfectMarketsandImperfectRegulation,Cambridge,MAandLondon,UK:MITPress.3.Newbery,D.,M.G.Pollitt,R.A.RitzandW.Strielkowski(2018),‘Marketdesignforahigh-renewablesEuropeanelectricitysystem’,RenewableandSustainableEnergyReviews,91(August),695-707.19CHAPTER4.WholesaleElectricityMarketDesignFrankA.WolakInternationalexperienceaftermorethan25yearsofwholesaleelectricitymarketdesignhasrevealedseveralfactorsthatarecrucialtoachievinglastingimprovementsinindustryperformanceandtangibleeconomicbenefitstoelectricityconsumers.Thesefactorsare:1)thematchbetweentheshort-termmarketusedtosetpricesanddispatchgenerationunitsandhowtheactualelectricitynetworkisoperated;2)theeffectivemarketandregulatorymechanismstoensurelong-termgenerationandtransmissionresourceadequacy;3)theappropriatemechanismstomitigatesystem-wideandlocalmarketpower;and4)themechanismstoallowactiveinvolvementoffinaldemandintheshort-termmarket.1.MatchBetweenMarketMechanismandActualSystemOperationAnimportantlessonfromelectricitymarketdesignprocessesaroundtheworldistheextenttowhichthemarketmechanismusedtodispatchandoperategenerationunitsisconsistentwithhowthegridisactuallyoperated.IntheearlystagesofwholesalemarketdesignintheUS,alloftheregionsattemptedtooperatewholesalemarketsthatusedsimplifiedversionsofthetransmissionnetwork.Singlepricingzoneormultiplepricingzonemarketsassumedinfinitetransmissioncapacitybetweenlocationsinthetransmissiongridoronlyrecognisedtransmissionconstraintsacrosslargegeographicregions.Thesesimplificationsofthetransmissionnetworkconfigurationandotherrelevantoperatingconstraintscreatedopportunitiesformarketparticipantstoincreasetheirprofitsbytakingadvantageofthefactthattheactualconfigurationofthetransmissionnetworkandotheroperatingconstraintsmustberespectedinrealtime.Thesesimplifiedmarketssetasinglemarket-clearingpriceforahalf-hourorhourforanentirecountryorlargegeographicregion,despitethefactthattherearegenerationunitswithofferpricesbelowthemarket-clearingpricenotproducingelectricity,andunitswithofferpricesabovethemarket-clearingpriceproducingelectricity.Thisoutcomeoccursbecausethelocationofdemandandavailablegenerationunitswithintheregionandtheconfigurationofthetransmissionnetworkpreventsomeoftheselow-offer-priceunitsfromproducingelectricityandrequiresomeofthehigh-offer-priceunitstosupplyelectricity.Theformerunitsaretypicallycalled‘constrained-off’unitsandthelatterarecalled‘constrained-on’or‘must-run’units.Multi-settlementwholesaleelectricitymarketsthatuselocationalmarginalpricing(LMP),alsoreferredtoasnodalpricing,largelyavoidtheseconstrained-onandconstrained-offproblems,becausealltransmissionconstraintsandotherrelevantoperatingconstraintsarerespectedintheprocessofdeterminingdispatchlevelsandlocationalpricesinthewholesalemarket.Thismarketdesignhasbecomethedefacto20standardmarketdesigninallUSmarketsandmanyinternationalmarkets.AnumberofcountriesinEuropearecurrentlyconsideringtransitioningtothismarketdesign.2.MechanismstoEnsureLong-TermResourceAdequacyWhatisdifferentaboutelectricitymarketsthatjustifiestheneedforalong-termresourceadequacymechanism?Theanswerliesinhowmarketsforotherproductsoperaterelativetothemarketforwholesaleelectricity.Thelimitationonthelevelofshort-termpricesandthewaythatsupplyshortfallsaredealtwithinwholesaleelectricitymarketscreatea‘reliabilityexternality’thatrequiresanexplicitregulatoryinterventiontointernalise.Twogeneralapproacheshavebeendevelopedtoaddressthisreliabilityexternality.Thefirstisbasedonfixed-priceandfixed-quantitylong-termcontractsforenergysignedbetweengenerationunitownersandload-servingentitiesatvarioushorizonstodelivery.Thesecondapproachisaregulator-mandatedcapacitymechanism.Typically,theregulatorrequiresthatload-servingentitiespurchasesufficientfirmgenerationcapacity,atamagnitudedefinedbytheregulator,tocovertheirannualpeakdemand.Generationunitownersreceivearegulator-determinedpaymentforthecapacitytheyprovidetotheload-servingentity.DifferingdegreesofregulatoryinventionareusedtodeterminethisUSD/KW-yearpaymentacrosstheexistingcapacitypaymentmechanisms.Capacitymarketsarepoorlysuitedtoregionswithasignificantshareofintermittentrenewables.Inthesemarkets,itisrarely,ifever,thecasethatthereisacapacityshortfallinthesensethatthereisinsufficientinstalledgenerationcapacitytomeetpeakdemand.Themorecommonproblemisinsufficientenergy,typicallyintheformofwaterstoredbehindadam,tomeetanticipateddemand.Withwindandsolarphotovoltaicgenerationunits,capacityshortfallsarealsoextremelyunlikely.Itismorelikelythatthesundoesnotshineorthewinddoesnotblowforasustainedperiodoftime.Inbothcases,theproblemisnotacapacityshortfallbutanenergyshortfall.Ambitiousrenewableenergygoalsinmanyregionsarecausingregulatorsinthoseregionstoconsidertransitioningtoenergycontracting-basedapproachestolong-termresourceadequacy.3.ManagingandMitigatingSystem-WideandLocalMarketPowerTheconfigurationofthetransmissionnetwork,thelevelandlocationofdemand,aswellasthelevelofoutputofothergenerationunitscanendowcertaingenerationunitswithasignificantabilitytoexerciseunilateralmarketpowerinawholesalemarket.Aprimeexampleofthisphenomenonistheconstrained-ongenerationproblemdescribedearlier.Theownerofaconstrained-ongenerationunitknowsthatregardlessoftheunit’sofferprice,itmustbeacceptedtosupplyenergy.Withoutalocalmarketpowermitigation(LMPM)mechanism,thereisnolimittotheofferpricethatcouldbesubmittedbythegenerationunitownerandbeacceptedtoprovideenergy.Consequently,alloffer-basedelectricitymarketsintheUSrequireaLMPMmechanismmechanismtolimittheoffersagenerationunitownersubmitswhenitfacesinsufficientcompetitiontoservealocalenergyneed.Implementinganoffer-basedshort-termmarketwithoutanLMPMmechanisminplacewouldbeimprudent.214.ActiveInvolvementofFinalDemandintheWholesaleMarketTheactiveinvolvementoffinalconsumersinthewholesalemarketcanreducetheamountofinstalledgenerationcapacityneededtoservethemandreducethecostofintegratinganincreasingamountofintermittentrenewablegeneration.Therearethreenecessaryconditionsfortheactiveinvolvementoffinalconsumers.First,customersmusthavethenecessarytechnologytorecordtheirconsumptiononatimescalesimilartothatofthewholesalemarketproducts.Second,theymustreceiveactionableinformationthattellsthemwhentoaltertheirconsumption.Third,theymustpayaccordingtoapricethatprovidesaneconomicincentiveconsistentwiththeactionableinformationtoaltertheirconsumption.22CHAPTER5.TheEvolutionofCompetitiveRetailElectricityMarketsStephenLittlechildCompetitiveretailelectricitymarketsfollowedverydifferenttrajectoriesinthevariousjurisdictionsthatintroducedthem.Thischapterconsidersthreemainissues.First,howtoopenretailmarkets?Second,howtohandlesomeongoingissueswithretailcompetition?Third,howtopreparefortheneweraofhybridmarkets,prosumersandelectrificationofenergyend-uses?1.HowtoOpenRetailMarketsThe1980ssawthefirstdebatesonwhethertoopencompetitiveretailelectricitymarkets.SomeenergyeconomistssuchasStephenLittlechildpromotedtheidea,whileothers,suchasPaulJoskowandWilliamHogan,weredoubtfulwhetheritwasappropriateforresidentialcustomers.GreatBritainwasfirsttoopenitsretailmarkettocompetition,onaphasedbasisbeginningwiththelargestindustrialcustomersin1990andmovingontoresidentialcustomersin1998.Atemporarypricecapwasputinplaceincasecompetitiondidnotmaterialise,butexistingregionalsupplierscompetedinotherregionalareas,andnewplayersenteredthemarketwithcheaperoffers.Aftertwoyears,thescopeofthepricecapwasreduced,andafteranothertwoyearswasremovedentirely.WhenTexasopeneditsretailmarketin2002,itestablishedwhatwasineffectaminimumpricecap–a‘pricetobeat’–whichappliedtoincumbentsuppliersforfiveyears,oruntiltheylost40percentoftheircustomers,therebyenablingcompetitorstoenterthemarketandgrow.In2004,theEuropeanUnionmadeitmandatorytoopenuptheretailmarketforallnon-residentialcustomersandextendedthistoallresidentialcustomersin2007.ThelawlefttheactualprocessofmarketopeninguptothediscretionofindividualMemberStates.Nordiccountriesestablishedretailmarketswithnopricecapandnoretailpricemonitoring.Bycontrast,Franceopeneditsretailmarketbutmaintainedregulatedtariffsforallresidentialandsmallnon-residentialcustomerswhodidnotoptforanenergysupplyonthefreemarket.Attheendof2021,twothirdsofFrenchresidentialcustomerswerestillsuppliedunderregulatedtariffs.Manyotherissuesattractedtheattentionofregulatorsandpractitionersovertheyears.Forexample,shouldmeteringbeacompetitiveorregulatedactivity?Shouldresidentialcustomersbeservedonthebasisofaloadprofile,orshouldreal-timemeteringbeintroduced?Howshouldaccesstoliquidwholesalemarketsbestbeprovidedtonewplayerswhowerenotverticallyintegratedwithgeneration?Differentcountrieshaveadoptedverydifferentapproachestotheseandotherquestions.232.HowtoHandleSomeOngoingIssueswithRetailCompetitionRetailcompetitionposedsomenewchallengestoenergyregulators,governmentsandlegislators.Forexample,somecriticsarguedthatactiveconsumersswitchedsupplierstoachievelowerprices,whereasinactiveconsumersremainedwiththeirexistingsuppliersandpaidahigherprice.Theyarguedthatregulatorsshouldtakestepstolimitprices,eitheronanabsoluteorrelativebasis–forexample,bystoppingsuppliersfromofferinglowerpricestonewormoreactivecustomers.Otherscounteredthattheproductsofferedatlowerpriceswereoftendifferent–forexample,theywereavailableonlyonlineandnotincludinganydiscountforlow-incomehouseholds.Ortheyarguedthatthelowerpricescamefromsupplierswhowereoftennew,unknownandriskier(assubsequentlyprovedtobethecase).Therehavealsobeenmovestoprotectparticularlyvulnerableconsumers,asacknowledged,forexample,byEuropeanlaw.IntheUSStateofNewYork,evermorestringentregulationofenergyservicecompanieswasintroducedovertheperiod2014-19.Increasingly,electricityconsumersareservedbynewtypesofsuppliers,sometimescharacterisedas‘asset-light’companies,thatiscompanieswithoutgenerationassetsandoftenevenwithoutsignificantfinancialresources.Theyarefullydigitalisedandseemtodeliverdifferentorlower-costproductscomparedtotheold,asset-heavy,incumbents.Thesenewsuppliersdonotnecessarilytargetconsumerswiththesameconsumptionprofileasthoseservedbyincumbents.Theymayalsoholddifferentpositionsinthewholesalemarketandadoptdifferenthedgingstrategiesregardingwholesalepricevolatilityandtheriskofpricespikes.Itisquestionablewhetherenergyregulatorsaresufficientlyskilledandagiletointerveneinthislandscape.Anyinterventionbytheregulatorvis-à-viscontractsandpricesofferedbynewsuppliersorincumbentsmusttakeallthesecomplexfactorsintoaccount.Thisisnotatrivialtask,asexemplifiedbytheconsequencesofthepricecapintroducedintheBritishmarketin2019,whichfollowedanerroneousdiagnosisofthecompetitiveretailmarketbytheCompetitionandMarketsAuthorityin2016.Initially,thepricecapseemedbeneficial:protectionwasofferedtothosecustomerswhowerelessactive,whileintensecompetitionledsomecompaniestoofferpricesbelowthecaptothosecustomerswhoweremoreactive.However,thiswasanartificialconsequenceofafallingwholesalemarket.Whenwholesalepricesstartedsurginginsummer2021,theundulysevereandinflexiblepricecappushedalmost30newenergysuppliers(withover2.5millioncustomers)intobankruptcy.Ontheothersideoftheworld,inCalifornia,retailcompetitionwasstoppedin2001becauseaninappropriatelyinflexiblepricecapcausedthebankruptcyofsomeincumbentsuppliers.Morerecently,theintegratedincumbentsupplierPG&Ewentintobankruptcyin2019asaconsequenceofitsmismanagementofheatwavesandwildfires.MistrustofincumbentutilitiesappearstobeontheriseinCalifornia,andmorethantenmillioncustomershavealreadylefttheminfavourof‘CommunityChoiceAggregation’,asolutionwherelocalpublicauthoritiesnegotiatelong-termsupplycontractswithnewgeneratorsinvestinginrenewables.243.HowtoPreparefortheNewEraofHybridMarkets,ProsumersandElectrificationofEnergyEnd-UsesRetailcompetitionwasinventednearly40yearsagoinordertopassontocustomersthebenefitsofwholesalecompetitionwithoutthecostsanddistortionsofconventionalregulation.Otherchaptersinthishandbooksuggestthatdevelopmentsintechnologyandthepolicypushfordecarbonisationviarenewablegenerationarecausingashifttowardsanewregimeof‘hybridmarkets’.Someresidentialconsumersareinvestingtobecomegeneratorsandcoverautonomously(partof)theirenergyneeds.Theyaretheso-called‘prosumers’.Whatkindofretailcontractsandservicescansuppliersofferthemfortheremaininganduncoveredpartoftheirconsumption?Couldassetmanagementservicesintegratetheirgenerationandstorageassetsintoavirtualpowerplant,activatedandoptimisedbysomeinnovativesuppliers?Electrificationoffinalenergyusesviaelectricvehicles(EV),heatpumpsandsoonmightamplifytheseeffectsofhybridisation.AcarmanufacturercouldbecomeanEVchargingsupplieroranelectricityaggregator.Asmartchargingsuppliermightalsobecomeanaggregator,sellingbacktheflexibilityoffinalconsumptiononthewholesalemarketordirectlytothesystemoperatorofagrid.Heatpumpsandheatstorageinbuildingscouldfollowsimilartrends,wheredemandandsupplyworktwowaysandnotonlyone.Allthiswillrevolutioniseretailmarkets.Customerswillbeabletotakemoreactiverolesthanthoseforeseenatthetimeoftheindustryrestructuring.However,howkeenwillcustomersbetotakethoserolesandparticipate?Surely,participationwillbeeasiertoachieveinamarketwherecustomersarealreadyaccustomedtoengagingactivelyintheselectionofthebestproductsandsuppliers.Andwhereretailsuppliersareaccustomedtotheprocessofdiscoveringwhichproducts,servicesandmarketingapproachesappealtocustomersandwhichdonot.Thewayforwardisundoubtedlytobuilduponretailcompetitionandcustomerchoice,ratherthantoprohibitorrestrictit.25CHAPTER6.StrengthsandWeaknessesoftheBritishMarketModelDavidNewberyTheBritishmodelhasevolvedtocovertheislandofGreatBritain(England,WalesandScotland),whileNorthernIrelandhasevolvedintoaquitedifferentmarketmodelcoveringtheislandofIrelandinitsSingleElectricityMarket(SEM).ThischapterdiscussestheBritishmarket.TheemphasishereisonEnglandandWales,whichexperiencedthemainrestructuring.Scotlandhadtwoverticallyintegratedregionalstate-ownedutilitieswhichretainedtheirunbundledstructureafterprivatisation.1.ElectricityRestructuringinGreatBritainBeforerestructuringandprivatisationin1989-90,thestate-ownedCentralElectricityGeneratingBoard(CEGB)ownedallgenerationandtransmissioninEnglandandWales.TransmissionandsitelocationofnewgenerationwascoordinatedbytheCEGB,althoughthemainhightension(440kV)gridhadbeenlargelycompletedbythe1960swithsubstantialsparecapacity.Similarly,theintenseperiodofbuildinglargepowerstationswaspredicatedoncontinuedgrowthindemandofeightpercentperyearthathadcometoanabrupthaltwiththefirstoilshockinthe1970s.Thestationsunderconstructionwoulddeliversubstantialexcesscapacityoncecompleted.Distributionandsupply(retailing)weremanagedby12AreaBoards,whopaidtheCEGBtheBulkSupplyTariff,anefficientmulti-partcapacityandenergychargewithusefullessonsforthefutureelectricitysystemwithhighvolumesoflowmarginalcostgeneration.TheCEGB’sperformancehadbeenstronglycriticisedforitsinefficiency,particularlyindeliveringtimelyandcost-effectiveinvestmentandunder-pricingitsoutput.Afterthesuccessandlessonslearnedfromearlierutilityprivatisations,theCEGBwasripeforrestructuringtocreatecompetitivewholesaleandretailmarkets,andregulatedtransmissionanddistributionnetworks.Ithadadequategenerationandtransmissioncapacitysoneededlittleinvestment,usedhigh-costdomesticcoalthatwasrapidlydisplacedbygasandimportedcoal,whileRPI-Xincentiveregulationhadmaturedandwaswellsuitedtoregulatingdistributioncompaniesthatcouldbebenchmarkedagainsteachother.Transmissionregulationgraduallyimprovedwithincentives,andbothnetworksinvestedandalsoimprovedtheirqualityofservice.2.ANever-EndingReformProcessMarketpowerwasacontinuingproblemforthewholesalemarketuntiltheduopolistsdivestedtocreateaworkablecompetitivestructure,justbeforetheregulatorandgovernment,despairingofreformingtheElectricityPoolandconcernedwithmarketpower,replacedthecentrallydispatched‘pool’modelwithcapacitypaymentsbyan26energy-onlymarketandatwo-pricedbalancingmechanism.Subsequentverticalintegrationofgenerationandsupplydiscouragedentryofnewplayers,unstableenergypoliciesdiscouragedincreasinglyneededinvestmenttoreplaceagingfossilandnuclearpowerplants,whiletheshifttothecostlyRenewablesObligationfailedtodelivertherenewablestarget.Inresponse,theElectricityMarketReform(EMR)reintroducedcapacitypaymentssetatannualauctions.Itreplacedrenewableobligationcertificateswithavariantoffeed-intariffs,which,afterauctionswereintroduced,loweredcostsandmadetheUKthesecondlargestEUproducerofnewrenewables.UnderpressurefromtheClimateChangeAct,the2011budgetintroducedtheCarbonPriceSupport(CPS),ataxonthecarboncontentoffuelsusedtogenerateelectricity.ThecombinationoftheCPS,fallingdemandandgrowingrenewableshadadramaticimpactonthecoalshare,whichfellfrom41percentin2013to1.8percentin2020.Thecapacityauctionsdeliverednewgenerationat40percentoftheanticipatedprice,largelybecauseofadistortionarysubsidyprovidedtosmalldistribution-connectedgeneration.Ittookoverthreeyearsfortheregulatortoremovethatdistortion.3.LessonsLearnedTheBritishprivatisedelectricitysystemisnowover30yearsoldandtodayoffersagoodmomenttotakestockofitssuccessesandweaknesses.Thepremiseofprivatisationwasthatprivateownerswouldinvestandoperatemoreefficientlythanstate-ownedenterprises,andthatbyescapingthedeadhandoftheTreasurytheycouldaccessmoreinvestmentfunds,wouldchoosemorecost-effectiveinvestments,andwouldceaseunprofitableactivitiessoonerwhilerespondingtonewopportunitiesmorequickly.Thesepotentialbenefitswouldhavetobeweighedagainsttheincreasedcostofprivatecapitalandapossiblelossofconcernoverdistributionalissuesandenvironmentalimpacts,unlessmarketplayersweremotivatedtotakethemintoaccount.EconomichistorianAvnerOfferarguesthattheprivatesectoriswellplacedtoinvestwherethecredittimehorizonisattractivetoprivatelenders,definedasthetimetopaybacktheloan.Roughlyspeaking,privatefinanceistwicethecostofpublicfinance,sotheprivatepay-backperiod,simplycomputed,ishalfthatofthegovernment.Governmentguaranteesortheirregulatoryequivalent(suchastheUSmodelofrate-of-returnregulationunderpinnedbyaconstitutionallybackedruleoflaw)canofferreassurances,lowerthecostofcapitalandextendthiscredithorizon.TheBritishelectricitysupplyindustryin1989waswellplacedtoreapmanyofthebenefitsofprivateownership,and,initially,toavoidmanyofthedownsidecosts.Sparecapacityavoidedtheneedforcostlydurablegeneratingcapacityandtheriskofaninappropriatecredittimehorizon.Thearrivalofcheapcombinedcyclegasturbines(CCGTs)ofmodestscale,rapiddeliveryandhighefficiency,atatimeoffallinggasprices,madeanysuchinvestmentslowerrisk.Eventhen,theseinvestmentsreliedonlong-termcontractsandacaptivefranchisemarket.Themorecapital-intensiveanddurablenetworkswereassuredoffinanceabilitythroughlicenceconditions,obligationsontheregulatorandacredibledisputeresolutionprocess.Distributionalconcernsemerged,andwere,withvaryingdegreesofsuccess,metwithlicenceconditionsonutilities,inquiriesbytheCompetitionandMarketsAuthority,andpricecaps.27Environmentalconcernsweremetwithincreasinglystringentemissionsstandardsonpollutants,theEUEmissionTradingSystem,variousEUdirectives,andtheCarbonPriceSupport.Problemsemergedwhennewcapital-intensivegenerationinvestmentwasneededtomeetcarbonandrenewablestargetsandtomaintainreliability.Theideologyofthemarketinitiallyledtoauctionsforrenewablesthatwereremarkablyeffectiveatdrivingdowncosts,butlesssoatdeliveringadequatevolumes.Theshifttorenewableobligationspulledthroughmoredeliverybutatahighcostoffinance.Ittookover20yearstolearnfromexperienceelsewherethatlong-termcontractsatassuredoff-takepriceswouldlowerthecostofcapitalandwithitthedeliveredcostofrenewableelectricity.Nuclearpowerandcarboncaptureandstorage(CCS)demonstratedtheforceofOffer’scredittimehorizon.Nonuclearpowerstationhaseverbeenconstructedwithoutstrongandcredibleunderwritingfromeitherthegovernmentorautilityempoweredtopassthecostthroughtofinalconsumers.InBritain,HinkleyPointChasstaggeredonsincebeforeprivatisation,andonlysecureditsfinalinvestmentdecisionafteroneofthecostliesteverfinancingarrangementswithgovernmentguarantees.Givenapossibleconstructionperiodoftenyearsandasubsequentlifeof60years,possiblyfollowedbycenturiesofwastemanagement,nuclearpowerbustsOffer’scredittimehorizoncomprehensively.CCShashadanevenworseexperience,withoveradecadeofunfulfilledpromisestodeliveracommercial-scaleplant.EvenconventionalCCGTsnowneed15-yearcapacitypaymentstoencourageinvestment,sothattoagreaterorlesserextentallnewgenerationnowreceivesunder-writtenguaranteesbythegovernmentforallorpartoftheoutput.Criticsarguethatthisreflectsabetrayaloftheoriginalaimsofprivatisation,whilerealistsand,verybelatedlyandtoalimitedextent,thegovernmentarguethatdurableessentialinfrastructurelikeelectricityneedsaccesstolow-costfinancethatonlygovernment-backedorguaranteedfinancecanassure.PerhapsthemostusefullessonfromtheprivatisationofelectricutilitiesisthattheUKhasevolvedasystemofregulatingatleastpartoftheinfrastructure(thenaturalmonopolypipesandwires)thatworksreasonablywellandhasdeliveredhighlevelsofinvestmentatmodestratesofinterest.ItwouldbeencouragingtothinkthattheUKcancontinuetolearnhowbettertofinancethenecessarycapital-intensivezero-carbonenergytomeetourclimategoalsinatimelyfashion.28CHAPTER7.StrengthsandWeaknessesofthePJMMarketModelWilliamHoganTheAmericanPJMInterconnectionintheMid-Atlanticstatesenjoysiconicstatusasamajorinnovatorinelectricityrestructuring.Buildingonitslonghistoryasamajorpowerpool,PJMdemonstratedthecapabilitytoprovidethenecessarycoordinationforcompetitioninelectricitymarkets.ThecoreofthePJMmarketdesign,abid-based-security-constrained-economic-dispatch-with-locational-marginal-prices(BBSCEDLMP)model,worksintheoryandinpractice.Itistheonlyelectricitymarketdesignthatintegratesengineeringandeconomicstosupportefficientmarketsundertheprinciplesoftransmissionopenaccessandnon-discrimination.ThismarketdesignwaseventuallyadoptedineveryorganisedwholesaleelectricitymarketintheUnitedStates.Thedevelopmentofthismarketfollowedaprocesscombininganalysis,experimentationandlearning.Theevolutionaryprocesscontinuestomeetnewchallenges.1.BriefHistoryofthePJMWholesalePowerPoolElectricutilitiesstartedoutlocal,typicallyinasinglecity,andgrew.Giventhevariabilityofelectricloadandthediversityofgeneratingplants,itbecamethenormforinterconnectionarrangementstosharegenerating,transmissionandotherresources.ThepowerpoolcalledthePennsylvania-NewJerseyInterconnectionwasestablishedin1927.Later,theFederalEnergyRegulatoryCommission(FERC)encouragedeffortstobuildonpowerpooloperationsforelectricitymarkets.TheinitialPJMmarketmodelcalledforasinglemarket-clearingprice(MCP)acrosstheentirepool.Thisdoesnotworkintheory,anditdidnotworkinpractice.In1998,afterayearofoperationsunderthisflawedsinglemarket-clearingpricedesign,PJMconvertedtoaneconomicdispatchwithlocationalmarginalprices(LMP)appliedtoloadandgenerationateachlocation.ThenewLMPmarketwasaccompaniedbytheintroductionoffinancialtransmissionrights(FTR)andanearlyinstalledreservecapacitymarket.2.TransitiontoOpenAccessandNon-DiscriminationInthelastdecadeofthe20thcentury,electricityreformwasintheair,especiallyafterthedecisiontocreateawholesalepowerpoolinEnglandandWalesin1990.Akeyfeatureofthispolicyinsupportofwholesalecompetitionincludedaccesstothehighvoltagetransmissionsystem.Thediscussionbeganwiththeassumptionthatgeneratorsandloadswouldbeabletomakebilateralarrangementsforcontractsofvariousdurationsandthenarrangefortransmissionrights,muchashadalreadybeendoneundertheopen-accessregimeforinterstatenaturalgaspipelines.Thetermofartwasthe‘contractpath’,wherebymarketparticipantswouldidentifyapath29throughthegridandmakearrangementstoutilisetheavailabletransmissioncapacity.However,unlikenaturalgasflowingalongaspecificpipeline,themovementofelectricpoweriscompletelydifferent.Theessentialproblemisthatpowerinjectedatonelocationandremovedatanotherwouldtravelalongeveryparallelpath,distributingitselfaccordingtothelawsofphysicsto(roughly)equatethemarginallossesoneverypath.Fromaneconomicperspective,thedefectofthecontractpathcreatedmaterialmarketexternalities.Individualbilateraltransactionswouldinterferewithallothertransactions.Thecontractpathmodelmighthavebeenaconvenientfictionwhentherewereonlyafewmembersoftheclubofcooperatingutilities,buttheopen-accessmarketwouldbeoverwhelmedwhennewentrantsrespondedtotheperverseincentivescreatedbytheexternality.3.ElectricityMarketsandEconomicDispatchWithamarket-clearingprice,thebestchoiceforthebuyeristhequantityatthecompetitiveequilibrium;similarly,thebestchoiceforthesupplierisatthesamecompetitiveequilibriumpoint.Pricesthensupportthedispatch.Inanysystemunderopenaccessandnon-discriminationprinciples,marketparticipantswillhavethefreedomanddiscretiontobuyandsellpoweraccordingtotheirowninterests.Ifmarketpricessupporttheeconomicdispatchsolution,thentheprivateinterestswilloperateaswiththe‘invisiblehand’tofollowtheefficientoutcome.TheLMPpricesarepreciselythemarketpricesthatsupporttheeconomicdispatch.Anyotherpricingapproachwould,necessarily,createincentivestodeviatefromtheefficientoutcome.4.PriceFormationandMarketDesignChallengesPJMwilllikelymaintainitsprocesstoprioritiseandimproveonanumberofelectricitymarketdesignchallenges.Anexampleofthemisprovidedbyscarcitypricing.Scarcitypricingreferstoconditionswhenloadisclosetousingallavailablegeneratingcapacity,includingcapacityreservedtomeetcontingencyconstraints.Intextbooktheory,pricesshouldrisetoreducedemandandrationtheavailablesupply.InPJM,anOperatingReserveDemandCurve(ORDC),basedonvaluingtheimpactsofoutagesandreserveshortages,providesapracticalwaytoaddressscarcitypricingwithintheframeworkofcurrenteconomicdispatchmodels.Thechallengesposedbythedecarbonisationoftheelectricitymixincludedealingwiththeintermittentsuppliesthatcanincreasestressonthesystem.Thearrivalofincreasingvolumesofzeromarginal-costrenewableresourcespromptsaconcernthatthiswilldrivedownenergypricesandunravelthefundamentalmarketdesign.Anotablefeatureoftheeconomicdispatchisthelackofanyspecificationofthedetailsoftheunderlyingcostfunctions.Themodelisquitegeneralandthebasicanalysisfromfirstprinciplesisunaffectedbythearrivalofloworzero-variablecostresources.Aprincipalconclusionofacloseranalysisisthattheimportanceofscarcity30pricingescalateswiththeincreasingpenetrationofzero-variablecostresources.ThePJMreal-timeandday-aheadmarketeconomicdispatchmodelsaredeterministic.Themodelsarebasedonbidsandoffers,andonexpectedsystemconditions.Therealdispatchfacesuncertainconditionsoverthenearfutureinrealtime,andoverthedayintheday-aheadproblem.ThetreatmentofoperatingreservesinrealtimeanddayaheadinPJMisanexampleofbuildinginapproximationsthatservetoproxyforsomeofthemajoreffectsofuncertaintywhilemaintainingasimplifiedrepresentationinadeterministicmodel.5.ConclusionThephysicsofpowertransmissionsystemsmakesexistingelectricitymarketsunlikemarketsforothercommodities.Marketscannotsolvetheproblemofelectricitymarketdesign,andsimpleanalogiestoothermarketscanleaddesignastray.PJMhasbeenattheforefrontofapplyingfirstprinciplesofengineeringandeconomicsinthecontextofprovidingcoordinationforcompetitionasneededtosupportefficientmarkets.PJMstrivesforthebestapproximationofasuccessfulmarketdesignorganisedaroundbid-based-security-constrained-economic-dispatch-with-locational-marginal-prices.Theevolutionofmarketdesigntoaccommodatethechangingmixofloadandgenerationresourcesshouldavoidthemistakesofthepastandcontinuetoemphasisethefundamentals.31CHAPTER8.ERCOT:Success(SoFar)andLessonsLearnedRossBaldick,ShmuelOren,EricS.SchubertandKennethAndersonTheexperienceoftherestructuredelectricitymarketintheElectricReliabilityCouncilofTexas(ERCOT)region,whichcoversmostofTexas,isanalysedinthischapter,whichisdividedintothreeparts:1)anoverviewofERCOT;2)thechallengesofcreatingaself-sustainingpowermarket;and3)howERCOThasmetthosechallenges.1.OverviewofERCOTTheElectricReliabilityCouncilofTexas,Inc.(ERCOT)isanon-profitcorporationthatmanagestheflowofelectricpowertomorethan26millionTexascustomerswhoarelocatedwithintheTexasInterconnection,whichhasonlylimitedasynchronousconnectionstotherestofNorthAmerica.In1995,theTexasLegislatureactedtoderegulatethewholesalegenerationmarketwithintheTexasInterconnection,andthePublicUtilityCommissionofTexas(PUCT)begantheprocessofexpandingERCOT’sresponsibilitiesandcapabilitiestoenablewholesalecompetitionandfacilitateefficientuseofthepowergridbyallmarketparticipants.Severalchangesfollowed,culminatingintheTexasLegislatureenactingSenateBill7,whichrequiredinvestor-ownedutilities(IOU)tounbundletheirfunctions(generation,delivery,andretailsalesofelectricity).By1January2002,thesameBillorderedthecreationofacompetitiveretailelectricitymarkettogivecustomerstheabilitytochoosetheirretailelectricityproviders.Aday-ahead‘scheduling’processwasestablishedin2001wherebymarketparticipantsprovidedmatchedgenerationandconsumptioninformationforeach15-minuteintervalinthefollowingdayandmadeofferstoprovideancillaryservices.AftertheinitialoperationoftheERCOTwholesalemarketwithoutanyrepresentationoftransmissionlimits,in2002ERCOTwasdividedintofourzonesforthepurposesofdispatchingandpricingpowerpurchasesfromgeneratorsandsalestoretailcustomers.Supplywasspecifiedbasedonportfoliosofgenerationineachzoneanddemandwasalsospecifiedzonally.A‘balancingmarket’thensoughtbidsandofferstodeviatefromtheday-aheadschedules.Itsoonbecameevidentthatsuchasystemofzonalportfoliodispatchwasinefficientinmaintaininggridreliabilityandexpensiveforwholesalemarketparticipants.Asaresult,inSeptember2003thePUCTorderedERCOTtodevelopanodalwholesalemarketdesign.Thenewmarketopened,afterconsiderabledelays,on1December2010,andincludedunit-specificdispatch,locationalmarginalpricingforgeneration,aday-aheadenergyandancillaryservicesco-optimisedmarket,day-aheadandhourlyreliability-unitcommitment,andcongestionrevenuerights.Thereal-timemarketpricesanddispatchesgenerationin5-minuteperiodsandsettlesin15-minute32increments.Insteadofzonalportfoliooffersandbidsasinthepreviousmarketdesign,thenodalmarketrequiredoffersspecificallyfromeachgeneratingunit.2.ChallengesofCreatingaSelf-SustainingPowerMarketTherearetwomainpolicygoalsrelatedtocustomerchoiceinERCOT,namely,implementingretailchoiceandfacilitatingtheintegrationofnewtechnologies.Thechallengesinmeetingthesegoalsincludethefollowing:•Copingwiththeunpredictabilityofevolvingmarketsthatareopentomarketforcesratherthanregulatorydecisions.•Adaptabilitytotherapiddeploymentofnewtechnologies,includingsmaller-scalegeneration,andwavesoftechnologicaladoption.•Engineeringchallengesinapolicycontext,includingtheextenttowhichtechnicalconsiderationsandconstraintsshouldbereflectedinthecommercialmodelunderlyingthemarket,specificallyrelatingtofeaturesthatareuniquetoelectricity,suchasalmosttotalnon-storability,itslocationalcharacter,andinherentbarrierstocompetitioninelectricitymarkets.•Commercialchallengesinenablingdecentralizedcommoditymarketsandintegratingnewtechnologies.3.HowTexasAddressedtheChallengesThissectiondescribeshowTexas,andspecificallyERCOT,hasaddressedtheabovechallenges.a)HowTexasCultureandGeographyAssistedtheDevelopmentoftheERCOTPowerMarketTexascultureandgeographyhaveplayedanimportantroleinthedevelopmentoftheERCOTpowermarketbyprovidingpolicymakerswithabundantdegreesoffreedomtomakechoicesthatfacilitategoodmarketoutcomesforTexasenergyproducersandconsumers.Self-governancehasbeenaforcedrivingthepoliciesoftheTexasLegislatureandthePUCTacrosstheretail,wholesale,andwirespartsoftheERCOTmarket.ThisapproachispartofalongtraditiondatingbacktotheearlydaysoftheTexasInterconnectionwhentheevolvingTexasgridbecameaseparateinterconnectionbasedonthedesireforTexanstomanagetheirownelectricpowersystemissuesoutsideofthejurisdictionoftheFederalPowerCommission,whichlaterbecametheFederalEnergyRegulatoryCommission(FERC).Thiswasenabledbythehistoricalpatternofinterconnections,whichwereprimarilydrivenbyTexasgeography,andthatallowedinterpretationsoftheFederalPowerActinawaytolimitFERCjurisdiction.33b)OverseeingtheSimultaneousEvolutionofTwoComplexPhenomenainOrganisedPowerMarketsThesimultaneousandfast-pacedevolutionofthesetwocomplexphenomena–reliabilityandcommerce–associatedwithorganisedpowermarkets,haschallengedregulatorsandlegislatorsacrosstheglobe.Arguably,thegovernanceneededtonurtureevolvingpowermarketecosystemswhilemaintaininggridreliabilityisradicallydifferentfromthetraditionalregulationofthepowerindustry.Traditionalregulationhasthetoolsandstructuretoaddresscomplicated,staticmatterswell(suchasdeterminingandallocatingcostsofnewgenerationandtransmissionconstructionincost-of-serviceproceedingsandmanagingincrementalpowertradesacrossbalancingauthoritiesfromdispatchable,utility-scalegeneration).However,traditionalregulationhasnotdevelopedthetoolsandstructuretoaddresscomplexissues(suchasassessingstaticoptimalcapitalinvestmentormanagingevolvingdynamicmarketecosystemsandgridreliabilityofpowerpoolresourcesassociatedwiththedeploymentanduseofintermittentrenewables,distributedgenerationandactiveenergymanagement)inatimelyandeffectiveway.Thethree-tiergovernancethathasemergedinTexastooverseetheERCOTmarketisexceptionallywell-suitedforgoverningacomplexphenomenon,especiallygiventherapidtechnologicalchangesthatareoccurringinthepowerindustry.Thisuniquegovernanceapproachhasaddressedtheuncertaintiesandchallengesassociatedwithtwoevolving,complexsystems(gridreliabilityandcommercialpowermarkets)overthepast20years.Thefollowingsectionprovidesfivekeyexamplesofhowthisstructurehasmetthevariouschallenges.c)MeetingCurrentChallenges:FiveKeyExamplesi)ChangesinProtocolstoFacilitateWindIntegrationSeveralchangesintheprotocolsresultedinnooverallincreaseintheneedforfrequencyregulationreservesdespitegreatlyincreasedlevelsofwindproduction.Theprincipalchangewastheshiftfrom15-minuteclearingintervalsinthezonalmarketto5-minuteclearingintervalsinthenodalmarket.ii)OperatingReserveDemandCurveFollowingthestartofthenodalmarketon1December2010,themostsignificantenhancementtopriceformationinERCOT’senergy-onlymarkethasbeentheadoptionofanOperatingReserveDemandCurve(ORDC)in2014,whichwaschosenoverothermandatoryactionssuchasaminimumreservemargin.iii)MarketPerformanceandTightReserveMarginsinSummer2019OccasionalhighpricesinERCOThaveresultedinthedevelopmentofmarket-baseddemandresponsethathasgenerallyenabledtheERCOTgridtoavoidinvoluntaryinterruptions,despite,forexample,tightreservemarginsin2019.34iv)IntegratingDistributedEnergyResourcesDistributedenergyresourcesplayanincreasingroleinthesupply-demandbalanceandvariousreformshavebeenintroducedorareplannedtoenabledeeperparticipationbysuchresourcesinthemarket,principallyinvolvingsettlement.v)ERCOTvsMulti-StateRegionalTransmissionOrganizationInERCOT,asingleregulator(PUCT)reportstoasinglelegislativebody(TexasLegislature).Subjecttothatlegislativeoversight,thePUCToverseesthegridoperator,thewholesaleandretailmarketdesigns,aswellastheconstructionandcostallocationofnewtransmissionlines.ThiscombinationhasgivenTexastheabilitytoaddressthechallengesofintegratinglow-carbonresourcessuchasalmost25GWofwindfarmsinanintegrated,logicalwayandtomaintainaconsistentmarket-orientedapproachovertimewithoutthecomplexityofmultiplejurisdictionsthatoccursinotherstatesandregionsoftheUS.35CHAPTER9.Australia’sNationalElectricityMarket:StrengthsandWeaknessesoftheReformExperiencePaulSimshauser1.GenerationAustralia’sNationalElectricityMarket(NEM)commencedin1998.ThecentrepieceofNEM’sreformswastherestructuringofverticalmonopolyelectricityutilitiesandthecreationofanenergy-onlywholesalemarketandassociatedforwardcontractmarket.ThereformslargelyfollowedtheBritishmodelwithfourkeyrestructuringstepsundertakenoverafivetoten-yearwindow,commencingintheearlytomid-1990s:•State-ownedmonopolyElectricityCommissionswerecommercialised.•Commercialisedmonopolyutilitieswereverticallyrestructuredintothreesegments:generation,transmissionanddistribution/retailsupply.•CompetitivesegmentsofgenerationandretailsupplywerehorizontallyrestructuredintoanumberofrivalentitieswithineachoftheNEM’sfour‘regions’.•Businesseswereprivatisedandretailpricecontrolsremoved.Post-reform,aseriesofcapitalmarkets-drivenmergersandacquisitions(M&A)occurredacrosshorizontallines(i.e.mergersofretailerstocreate‘scale’)andverticalre-integration(i.e.mergersofretailandgeneration).Lookingback,an‘electricitymarketarmsrace’played-outovertheperiod1995-2015.TheNEM’s‘BigThree’retailers(orgentailersastheyarecommonlyknown)emergedaswinnersfromastringofhorizontal,verticalandgeographicprivatisationandM&Aeventsoverthis20-yearperiod.Verticalreintegrationwasthevisibletrend.Notonlydidthethreeincumbentretailerspursueverticalintegrationwithmerchantgeneration,butverticalintegrationalsobecamethedominantstrategyamongstincumbentmerchantgenerators–manyofwhichnowhavelargeretailbusinessesintheirownright.Afurther15-20newentrantpure-playretailersformthecompetitivefringe.AdefiningcharacteristicoftheNEMisitsgovernancearrangements.Policy,rulemaking,regulation,andsystemandmarketoperationsaresegregatedasfollows:•Policy–EnergyministersfromeachNEMStateandtheCommonwealthformthemembersoftheEnergyCouncil.•Rulemaking–theAustralianEnergyMarketCommission(AEMC)operatesonbehalfoftheEnergyCouncilasthemarketrulemakingentityandpolicyadvisor;ithasestablishedanopen-sourceplatformfordoingso.36•Regulation–theAustralianEnergyRegulator(AER)enforceswholesaleandretailsupplyrules,andistheeconomicregulatoroftheNEM’sregulatednetworks.•Systemandmarketoperations–theAustralianEnergyMarketOperator(AEMO)istheIndependentSystemandMarketOperator,responsibleforcoordinatingdispatch,powersystemoperationsandwholesalemarketoperations,includingthespotelectricitymarketandeightFrequencyControlAncillaryService(FCAS)markets.TheNEMisclassedasareal-time,energy-onlygrosspoolmarket(i.e.,thereisnoday-aheadmarket),with5-minutemulti-zonalspotpricesformedunderaconventionaluniformfirst-priceauctionclearingmechanism.Inadditiontothespotmarketforelectricity,thereareeightco-optimisedspotmarketsforFCAS.Beinganenergy-onlymarket,thereisnocentrallyorganisedcapacitymechanism.InvestmentinfuturegenerationcapacityisguidedbytheNEM’sforwardmarketsandAEMOprojections;derivativecontractsaretradedbothon-exchangeandover-the-counter,andhavehistoricallyexhibitedaturnoverofbetween300percentand500percentofphysicaltrade,albeitwithconsiderablevariationbetweenseasonsandregions.Byvirtuallyanymetric,thewholesalemarketoperatedlikeamarvelofmicroeconomicreformthroughoutmostofitshistory.Avastoversupplyofgenerationcapacitywascleared,unitcostsplunged,generatingplantsavailabilityratesreachedworld-classlevels,requisitenewinvestmentflowedwhenrequired,investmentriskswerebornebycapitalmarketsratherthancaptiveconsumers,andreliabilityofsupply–inspiteofanenergy-onlymarketdesign–wasmaintainedwithfewexceptions.Onecouldconcludewithconsiderablejustificationthatthereformobjectivesofenhancingproductive,allocativeanddynamicefficiencywereachieved.Iftherewasacaveattothissetofobservations,itwouldbetheperiod2016-19,whenwholesalepricesstruggledtoremainwithinpoliticallytolerablelimits,andoneregion(SouthAustralia)experiencedablacksystemevent.However,NEMmarketmechanismsremainedtruthfulthroughoutthisperiod,becausepriceslargelyreflectedthephysicalandeconomicrealitiesofthecircumstancesinwhichthemarketfounditself.Whatismoreinterestingistheunderlyingcauseswhichprecededthe2016-19period:•Adverseeffectsofclimatechangepolicydiscontinuity,whichadverselyimpactedgenerationentry(andexit).•Suddenanduncoordinateddivestmentofcoal-firedpowerplants.•Turmoilintheadjacentmarketfornaturalgasthroughexcessliquifiednaturalgas(LNG)exportcapacity,whichwouldotherwiseserveasthetransitionalfuelandshockabsorberrequiredforcoalplantexits.Thesupply-sideresponsetohighpriceswassignificant–duringtheperiod2016-21therewere135projectstotalling15939MWorUSD26.4billioninrenewableinvestments.However,thisrapidpaceofinvestmentwouldalsocreatea‘rateofchange’problemthroughthevelocityandpaceofnewinverter-basedentry,manifestinginsharpadversemovementsinsystemstrengthandavisibledeterioration37inthedispersionofthepowersystem’sfrequency(i.e.,50Hz+/-0.15undernormaloperatingconditions),allofwhichwouldrequirecarefulmanagement.2.TransmissionandDistributionTransmissionanddistribution(T&D)networksservicingtheNEM’s10millionbusinessandresidentialcustomersareregulatedbytheAustralianEnergyRegulator(AER)inratecasesoffiveyears’duration.Capitaldeployedbynetworkstendstobedominatedbyresidentialsegmentpeakloads.Conversely,adoptionofrooftopsolarPVhasbeenprolificintheresidentialsector;morethanthreemillionhouseholdshaveinstalledarooftopPVsystem(i.e.,oneinthreehouseholds),givingAustraliaamongthehighesttake-upratesintheworld.Thismatters,becausesolarPVsystemsgreatlyreduceenergy(kWh)demand,butincertainregionsonlymarginallyimpactpeakcapacity(kW)demand.Consequently,two-parttariffsdominatedbyavolumetricvariablechargearenotwellsuitedvis-à-visratestability.Networkpolicy,networkregulationandoverallnetworkperformancehavebeenamongstthemostcontentiousaspectsofAustralia’senergymarketreforms,especiallyfrom2007to2015.ThisperiodcoincidedwithanenormousincreaseinthecombinedT&Dregulatoryassetbase(andthereforepricerises).Keypolicyandregulatorydecisionsunderpinnedthisincrease,including:1)policydecisionsbytheStateGovernmentsofQueenslandandNewSouthWalestotightenreliabilitystandardsfollowingnetwork-relatedblackoutsintheircapitalcities;2)thedecisiontorevaluenetworkassetsinthemid-1990sbeforetheopeningofthemarket;and3)apolicydecisionbyallstategovernmentsin2006thathadtheeffectofmakingnetworkregulationformulaic.Oncetheeffectsofatightenedreliabilitystandardbecamecleartoregulatorsandpolicymakers,aseriesofmaterialpolicyandregulatorychangeswouldfollow.BothQueenslandandNewSouthWalesabandonedtheirtightenedreliabilitycriteria,essentiallyrevertingbacktoaprobabilisticandnotdeterministicapproach.TheAERmaximisedthelow-interestrateenvironmentandpushedtheallowableweightedaveragecostofcapital(WACC)ineachdeterminationdownfrom2015–withreturnsfallingfromroughly10percenttoarangebetweenfourandsixpercent.TheAERalsoadoptedahardlineoncapitalandoperatingexpenditureallowances,routinelyrejectingasmuchas30percentofthefiguresproposedbynetworkcompanies.3.RetailCompetitionintheretailsegmentformedakeycomponentofAustralia’senergymarketreformsandwasbasedonGreatBritain’sapproachtocontestability.Incumbentretailsupplycompaniesstartedwithamonopolyfranchiseovertheircustomerbase,butthisfranchisewouldgraduallydiminish.Inordertoensureanorderlytransition,retailelectricitymarketcontestabilitywasphasedinoveratimetablecomprisingfourtosixtranchesofconsumers(startingwiththelargestcustomers)andspanningfourtoeightyears.Thefinaltrancheofcustomers(i.e.,residential)hadaddedpolicyscaffoldinginthetransitiontoafullycontestablemarket–a‘regulatedtariffcap’–retainedasatransitionalmeasureuntiltheso-calledmassmarketwasdeemedtobeworkablycompetitive.Themassmarketwouldbedeemedworkablycompetitivebyreferencetomeasuressuchas:1)consumerawarenessoftheirabilitytoswitch38supplier;2)thenumberofrivalretailers;3)arrayofproductsandthedepthofdiscounting;4)customerswitchingrates;5)marketshareofincumbentretailers;6)thenumberofcustomersremainingonthedefaulttariff,andsoon.Onbalance,thederegulatedretailelectricitymarketperformedwell,butdefaulttariffsforretailers,whichapplytoarelativelysmallpercentageofcustomers,receivedadisproportionatelevelofpoliticalattention.Policysolutionsofre-regulatingpricesthroughpricecapsfollowed(andareunlikelytoendwellforthoseconsumersactiveinthemarketasretailersprogressivelyre-adjusttheirmarketsegmentationsandprofitstrategies).Thisisnottosuggesttheretailmarketisoperatingwithoutfault;vulnerablerusted-oncustomersrepresentamisallocationproblem(i.e.,low-incomehouseholdsareonatariffdesignedforaninelasticsegment),anddiscountsarenolongeranchoredtoacommonprice.Bothofthesemattersareseriouspolicyproblemsthatrequirefurtherworkbyretailersandpolicymakers,respectively.4.StrengthsoftheReformThereformoftheAustralianelectricitysectorshowsfourstrengths:•TheNEM’senergy-only,grosspoolmarketdesignwithaveryhighvalueoflostloadandtheassociatedmarketforforwardderivativeshasdeliveredresourceadequacyandwithstoodawidearrayofeconomicandtechnicalconditions.Whetheritissuitedtoahighrenewablesmarketisanopenquestion:theweightofopinionsuggestsitisnot.•TheNEM’scoregovernancestructureandapproachtoopen-sourcerulemakinghavehadthebeneficialeffectofminimisingmisguidedpoliticalinterferenceandensuredrulechangeshavepurposefullythoughtthrougheconomictrade-offs.•Capitalmarketsdeterminedverticalbusinessboundaries.•CompetitionintheNEM’sretailmarketshasgenerallyperformedwell,especiallyintheindustrialsegment.5.WeaknessesoftheReformThereformoftheAustralianelectricitysectorshowsfiveweaknessesaswell:•Risinglevelsofintermittentrenewablesrequiredawiderarrayofessentialsystemservicestobeprocured.Marketdesignersweretooreactionary.•Althoughnotdiscussedindetailabove,thelackofacoordinatedpolicyongasmarketsandLNGexportcapacityproducedunnecessarygyrationsinthegasmarket(whichimpactedgeneratorunitcosts).•Policydiscontinuity,designerrorsvis-à-visclimatechangepolicy,andagenerallackofaunitedclimateandenergypolicyarchitecturecreateduncertaintyvis-à-vis(clean)generatorentryand(emissions-intensive)39generatorexit.•CoalplantexitcouldhavebeenbettermanagedintheNEMifthegasmarkethadbeenfunctioningproperly.Butregardless,transparencyaroundexittimingneededtobegreatlyimproved.•NetworkregulationintheNEMprovedtobeaweaknessthroughouttheperiod2004-15.Criticalerrorsweremadebycertainstategovernmentsvis-à-visreliabilitystandards,andtherulesweretooformulaictodealwithlargeshocks.40CHAPTER10.StrengthsandWeaknessesoftheNordicMarketModelChloéLeCoqandSebastianSchwenenTheNordicpowermarketcomprisesthenationalelectricitymarketsofNorway,Sweden,Finland,Denmarkand,morerecently,theBalticStates.Itischaracterisedbyrelativelylowmarketpricesandhighsharesoflow-carbongeneration,majorlyhydropower,nuclearpowerandincreasingsharesofwindpower.Itsuniquemulti-nationalarchitectureandgovernanceareitsstrengthsandweaknesses.Thereareclearbenefitsfrompoolinglow-carbontechnologiesacrossborders,havingoneNordicwholesalepricingsystem,andbeingunderoneregulatorybody.However,strongcoordinationbetweencountriesandneighbouringsystemoperatorsisrequired,especiallyconcerningcross-bordertrading,balancingandcongestionmanagement.1.AMulti-NationalMarketwithMulti-PartnerGovernanceTheNordicpowermarket,theso-called‘NordPool’,comprisesthenationalelectricitymarketsofNorway,Sweden,Finland,Denmarkand,morerecently,theBalticStates.Thedifferentnationalmarketshavebeenliberalisedandintegratedsuccessively,mainlybyadaptingandaligningnationalregulations.SwedenandNorwayfirstestablishedajointpowerexchangein1996,Finlandjoinedin1998,andDenmarkintegratedfullyin2000.TheintegrationoftheBalticStateswasdonegradually,withEstoniain2010,Lithuaniain2012,andLatviain2013.NordPoolcontinuedtoexpandwithtradingarrangementsandinterconnectionswithGermany,theNetherlands,PolandandtheUK.ThegovernanceofNordPoolisuniqueduetoitsbottom-upmulti-nationalapproach.TheNorwegianregulatoryauthorityistheregulatorybody,buttherespectivenationalregulatoryauthoritiesenforcemarketrules,andcongestionmanagementisthetaskofnationaltransmissionsystemoperators(TSO).Until2020,thephysicalpowerexchangeNordPoolwasanindependententityownedbyaconsortiumofNordicandBalticpowersystemoperators.TheEuropeanstockmarketoperatorEuronextowns66percentoftheNordPoolgroup,whiletheTSOsown34percent.2.HybridArchitectureandZonalPricingIntheNordics,electricityistradedviabilateralcontractsandonacentralisedpowerexchange.TradingontheNordicwholesaleelectricitymarkettakesplaceonasequenceofcross-bordermarkets,followedbyasetofnationalreal-timemarkets.Producers,retailersandenergy-intensiveconsumerscangraduallyadjustproductionanddeliveryplansbytradingonday-aheadandintradaymarkets.Ninety-fiveper41centoftheproducedelectricityistradedontheday-aheadmarket,eventhoughtheintradaymarketisincreasinginvolume.Since2014,day-aheadpriceshavebeendeterminedjointly,withmostEUpowermarketsusingthecommonpricecouplingalgorithmEUPHEMIA(seeChapter11foranoverviewoftheEUelectricitymarketmodel).TheNordicmarketcurrentlyexhibits15pricezones.Theconfigurationofzonesfollowsnationalbordersbutalsoincludesmultiplezoneswithinsomeindividualcountries.Finally,inFinlandandSweden,transmissionsystemoperatorsprocuresomereservecapacitiestobeusedincaseofimmediateriskofcapacityshortage.Toavoidanycompetitivedistortion,thecapacityincludedinsuch‘strategicreserves’doesnotparticipateinthecommercialpartofthemarket.3.LowPriceandAmbitiousClimateGoalsTherelativelylowmarketpriceusuallyobservedintheNordicsismainlyexplainedbytheflexibilitypotentialsacrossthesevenNordicandBalticcountries.Thereisacleardominanceofhydropower(around50percentoftotalproduction)and,toalesserextent,nuclearpower(about20percent).Wind,fossilfuelsandbiomasscontributearoundtenpercent,eightpercent,andfourpercentofelectricityproduction.Hydropowerresourcesaresovastthattheyoftenleadtolowmarketprices.ThereisalsorelativelylimitedevidenceofabuseofmarketpowerattheNordiclevel.Demandresponseprogramsarecurrentlynotwelldeveloped,despitetheaccesstosmartmetersandthederegulationoftheretailmarket.TheNordiccountriesshareambitiousclimatepolicytargets,withthecommongoaltoreduceenergyusagefromfossilfuelsclosetozeroby2050.Swedencommittedtononetemissionsby2045.Denmarkaimstobeindependentoffossilfuelsby2050,whenNorwayenvisagesbecomingcarbonneutral.Denmarkimplementedasupportschemeforrenewablesearlyon,in1993.Withtheirlargehydroandnuclearassets,NorwayandSwedeninsteadoptedforajointgreencertificatemarketin2012.TheNordicmarkethasbeenafrontrunnerwhenitcomestodecarbonisation.Althoughthismarkethashistoricallyexhibitedrelativelylow-carbongenerationduetoitsvasthydroresources,theNordiccountries(andtoalesserextent,theBalticStates)haveactivelypushedfortheconstructionofotherlow-carbonassets,mostlyfromwindenergy.WhiletheNordicmarketsarewell-endowedwithaportfolioofcarbon-freetechnologies,amajorchallengetotheirgenerationcapacitywillbetoreplacethenuclearpowergenerationinSweden(about40percentofnationalproduction),whichistobephasedoutby2040.Inaddition,safeguardingsecuresupplyisdealtwithforemostattheNordicratherthantheEuropeanlevel.TheNordicmodelhasreliedonstrategicreserveandmarketmechanismsandisconsideredanenergy-onlymarket.Whetherthatmechanismwillensurecapacityadequacyoncetheshareofwindandsolarpowerishigherisahotly-debatedissue(seeChapters15and16).42CHAPTER11.TheEvolutionoftheEuropeanModelforElectricityMarketsFabienRoquesTheEuropeanmodelforelectricitymarketshastakenthreesuccessiveshapesthatcanbetermedas:1)liberalisationofnationalmarketswithopenborders;2)EuropeanisationofnationalmarketsviaEUlegalpackagesandcommongridcodes;and3)hybridisationofnationalmarketstoreconcilepublicpolicyobjectivesandplanningwithcompetitivemarkets.1.LiberalisationofNationalMarketswithOpenBordersWiththeSingleActof1986,alltheEUMemberStatesagreedtoopentheireconomiesandremovetradebarriers.Thismovementtocreateasinglemarketreachedtheelectricityindustryin1996withtheadoptionofthefirstdirectiveconcerningcommonrulesfortheinternalmarketinelectricity.ThedirectivegaveEuropeancountriessignificantfreedomregardingthespecificapproachandprocessforliberalisingtheirelectricityindustry.Indeed,EUdirectivestypicallydefinethekeyprinciplesandtargets,butleteachMemberStatefinditswaywithitsownnationallawsandrulesinaprocesstermed‘nationaltransposition’,usuallywithatwo-yeardeadline.Theimplementationofthefirstelectricitydirectiveledtotheemergenceofdifferentnationalmarketsystems,dependingonthecountries’nationalindustrystructureandorganisation,theirenergyresourcesandforeignpartnerships.Asaresult,from1996to2009,differenttypesofnationalmarketsco-existedacrossEurope,withtwofundamentalrulesincommon:cross-bordertradehadtobeallowed,andnodiscriminationagainstproducersandsuppliersonthebasisofnationaloriginwaspermitted.Thislegalframeworkresultedinapatchworkofmarketrulesandorganisationacrossthedifferentcountries,with,forexample,centraldispatchandmandatorypoolsinsomecountriesandself-dispatchandvoluntaryexchangesinothers,continuousintradaytradinginsomecountriesanddiscreteauctionsinothers,differentapproachesforcontractingandactivatingreserves,etc.2.TowardanIntegratedEUElectricityMarket,viaEULegalPackagesandCommonGridCodesWhilsttheliberalisationofnationalelectricitymarketswasonitsway,theirintegrationintoasingleelectricitymarketatthecontinentallevelmadelittleprogress.Bytheendofthe1990s,itwasincreasinglyclearthatfurtherharmonisationofnationalmarketdesignswasnecessarytofacilitatemarketintegration.In2004,theEuropeanCommissiondevelopedasetofproposalstosupportwhatbecametheEuropean‘TargetModel’forelectricitymarkets.Theaimofthetargetmodelwasthegradualintegrationofmarketsthroughtheadoptionofasetofcommonrulesandnetworkcodes.In2009,the‘ThirdEnergyPackage’representedadecisivestep,becauseitestablished43aprocesstodevelopacommonsetofrulesforEuropeanenergymarkets.TheThirdPackagemandatedtheunbundlingofelectricitygridsfromgenerationandsupply,andconfirmedtheobligationtocreateindependentnationalenergyregulatorsresponsibleforcontrollingthird-partyaccesstothegrids.Inaddition,theThirdPackageestablishedanAgencyfortheCooperationofEnergyRegulators(ACER)tofostertheirEuropeanisation.AEuropeanNetworkofTransmissionSystemOperatorsforElectricity(ENTSO-E)wassetupwithasimilarpurpose:toEuropeanisetherelationsbetweennationalgrids.BothACERandENTSO-Ewerealsomandatedtodefinecommongridcodes,providingthedetailedrulesfor1)theconnectionofgenerationassetstothegrids;2)thecalculationandallocationofinterconnectioncapacity;3)theoperationofsystemsforcongestion,crisisandblack-outmanagement;4)thefacilitationofpowermarketoperationforforward,day-ahead,intradayandreal-timehorizons,etc.AnimportantstepforwardintheintegrationoftheEUmarketwasrepresentedbytheimplementationof‘marketcoupling’,whichallowsenergytraderstoimplicitlybidforgridcapacitythroughtheirenergybidsinsteadofbiddingintwoseparateauctions.Incouplednationalmarkets,nationaltransmissionsystemoperators(TSO)definetheleveloffirminterconnectioncapacityforthenextday.Nationalpowerexchangesusethatlevelasaninputtothecommonpricealgorithm,togetherwithallthebidssubmittedbythesellers(andbuyers)locatedwithintheinvolvednationalmarkets.Thealgorithmthenensuresthatthecheapestgeneratorsaredispatched,irrespectiveoftheirnationallocation,aslongassufficientinterconnectioncapacityisavailable.Despitethegradualextensionofmarketcoupling,theintegrationoftradingarrangementsalwaysremainedsomewhatlimited,becauseenergypoliciesareprimarilydefinedatthenationallevel.Thischoiceaffects,forinstance,theprocessofdevelopingcriticalinfrastructuressuchasinterconnectionsorthedefinitionofthegenerationmix.3.HybridisationofMarketstoReconcilePublicPolicyObjectivesandPlanningwithCompetitiveMarketsInparalleltothegradualintegrationofEUpowermarkets,the2000ssawtheemergenceofenvironmentaldecarbonisationobjectives,combinedwitharevivalofsecurityofsupplyandcompetitivenessconcerns.Thisnewpolicycontextmarkedaprofoundshift,becausethecreationofacompetitiveinternalmarketforelectricitywasnotanendobjectiveinandofitselfanymorebutwouldinsteadservetheotherpolicyobjectives–namelyensuringareliableandaffordablesupplyofenergytoEuropeancitizensandworkingtowardsthelong-termdecarbonisationoftheenergysector.Inconcreteterms,thesenewpolicyobjectivesledpolicymakerstointerveneinelectricitymarketsviaasetofuncoordinatednationalpolicyinterventionswhichgotinthewayoffurthermarketintegrationandledtoarangeofnewapproachesbeingexploredformarketdesignacrossEurope.TheprimarymotivationsforpublicinterventioncomprisethreemaindriversinmostEuropeancountries:•Theneedtoovercometheperceivedmarketfailuresthatundermineinvestmentinsufficientgenerationcapacitytosatisfygrowingloadneedsandmaintainsecurityofsupply.44•Thedeterminationofpartofthegenerationmixthroughsupportforrenewableorlow-carbontechnologies.•Systemplanningtooptimisegenerationandtransmissionsystemdevelopment.DespitethediversityacrossEuropeancountriesofmarketreformsandstateinterventions,anewmarketmodelbasedonthesamefundamentalprinciplesseemstoemergealmosteverywhere.Thismodelfeaturescompetitionintwosteps,with‘competitionforthemarket’(i.e.,forinvestmentinnewgeneratingcapacity)intheformoftendersforlong-termcontractsfollowedby‘competitioninthemarket’(i.e.,toorganiseanefficientsystemoperation)basedonthesetofexistingintegratedwholesalemarkets.Thefirststep,competitionforthemarket,typicallyinvolvesthetenderingoflong-termcontractsbasedonthetechnologyandinfrastructureindicativeplanningprocessesatnationalor,inanidealfuture,regionalandEuropeanlevels.Long-termcommitmentshelpfacilitateinvestmentandfinancingoflow-carbongenerationcapacityaswellasstorageandotherflexibilityresources.Suchlong-termcontractsandauctioningprocessesinvolvedifferentproductsdependingonthelocalelectricitysystemneeds,andthereiscurrentlyagreatdiversityofapproachesacrossEurope.Onekeyissueistoensurethatthesecontractsaredesignedinawaythatminimizesanypotentialdistortionsofthemarkets.Goingforward,anewhybridEuropeantargetmarketmodelcouldemergewhichwouldcoordinateandharmonisethetypesofcontractsandtheirinterfacewithshort-termmarket.Thisnewregimeofwholesaleelectricitymarketsischaracterisedas‘hybrid’becauseitmixesformsofpublicplanningandpublicpolicieswithastrongroleforthecompetitiveprocessbothtoinduceefficientinvestmentdecisions(throughtendering)andoperationofthesystem(throughasetofintegratedenergymarkets).45CHAPTER12.NewTechnologiesontheSupplySideNilsMayandKarstenNeuhoffNewtechnologiesbasedonrenewableenergysourcesarerevolutionisingelectricitysupply.Theyincreasinglysubstituteforthethermalpowerplantsthatemitgreenhousegaseswhichinturndriveclimatechange,andcanreducedependencyonfossilfuelimports.Thischapterdiscusses:1)theportfolioofnewtechnologies;2)theeconomicandregulatoryfactorsdeterminingtheirdeployment;and3)howsystemfriendlydesignsallowforhighsharesofrenewablepowergeneration.1.EvaluationofthePortfolioofNewTechnologiesTheemergingroleofdifferentrenewabletechnologiesisdeterminedbytheircurrentandprojectedcosts,theirresourceandenergypotentialandtheirpositiveandnegativeexternalities.Windandsolarpowerarethemostpromisingenergies.Conventionalrenewableenergiessuchashydropower,traditionalbiomassandwasteincinerationcontinuetoplaylargerolesglobally,buthavelimitedgrowthpotential,whichlimitstheirrelevancecomparedtonewerrenewableenergytechnologies.Windandsolarpowerhaveseentremendouscostreductionsoverthelastdecades,makingthemthecentraltechnologiesfordecarbonisingelectricitysystems.Forexample,theIEA’sNewPoliciesScenarioanticipatesanine-foldincreaseintheirdeployment.Biomassalsoexhibitsfavourableattributes,particularlydispatchability,whichmakesintegrationintoelectricitysystemsbuiltaroundthermalpowerplantseasier.However,thehighervalueofitsuseinaviationandfreighttransport,itsuseaschemicalfeedstock,aswellaseasystorabilityfordecentralisedandseasonalenergyneeds,suchasheating,suggestthatlimitedpotentialremainsfordeploymentintheelectricitysector,consideringthattheoverallpotentialforsustainablebiomassislimited.Furthertechnologiespossessinterestingcharacteristicsbutaremorelimitedbytheirresourcepotentialortechnologicalandeconomicdevelopmentstages.Geothermalenergyholdsmorepromiseforheatingpurposesthanforgeneratingelectricity.Electricitygenerationfromgeothermalenergyisconstrainedtospecificlocations.Tidalenergy,whilepotentiallyalsogeneratingelectricityreliably,dependsonspecificlocaltopologyandinvolveslargeengineering-typeinvestmentsthatexhibitlimitedcostreductionpotential.Therefore,itdoesnothavetheresourcepotentialtocoverasignificantshareofglobalelectricitydemand.Lastly,waveenergy,whileinprinciplepresentingalargeresourcepotential,isatanearlytechnologystageandhasyettoovercometechnologicalchallengesanddemonstrateitseconomicviability.462.TheEconomicsofRenewableTechnologiesThedecreasedcostsofrenewableshavesignificantlyimprovedtheircompetitivenessagainstconventionaltechnologiesandhavebeenchangingtheroleofremunerationmechanisms.Initially,policysupportwasgrantedbecauserenewableenergiesproduceelectricitywithoutgreenhousegasemissions,becausecountrieswantedtoestablishanationalindustry,andtosupportlearningwiththehopethatcostscouldgodownovertime.Thissupportwasallthemorewarrantedbecausenegativeexternalitiesgeneratedbytheuseofcoal,naturalgasandnuclearpowerplantssuchasgreenhousegasemissions,importdependencyandnuclearwastewerenotreflectedinthepricesoftheelectricityproduced.Nowadays,investmentsintowindandsolarpowerincreasinglyoftencostlessthannewinvestmentsintoconventionalthermalcapacity,evenifenvironmentalandsecurityexternalitiesarenotpriced.Withcheaperrenewableenergiesandrisingcarbonprices,thisindicatesthecompetitivenessofwindandsolarenergyandputsaquestionmarkovertheeconomicsustainabilityofinvestmentsintothermalpowerplants.Themaindeterminantfortheeconomicviabilityofprivatesectorinvestmentsinrenewableenergyisnowtherelativefinancingcostsforrenewableandconventionalprojects.Thesecostsarelargelydeterminedbyregulatorychoices–suchastheelectricitymarketdesign,thedevelopmentoftheelectricitygrid,theenvironmentalpoliciesputinplaceandtheavailableremunerationmechanisms.Hence,despitethesocietalbenefitsofanacceleratedshifttoaportfolioofrenewabletechnologies,investmentchoicestorealisethesebenefitsmaystillbehinderedifgovernmentsfailtoaddressregulatoryrisksadequately.3.System-FriendlyRenewableEnergyDeploymentTheoutputofwindandsolarpowerplantsisintermittent,suchthatpowersystemswithlimitedflexibilityandsignificantsharesofwindandsolargenerationcapacityexhibitrelativelylowerelectricitypriceswhenitiswindyorsunnyandrelativelyhighpriceswhenitisnot.Inthenorthernhemisphere,windandsolarpowerareoftencomplementary–e.g.,windpowergeneratesmostlyinfallandwinter,whilePVsolargeneratesmostlyinspringandsummer.Onadailylevel,thewindblowsstrongestatnight,whereasthesunshinesexclusivelybyday.Thesecomplementaritiesexplainthebenefitofarenewabletechnologymix.Portfoliosofseveraltechnologiescanalsopayofflong-termwhenanyindividualtechnology’spotentialislimited.Besidesportfoliosofrenewableenergytechnologies,therearemanyapproachestodealingwithintermittency.System-friendlywindandsolarpowerplantdesignsandlocationsshifttheirproductiontohourswithlowersupply.Todecreasecorrelationwiththeoutputofothersolarpanels,alternativeorientationswestandeastinsteadofsouth(inthenorthernhemisphere)arediscussed,whichsacrificesomeoutputintermsofMWhachievableinexchangeforhighermarketvaluesforthepowerproduced.Themarketdesigncansupporttheflexiblerampingofconventionalplantsandfacilitatetheexchangebetweenregionsandcountries.Demand-sidemanagementcanadjustdemandtoelectricitypricesandreduceorshiftdemandwhenhighpricesoccur.Storingelectricity,forexampleinbatteriesorinpumped-hydrostations,shiftssupplyofelectricityfromhourswheresupplyisrelativelyhightohourswhereitisrelativelylow.Requiredstoragelevelsarenotextremelyhighwhensystemoperatorsareallowedtocurtailsmallamountsofrenewableenergyproduction.47CHAPTER13.NewTechnologiesontheDemandSideFereidoonSioshansiThedemandsideoftheelectricitysectorhastraditionallybeentreatedaspassiveandinelastic,withconsumersreceivingtheenergytosatisfyalltheirneedsfromthenetworktowhichtheyareconnected,andpayingabundledregulatedtariffthatincludesallcomponentsofservice(i.e.,generation,transmission,distributionandretailservice).Thisnarrativeisbreakingdownbecausemanyconsumersarebecomingprosumersorevenprosumagers.Newdemand-sidetechnologiesandintermediariesenablethistransition,whichhassignificantimplicationsforthesector.1.WhyandHowConsumersandDemandareChanging?Historically,everycustomerreliedonthenetworktowhichshewasconnectedforallherelectricityservices.Thisincludedgenerationofenergy,itstransmissionanddeliveryaswellasmeteringandbillingandotherservices,typicallyfromasingle,verticallyintegratedandregulatedmonopoly.Thecustomerusedtopayforthis‘bundled’serviceprimarilythroughavolumetricandregulatedtariff.Theelectricutilityusedtoconsiderthecustomerasapassiveconsumerwithinelasticdemandandusedtoinvestinadequateinfrastructureupstreamofthemetertoservethecustomer’sneedsunderanynormalcircumstance.Thisarrangement,whichstillprevailsinmanypartsoftheworldwithstate-ownedandverticallyintegratedutilities,wasconvenientandsimpletomanageandoperatewhentheindustrywascentralisedandmostgenerationcamefromthermalplantsinone-wayflowstofinalconsumers.Itprovidedsufficientrevenuestorecoverfixedandvariablecosts,andtofinanceandoperatetheinfrastructureupstreamofthemeter.Fewtechnologiesorincentivesexistedtomanagedemandorshiftitfromonehourtotheother.Customershadvirtuallynooptionsbuttobuyfromthenetworkatthetariffsetbytheregulatorand/orgovernment.Thisparadigmisgraduallychangingbecausesomecustomersnowhaveoptionstoproducesomeormostoftheelectricitytheyconsume,makingthemprosumers,and/orproducingandstoringsomeofthatgeneration,makingthemprosumagers.TheformerismadepossibleprimarilyduetothefallingcostofrooftopsolarPVs;thelatterduetothefallingcostofstorage,notonlyinbatteriesbutinwatertanks,inelectricvehicles(EV),andsoon.Asanexample,overthreemillionconsumersinAustralianowhaverooftopsolarpanels,withprojectionsforthisnumbertodoubleby2030(seeChapter9formoreinformationontheAustralianelectricitymarket).ThenumberofprosumersintheUSnowexceeds2.3millionandasimilartrendisvisibleinGermanyandotherEuropeancountries.Thenextdevelopmentonthedemandsidewillbedistributedstorage:CaliforniaalreadyhasoveronemillionEVs,whicharesimplystorageonwheels.482.HowistheTransitionofCustomersandDemandEnabledbyNewIntermediaries?BecauseofthedigitalisationofapplianceswhichareincreasinglyconnectedandaddressableviatheInternet,customerdemandcannowbemonitoredandmanaged.Thishasledtotheemergenceofsmartintermediariesusingsophisticatedsoftware–suchasAIandmachinelearning–toaggregatelargeportfoliosofcustomerloadsandoptimisethem,basedonwholesaleprices,congestiononthetransmissionordistributionnetworkandvariableretailprices,whicharebecomingcommonplaceinmanyrestructuredelectricitysystems.Thesignificanceoftheintermediariesandaggregatorsisthattheymakeiteasyforconsumers,prosumersandprosumagerstobecomeactiveparticipantsinelectricitymarkets,e.g.byofferingproductsandservicestothenetwork,ratherthanbuyingfromthenetwork.Thishasledtotheriseofvirtualpowerplantsanddigitalplatformstotradeelectricity,managecongestiononthedistributionnetwork,usestorageenergyinEVstomeetpeakdemand,andavarietyofotheroptionsnotpreviouslyavailabletocustomers.3.WhataretheImplicationsoftheTransformationofCustomersandDemand?Theimplicationsofthetransformationofpassiveconsumersintoactiveparticipantsenabledbynewdemand-sidetechnologiesandsmartintermediariesareprofound.Forexample,inSouthAustralia,onmanysunnyand/orwindydays,theentireelectricitydemandismetbyrenewableresources,mostofthemdistributedrooftopsolarpanels.Inthosehours,wholesalepricesfallsignificantly,toriseagainassoonasthesungoesdown.InCalifornia,onthecontrary,theprojecteddeploymentof7.5millionEVsby2030willofferamassivestoragepotentialthatcouldsoakupmuchoftheexcesssolargenerationonsunnydaysandfeeditbacktothegridaftersunset.Theconsequence,inthiscase,couldbeaflatteningofthefamous‘duckcurve’ofwholesaleelectricityprices.Thesebehind-the-meterdevelopments,whicharecurrentlyconcentratedinafewcountries,areexpectedtospreadaroundtheworldasthecostofdistributedgenerationpairedwithstoragecontinuestofall.Importantly,theywillnotonlyoffernewopportunitiestocustomers:ifproperlymanaged,theywillalsomakeiteasierforgridoperatorstomanagetheelectricitysysteminafutureincreasinglydominatedbyvariableelectricitygeneration.Withthehelpofdigitalplatformsandsmartintermediaries,activeconsumerswillbeabletoprovidenewsourcesofflexibilitytothesysteminarathereffortlessway.Byreactingtopricesandincentives,customerswillcontribute,toamuchlargerdegreethaninthepast,tothebalancingofsupplyanddemandandtothesolutionoflocalcongestionoranyotherissueoccurringonthegrid.49CHAPTER14.ToolsandPoliciestoPromoteDecarbonisationoftheElectricitySectorKathryneCleary,CarolynFischerandKarenPalmerAsthethreatsposedbyclimatechangeintensifyworldwide,manygovernmentsarelookingtodecarboniseelectricitygeneration,whichhashistoricallyreliedlargelyontheburningoffossilfuels.Inadditiontobeingconsideredthe‘low-hangingfruit’ofeconomy-widedecarbonisation,reducingemissionsfromelectricitygenerationcanalsoenablegreaterreductionsinothersectors,astransportandbuildingspursueelectrification.Thischapterexploresthevariouspolicymechanismscurrentlyinuseandunderconsiderationaroundtheworldfordecarbonisingelectricitygeneration.1.Price-BasedMechanismsMarket-basedpricingpoliciesaretypicallymorecost-effectiveatreducingemissionsthanlessflexibleregulatoryortechnologymandates,andhavebeenappliedsuccessfullyaroundtheglobe.Carbonpricingcanbeimplementedthroughtheestablishmentofcap-and-trademechanismsortheadoptionofcarbontaxes,aswellastradableperformancestandardsthatsetexplicitemissionsintensitystandards.Marketmechanismscanalsobeusedtoachievetargetsforamixoftechnologies,includingcleanenergystandardsandrenewableportfoliostandards(RPS).Policiesthatsetapricedirectlyonthecarbonsourceleveragethemostopportunitiesforreducingemissions,fromencouragingtheuseofmoreefficientandlesspollutingsourcestoreducingelectricityconsumptionoverall.Carbontaxesandcap-and-tradeprogramsinvolvedifferentdesignchoices–suchasdeterminingstringency,allocatingrevenues,orallowingalternativecomplianceoptions–buttheycantheoreticallyachievethesameefficiencyoutcomeifthepriceonemissionsisequaltothemarginaldamageinflictedbycarbonemissions.Aroundtheworld,64carbon-pricinginstrumentsarealreadyinoperation,fairlyevenlysplitbetweencarbontaxesandemissiontradingschemes.Tradableperformancestandardsrequirethepowersectortomeetaspecificemissionsperformancerequirementorintensitytarget.Theycanbecosteffectiveinmanysituations,asthetradingofcreditsacrossindividualpowerplantsorelectricityretailersalignsincentivesonthemargintoreduceemissions.However,theyarenotasefficientasdirectcarbonpricingbecausethebenchmarkcreditallocationfunctionsasanimplicitsubsidytogeneration.Bydiminishingthepass-throughofaverageembodiedcarboncostsintoelectricityprices,pricesignalsarelesslikelytoencourageconservationasameansofavoidingemissions.Somesystems,likethenascentChineseemissiontradingscheme,alsodifferentiatebenchmarksinwaysthatpresenthigher-emittingsourceswithhigherintensitytargets.Whilethisdifferentiationmayalleviatesomedistributionalconcerns,itcomesatanadditionalefficiencycost,becausemoregenerous‘defacto’subsidiesforhigheremittersdiscouragefuelswitchingasameansofreducingemissions.50Portfolio-basedpolicies,suchascleanelectricitystandardsandrenewableelectricitystandards,requireacertainpercentageofelectricitysalesorgenerationtobecarbon-freeorlow-carbonorcomefromacertainsubsetofcleantechnologies.Whiletheycanbeeffectiveatreducingemissions,thesepoliciesarelessefficientthandirectcarbonpricingbecausetheyexcludeincentivesforsomelow-costtypesofemissionsreductions,likereducingtheemissionsintensityoffossilfuelsources,reducingenergyuse,ortakingadvantageoflow-carbongenerationalternativesthat,whilecheaper,arenoteligibleforcreditunderthepolicy.Whenemissionsleakageisaconcern,policiesliketradablestandardsorotherformsofoutput-basedrebatingofemissionsrevenuescanbeausefultoolforencouraginggenerationofelectricityinareascoveredbythepolicyandtherebydiscouragingincreasedpowerimportsfromunregulatedregions.Analternativemechanism,usedbyCalifornia,isbordercarbonadjustment,whichimposescarbonpricingontheemissionsassociatedwithimportedelectricity.Thisapproachallowsforfullerpass-throughofcarbonpricesignalstoendusers.2.Technology-SpecificMechanismsOtherpoliciesthattargetspecifictechnologieshavebeenusedinmanypartsoftheworld,particularlywhenthetechnologiesarenascentandhavenotyetachievedmaturity.Thisgroupincludespoliciesthattargetsupportforrenewablesorthephasingoutofcarbonintensivetechnologiesthatburnfossilfuelssuchascoal.Technology-focusedpolicieshavebeenparticularlypopularforpromotingrenewables.Arenewablepromotionpolicythathasbecomewidespreadthroughouttheworldisthefeed-intariff(FiT),whichprovidesaguaranteedsubsidypaymentperkWhofelectricitygeneratedfromrenewableenergysourcessuchassolarandwind.AlthoughFiTexpenditureshavebeencostly,thereisevidencethatsuchpriceguaranteeenhancesadoptionoffossil-freeenergy.Today,auctionsareemergingasanefficientmeansforsettingthelevelofsupportprices.IntheUS,manystateshaveRPSprograms,whilethefederalgovernmentofferstaxcreditsforwindandsolar.Policiesonnuclearpowervaryacrosstheglobe.Insomelocations,nuclearpowerreceivesfinancialsupportforitscarbon-freeattributes;inothers,itisbeingpurposefullyphasedoutduetoconcernsaboutthesafetyofthefacilitiesandofspentfuel.Forexample,severalUSstatesprovidesupportforuneconomicnuclearplantsintheformofzeroemissionscredits,whileGermanyandSwitzerlandarechoosingtophaseoutnuclearpowerduetosafetyconcerns.Ingeneral,policiesthattargetspecifictechnologiesratherthantheoutcomesassociatedwithusingthosetechnologies,suchasloweremissions,arecostlierstrategiesforreducingemissionscomparedtocarbonpricingorperformance-basedpolicies.3.EnergyEfficiencyWhilecertainpolicies,suchascarbonpricing,doprovideincentivestoreduceenergyconsumption,manyothersdonot;policiesthatpromoteparticulartechnologies51couldevenencourageconsumptionbyloweringelectricityprices.Moreover,researchsuggeststhathouseholdsandbusinessestendtounderinvestinenergyefficiencymeasuresfornumerousreasonsandthusfailtorealisecost-effectiveenergysavingsthatcouldhelptolowerthecostsoftheenergyservicestheyconsume,aswellasoverallemissions.Inordertobothreduceenergy-relatedemissionsandtoaddressconcernsaboutmarketfailuresintheadoptionofenergyefficientsolutions,manyjurisdictionssetspecifictargetsforenergyconsumptionandimplementspecificmeasuresfosteringenergyefficiency.Suchmeasuresincludebuildingcodesandappliancestandardsthatrequireminimumperformancelevels.AnotherpolicypopularinEuropeandinseveralUSstatesistheenergyefficiencyresourcestandard,which,likeanRPS,requiresthatautilityachievesacertainminimumpercentageofelectricitysavingsandmayfacilitatecredittradingforeachMWhofelectricitynotconsumed.Othermeasuresaretargetedathouseholdsandbusinesses,includingsubsidiesforenergyefficientequipment,informationcampaignsandlabelling,aswellasbehaviouralnudgessuchashomeenergyreportsthatuseinsightsfrombehaviouraleconomicstochangeconsumerchoicesaboutenergyuse.4.PolicyInteractionsTheeffectsofthepoliciesdescribedhereareoftenstudiedindependently,butjurisdictionsrarelyintroduceanyoneofthesepoliciesinisolation.Whetherornottheimplementationofmultiplepoliciesinconcertprovidesadditionalemissionsreductionsorenhanceseconomicefficiencymoregenerallydependsonthedesignofthepolicies(specificallyiftheyrelyonfixedpricesormarket-determinedprices)andifalsotheytargetmarketfailuresotherthantheenvironmentalones.Forexample,combiningrenewablesupportwithacap-and-tradeprogramwillnotleadtoadditionalemissionsreductions,duetoa‘waterbedeffect’.Sincetheexpansionofrenewablesreducesdemandforemissionallowances,themarketrespondswithalowercarbonprice,whichdecreasestheincentivetocutemissionsbyothermeans.Bycontrast,withacarbontax,additionalrenewablesupportcangenerateadditionalemissionsreductions,becausethepriceofcarbondoesnotchangeinresponsetomarketconditions.Evenifinteractingpoliciesdonotleadtoadditionalemissionsreductions,theycanstillprovidesocietalvalueiftheyaddressdifferentmarketfailures.Forexample,ifthemarkethasfailedtodeliveranefficientlevelofinnovation,thenapolicytargetedtoaddressthatfailurecanworktogetherwiththeemissionscaptoprovideadditionalsocietalvalue.Policyinteractionsneedtobetreatedwithcaution,astheycanhaveunintendedconsequences,suchasincreasingcoststosociety.However,ifdesignedandintroducedcarefully,asuiteofthepoliciesdescribedherecouldbenefitsocietybyfirstreducingthecostofnascenttechnologiesandthenhelpingtointroduceandgraduallyratchetuparobustcarbonprice.52CHAPTER15.ShiftingSupplyasWellasDemand:TheNewEconomicsofElectricitywithHighRenewablesRichardGreenThedemandforelectricityhasalwaysvariedaccordingtotheseasonandtimeofday,andfossil-fuelandhydroelectricgeneratorshaveadjustedtheiroutputtomeetit.Windandsolargenerationareneededtoreducecarbondioxideemissions,buttheiroutputislimitedbytheweather,raisingthefollowingissues.First,howwillthischangethepatternandlevelofprices?Second,whatdosystemoperatorshavetodotokeepthepowergridsrunningsmoothly?Third,howwouldthegrowthofelectricitystorageaffectthewayinwhichpricesareset?1.HowdoRenewablesAffectPriceSettingElectricitywholesalemarketshavebeenbuiltonamodelofsupplyanddemandinwhichthequantitydemandedvariesovertimeandisnotverysensitivetoprices.Onlyafewelectricityconsumerspayretailpricesthatvarywiththewholesaleprice,andsomosthavenoreasontoreducedemandwhenwholesalepricesrise.Onthesupplyside,thepowerstationsavailabledonotchangeverymuchintheshortterm,buttheyonlygeneratewhenthepriceishighenoughtomakegenerationworthwhile.Whendemandislow,itcanbemetfrompowerstationswithlowvariablecosts,andpricesarealsolow.Higherdemandsrequiremoreexpensivestations(intermsoftheirvariablecosts)tobeturnedon,andpricesrise.Chapters3and4inthishandbookshowhowthehighestpricesatpeaktimescanallowallgeneratorstorecovertheircostsinfull,aslongaswehavetherightcapacitiesinstalled.Windandsolargeneratorsarenotalwaysavailable;PVpanelsgeneratenothingatnight,andtheamountofwindoutputvariesstronglywiththewindspeed.Thismeansthattheindustry’ssupplycurvenowshiftsovertimeandmaynotbecorrelatedwithdemand.CountrieswithalotofsolarPVmayhaverelativelylowpricesinthemiddleoftheday,followedbymuchhigherpricesifdemandrisesasthesungoesdown.ThiscanaffecttheaveragerevenueperkWhgeneratedthatdifferentpowerstationsreceive.Mostnuclearstationsproducethesameoutputallthetimeandsoearnveryclosetothetime-weightedaverageprice(obtainedbyaddingallthehourlypricesovertheyearanddividingby8760).Fossil-fuelledpowerstationsgeneratemorewhenpricesarehigh,andsotheiroutput-weightedpricesarehigherthanthetime-weightedaverage.Becauserenewablegeneratorstypicallyproduceatsimilartimesandreducethemarketpricewhentheydo,theytendtoearnlessthanthetime-weightedaveragepriceforeachkWhtheygenerate.Thisisalong-runeffect,whichmeansthathavingalevelisedcostofelectricityequaltothemarketprice(so-called‘gridparity’)maynotoffersufficientincomeforwind53orsolargeneratorstocompetewithoutgovernmentsupport.Thiseffectisseparatefromthe‘meritordereffect’,whichistheshort-runconsequenceofaddingrenewablecapacitytoamarketandreducingaveragepricesuntilthecapacityofothergeneratorshasadjustedtomakeupforit(marketsalmostalwaysseelowerpricesifsupplyisgrowingfasterthandemand).2.WhatdoSystemOperatorsHavetodotoAccommodateRenewablesWhentheelectricityindustrystarted,powerstationshadtobeveryclosetoconsumers,butoncelong-distancetransmissionbecamepossible,theexploitationofeconomiesofscaleingenerationstartedtooccur.Theconnectionofalargenumberofconsumersandpowerstationstothesamegridthenreducedtheimportanceofindividualchangesindemandorstationavailability.Long-distancetransmissionallowsstationstobebuiltinthemostsuitableplaces,suchasclosetofuelsources.Thisisevenmoreimportantforrenewablegenerators,sincetheiroutputdependsonthestrengthofthesunandthewind,whichcanbestrongestalongwayfromwheremostconsumersarelocated.Buildingnewtransmissionlinescantakealongtimeifpeoplelivingalongtheroutehavetobeconsultedaboutit.Ifanareahasmorerenewableoutputthanthetransmissionsystemcancarry,someofthatoutputcannotbeused.Settinglocalornodalprices,ratherthanasinglemarket-wideprice,canhelptosignalthevalueofelectricityindifferentplaces.Tokeepapowersystemstable,theoperatorsmakesurethattheyalwayshavesomestationsinreserve,andareabletoincreaseoutputquicklyinresponsetoafaultorachangeindemand.Ifrenewableoutputismorevariablethanothersources,morereservecapacitywillbeneeded,increasingcosts.The‘free’inertiaprovidedbythespinningturbinesoffossil-fuel,hydroandnucleargeneratorsslowstherateatwhichthesystemfrequencyfallsorincreasesafterafault.Ifthereistoolittleinertiaavailable,systemoperatorsmayhavetoolittletimetodealwithanyproblemsbeforethefrequencybecomestoolowortoohigh.AswindandsolarPVgeneratorshavenoinertia,thislimitstheproportionofoutputthattheycanprovideinacertainsystem.Ireland’ssystemoperatorssometimeshavetospillrenewableoutputforthisreason,althoughtheyhavealsoboughtfast-actingreservestoreducetheamountofinertiatheyneed.3.HowdoesElectricityStorageChangePriceSettingBatteriesareagoodsourceoffast-actingreserves,andtheircostshavebeenfallingdramaticallyinrecentyears.Anumberofcompaniesarethereforeinvestingingrid-scalebatterysystems.Theycanarbitragebetweenperiodsofhighandlowprices,chargingwhenelectricityischeapanddischargingwhenitismoreexpensive.Putanotherway,theycanstoreelectricitywhenrenewablegenerationishighrelativetodemandanddischargeitlaterwhenlessoutputisavailable.Inmanycountries,pumpedstoragehydroschemeshavebeendoingthesamethingfordecades,pumpingwatertoanupperreservoirwhenpricesarelowandgeneratingwhentheyarehigher.Addingelectricitydemandwhenpricesarelowandsupplyelectricitywhentheyarehighmakesthosepriceslessvolatile.54Formostgenerators,thevariablecostofelectricityisdominatedbythecostofbuyingtheirfuel(orreplacingthestocksthattheywillburniftheygenerate,asitisthecurrentcostthatmatter,notthehistoricalone).Hydrogeneratorsgettheir‘fuel’forfree,ofcourse,buttheyfaceanopportunitycostasthewaterusedatacertainpointintimecannotbereusedlater.IntheNordiccountries,whichhaveaveryhighshareofhydrogeneration,thisopportunitycostisknownasthe‘watervalue’andisakeydriverofprices.Whenthereservoirsarefull,pricescanbelow,butifwaterisscarce,higherpriceshelpreducedemandandreflectthehighermarginalcostofproducingagreatershareofoutputfromothergenerators.Theeconomicsofhydropricingcanbeextendedtothecaseofrechargeablestorage,suchasbatteries.Thevalueofelectricityinstoragereflectsthepricethatwillbepaidforitwhenthestorageisdischarged.Itmustalsotakeintoaccountthecostofcharging.Ifabatteryis90percentefficient,thenthecostof10MWhusedinchargingmustbelowerthantherevenueitexpectstoearnfromdischarging9MWh.Inotherwords,thepriceatthetimeofchargingmustbelessthan90percentofthepricewhendischarging,andthedifferencemustbegreatersomeofthetimeifthebatteryistorecoveritsfixedcosts.Electricitystoragewillbeabletosmoothsomeofthepricefluctuationscausedbyvariationsinrenewablegeneration,butitcannotgetridofthemall.Thefundamentalsofelectricitymarketdesignarenotaffectedbytheriseofrenewablegeneration,butsomechangestomarketrulesarelikelytobehelpful,asdiscussedinChapter16ofthisbook.55CHAPTER16.TheFutureDesignoftheElectricityMarketMichaelG.PollittThischapterexploressomeoftheissuesconfrontingthefuturedesignoftheelectricitymarket,buildingonthepreviouschapter.Indoingsoitassumesthatthemarketdesignwillhavetocopewithincreasingamountsofintermittentrenewableelectricitygeneration,drivenbyconcernsaboutfossilfuelemissions,therelativelylowcostsofrenewableelectricitygeneration,andtheincreasinglyflexiblenatureofelectricitydemandcharacterisedbyEVs,electricheatingandelectricalenergystorage.1.AnEvolvingElectricitySystemWehaveinminddevelopmentsinthreemajorelectricitymarkets:Europe,theUSandChina.Collectively,theserepresentedmorethan58percentofworldelectricityconsumptionin20161.InEurope,the2030energyandclimategoalssuggestthat55percentofelectricitywillcomefromrenewableenergysourcesby2030(seeNewberyetal.,2018).IntheUS,individualstatessuchasCalifornia,NewYorkandtheNewEnglandstateshavesimilarlyboldplansfortheadditionofrenewableenergytotheirelectricitygrids2.InChina,ambitioustargetsforthereductionoflocalairpollutionanddecarbonisationimplyalargeincreaseintheshareofrenewable(andnuclear)electricitygeneration3.Whateachofthesemarketshaveincommonisthattheycurrentlyhaveelectricitysystemsbasedonfossilfuels.TheUSandEuropehavemarketdesignsforwholesaleelectricitytradethatweredevelopedwithfossilfuelgenerationinmind.Chapter2discussestheevolutionofthistraditionalmodeloftheelectricitymarketandChapter4detailsthecurrentstateoflearningonexistingwholesaleelectricitymarketsofthistype.ThesechaptersdrawheavilyontheextensiveexperienceofwholesaleelectricitymarketsintheUS.AsChinaattemptstointroducecomprehensiveelectricitymarketsforthefirsttime(seeChapter21),debateisstillunderwayastowhichmarketdesigntoadopt,withmanyprovincesintheprocessofintroducingacombinationofspotmarketsbasedonthemodeloftheAmericanPJMandcontractmarketsbasedonEuropeanpowerexchanges.2.ManyPossibleDesignsInthischapter,webeginbydiscussingwhymarketdesignforelectricitymarketsis1.Source:IEAElectricityInformation2018(OECDEurope,USandChina).2.California,NewYorkandConnecticuthave50percent,70percentand48percenttargetsfortheshareofrenewableelectricityby2030(seeforexample:https://www.eia.gov/todayinenergy/detail.php?id=38492).3.In2018,China’sNationalDevelopmentandReformCommission(NDRC)proposedanincreaseintotalrenewableenergyacrosstheeconomyto35percentin2030(asagainst32.5percentintheEU)(seehttps://www.bloomberg.com/news/articles/2018-09-26/china-sets-out-new-clean-energy-goals-penalties-in-revised-plan).56sodifficult.WewillthengoontocomparethePJMmarketdesign(describedindetailinChapter7)–whichisbasedoncentralisedmarketsrunbyanindependentsystemoperator(ISO)–withtheEuropeanmarketdesignthatisbasedonself-dispatch.Next,wediscusshowintermittentrenewablesandflexibledemandarestresstestingcurrentmarketdesigns.Wegoontodiscusstheconcernsofregulatorsandhowtheserelatetomarketdesign,emphasisinghowregulatorshavemultiplepolicyobjectiveswhichincludeadesiretolimithigh(andlow)pricesandpricediscrimination.Inthefollowingsection,weexaminethenatureofthefirmandmarketchoices,andhowthesearedirectlyrelevanttofuturemarketdesigns.Here,wepointoutthatelectricityeconomistsemphasiseflexiblemarketarrangementswhichmaximisewelfare,whereaselectricalengineerstendtofavourmechanisticpricingarrangements.Theselaterarrangementsoftenfavourproducers’interests(whocanbetterunderstandhowtogamethem).Weconcludewithadiscussionofpotentialnewmarketarrangementsthatareradicallydifferentfromcurrentmarketdesigns,drawingonideasfromthemanagementoftheInternet,andhybridarrangementswhichcombineelementsofcurrentmarketdesignswithradicallydifferentarrangements.3.TwoAlternativeViewsItisquitefashionableamongelectricalengineerstosuggestthatthefutureoftheelectricitymarketinvolvesmoreuseoftime-of-dayandlocationalpricesignalsthanweseetoday(followingSchweppeetal.,1988).Thisisbecausethenatureofintermittentrenewablesandflexibledemandwillmeanthatthereismorevalueinsignallingunderlyingsystemcostsmoreclearly.Theideaisthatthesetypesofpricesignalswillbemorenecessaryinaworldwhereconsumerscanvarywhenandwheretheychargetheirstoragedevicesandelectricvehicles;whereinvestorscanchoosewheretoplacetheirpowerplants;andwherenetworkcompaniesareunderpressuretodecentralisetheiroperationsandoutsourcecertainnetworkfunctionswhereverpossible(see,forexample,EPRI,2015;MIT,2016).InlinewiththeideasexpoundedbyRonaldCoasein1937,theeconomistsoftodayneedtoexplainjusthowextremethisviewoffuturespotmarketsis.Currently,mostproductsaresubjecttosimplepricing,andcustomersexpecttheprovidersoftheproductstomanagetheirowninternalcostsofprovisiontodifferentcustomers.Onlycertaintypesofpricediscriminationareacceptableandworthdoing,inconditionswheresimpleadvertisingmessages,corporatetrustandperceivedfairnessinpricingareimportantconsiderationsforcorporatepricingpolicy.Thatisnottosaythatsomeprovidersofservicestotheelectricitysystemcannotbeexposedtopricesthatvaryintermsoftimeandspace,buttheopportunitytoexposeallpartiestothesesortsofpricesislimited.Engineersadvocatingsuchspotmarketsalsofailtotakeseriouslytherealityofmarketpowerandthelinkagesbetweenmarkets.AsdiscussedatlengthinChapters2and4,marketpowerispervasiveintheelectricitysystemandwasoneoftheoriginalreasonsfortheintroductionofregulation.Marketpowertendstoincreasewherethereismarketfragmentation.Itcanbehandledindifferentways.Onewayistobringproductioninhouseandregulatetheoverallactivity;anotheristohavewideareamarketswithsuppressionofnodalpricing.Finally,thereisnoreasontoassumethatunregulatedmarketsforrelatedactivities,suchasenergy,non-energyancillaryservicesandnetworkinvestments,cumulativelyadduptoasocialoptimum,according57tothetheoryofthesecondbest.Indeed,itisonlyunderextremeconditionsthatthegeneralequilibriumwillbeefficientoverall.Advocatesoftheuseofextremelygranularpricesshouldrememberthat.References1.Coase,R.H.(1937),‘TheNatureoftheFirm’,Economica,4(16),386-405.2.ENTSO-E(2018),ElectricityBalancinginEurope,Brussels:EuropeanNetworkofTransmissionSystemOperatorsforElectricity.3.EPRI(2015),TheIntegratedGrid-ABenefit-CostFramework,PaloAlto,CA:ElectricPowerResearchInstitute.4.MIT(2016),UtilityoftheFuture,Cambridge,MA:MassachusettsInstituteofTechnology.5.Newbery,D.,M.G.Pollitt,R.A.RitzandW.Strielkowski(2018),‘Marketdesignforahigh-renewablesEuropeanelectricitysystem’,RenewableandSustainableEnergyReviews,91(August),695-707.6.Schweppe,F.C.,Caramanis,M.C.,Tabors,R.D.andR.E.Bohn(1988),SpotPricingofElectricity,NewYork:Springer.58CHAPTER17.NewBusinessModelsintheElectricitySectorJean-MichelGlachant1Sincearound2010,theelectricityindustryhasenteredanewrevolutionaryphase,asbigastheonetriggered20yearsbeforebytheintroductionofcombined-cyclegasturbines(CCGT)andthecreationofopenmarketsforpower.Thisnewrevolutioncanbecharacterised,likethepreviousone,bythedeploymentofnewgenerationassets(inthiscasemostlyintermittentanddistributedrenewableenergysourceslikewindandsolarphotovoltaic),andanewtransactionframe,aspermittedbythegrowingdigitalisationofgeneration,consumptionandtrade.Insuchacontext,existingbusinessmodelscanchangeandnewonescanbeinvented,testedandadopted.Thesenewmodelsarelinkedtothenewassetsbeingusedtogreentheelectricitygenerationmix,andtothenewproductcharacteristicsthatdigitalisationallows.Therefore,asimplewaytofollowtherenewalofbusinessmodelsintheelectricitysectorisfirsttotrackthenewassetsbeingdeployedandtherevenuestreamsnurturingthem,andthentotrackthenewproductcharacteristicswhichdigitalisationmakespossiblefortargetedcustomers.Betweenthesetwostrongavenuesofchangestandtheelectricgrids,bothtransmissionanddistribution,whichalsohavetoreinventtheirbusinessmodelsbut,becausetheyarebothregulated,donothaveafreehandtodoso.1.NewAssetsandNewRevenueStreamsforGreeningElectricityRenewableslikewindandsolarfavourdistributedgeneration(DG)andpermitdeploymentofmuchsmallergenerationunits,openingtheelectricityindustrytonewtypesofinvestors,includinglocalauthorities,communitiesandindividuals.However,thecoststructureoftheseassets(mainlyfixedcapitalcoststobepaidupfront)andtheirintermittentoutputplaceaquestionmarkovertheviabilityofsuchinvestments.Publicpolicieshavebeendesignedinthisregard:eagertosupportthedecarbonisationoftheenergysector,policymakershavebeenpronetoregulateinfavourofguaranteedrevenuestreamssuchasfeed-intariffs,renewablesportfoliostandards,ornet-metering(seeChapter14).Aftermorethanadecadeofimprovementinthetechnologiesandthemanufacturingofthesenewgenerationassets,several‘utility-scale’projectsarenowbeingbuiltpurelyonamerchantbasis,whileotherinvestorsprefertocontinuesecuringtheirrevenueswithlong-termcontracts,eitheronapurelyprivatebasis,aswithbilateralormultilateral‘powerpurchaseagreements’(PPA),orinapublic-privatepartnership,whereapublicentityunderwritesa‘contractfordifferences’(CfD).Meanwhile,thetransformationof‘feed-intariffs’intoa‘feed-inpremium’hasacceleratedtheprofessionalisationofinvestors,whonowhavetobeabletomaximisetheirrevenuesonopenwholesalemarkets.Thatsaid,therenewablessectorisextremelyheterogeneous.Eveninthecaseofa1.TheauthorwouldliketothankNicolòRossettoforhishelpfulcommentsandkindsuggestions.59singlerenewablesource,suchassolarenergy,generationassetscanrangefromarooftopPVunitofafewkW(thiscategoryrepresentedroughly40percentofglobalinstalledsolarcapacityin2020)tosmallutility-scaleunitsof1-5MW,tolargeutility-scaleunitsof30-50MW,andfinallytogiganticconcentratedsolarplantsof950MW(e.g.,theNoorEnergy1projectinDubai).InCaliforniaandGermany,thereisnowamassmarketforrooftopPV,whileinAustraliaone-thirdofallhouseholdshaveinstalledsolarpanelsontheirpremises.Inthewindsector,similarheterogeneityisvisible.Windturbinescanbeassmallas500kWor2MW,allowingmanysmallandlocalplayerstoenterthemarket(includingconsumercooperatives);however,utility-scaleonshoreprojectsmaybeaslargeas500MWor1GW.Intheoffshorewindsector,onlyafew‘RenewablesSupermajors’dominate,targetingportfoliosofbetween35GWand100GWinthecomingyears.MostlyEuropeans,thesecompanieshavetheresourcestobuildlargeoffshorefarmsofbetween700MWand4GW.Whilethecapacityfactorofoffshorewindislikelytoremainbetween20and30percent,recentoffshorewindprojectsaimforacapacityfactorof60percentby2030.2.NewProductCharacteristicsforTargetedCustomersThetraditionintheelectricitysectoristohaveahandfulofplayerswithheavybalancesheetsthatinvestinlarge-scale,long-livedphysicalassets.Today,thesectorisgoingintheoppositedirection.Numerousasset-lightplayers,oftennewtotheindustry,areemergingandofferingparticularcharacteristicstotargetedcustomers.Therearemanyexamples,fromaggregatorstodigitalplatformsforthemanagementofdistributedenergyresources.Thesenewplayersnowrevolutionisingtheelectricitysectorarefollowingthreedistinctpaths.Path1istheactivationoffinalenergydemandtocreateproductsthatcanbesoldbackontothewholesalemarketviaanewtypeofintermediary,theaggregator,whobasicallydoestheoppositeofwhattraditionalenergyretailersdo.Path2istheestablishmentofnewvenuesenablingdirecttradebetween‘retail-size’sellersandbuyers.Thisoccurswiththesupportofanothertypeofnewintermediary:thedigitalplatform.Ifthatintermediaryhasalimitedcontrolondirecttrade,itmaycreatethebasesfor‘peer-to-peer’transactions.Path3iswhereretail-sizeunitsinvestcomprehensivelyingenerationassets,energystorage,andcontrollableconsumptionmanagementdevices.Inthiscase,atotallynewspaceiscreatedforthecoordinationandgovernanceofelectricitytransactions,dominatedby‘prosumers’and‘prosumagers’.Thisspaceisfrequentlycalled‘behind-the-meter’,asitisremarkablyseparate,evenisolated,fromtheelectricutilitiesandregulatorswhoarethetraditionalkeydecision-makersoftheelectricityspace.Thisnew‘behind-the-meter’territorymayalsobeinhabitedbynewentrepreneursmanaginginaprofessionalmannerfleetsofconnectedassetssuchaselectricvehiclesandself-generatingbuildings.Equally,itmaybeinhabitedbyservicecompanieshelpingprosumerstooptimisethemanagementoftheirprivateassets.3.BetweenNewAssetsandNewProductCharacteristics:ChallengesfortheRegulatedGridsThechallengesfortheregulatedgrids(transmissionanddistribution)arerealbecausetheyriskbeingsqueezedbetweenthe‘GreeningRevolution’upstreamandthe‘Digital60Venues’or‘Behind-the-Meter’territoriesdownstream.Howwilltheoffshoregridbeconceivedandorganised,giventheEUtargetfor300GWoffshoreby2050?TheUKisofferingoffshorewinddeveloperstheopportunitytoalsobetheoffshoregriddevelopers,andoncethesenewtransmissiongridsarebuilt,itintendstoauctionthemtootherinvestorsthatarewillingtomanagethemasregulatedOFTOs(i.e.,OffshoreTransmissionOwners).Prosumersandself-generatingunitsmayjeopardisetherevenuesofdistributiongrids,withvolumetricchargesandnet-meteringthreateninga‘valleyofdeath’toestablishedregulatedcompanies.Facedwithanewgenerationofindividualstorageunitsanddynamicuseofelectricvehicles,theregulatedgridlosesthemonopolypowerithastraditionallyenjoyedastheessentialfacilitytogetaccesstoenergyandpower.Thedecisionstakenbytheregulatedcompanyanditsregulatorregarding,forinstance,tariffsandconnectionrulesarenomoretheultimatechoicethatconsumershavetoobeyto,butbecomepartofapatchworkofincentives,towhichprosumersandprosumagerscanreactwithnewinvestmentsornewbehaviours.Ontheoppositesideoftheretailuniverse,inthemegalopolisofNewYork,theregulatoryauthorityhopedtoleadarevolutionofdigitalisedvenuesformicrotransactions;itclaimedin2015thatthefutureofenergytradinglayina‘DistributedSystemPlatform’.Butsevenyearslater,ithasproveddifficulttobypassthetraditionalpoliticaleconomyof‘universalaccess’toa‘meritgood’with‘guaranteedaffordability’.However,inColorado,acooperativehasfullyimplementeda‘dynamictransactiveenergy’systemwhichoptimisesindividualconsumption,demandresponse,localstorage,self-generation,andelectricvehicles.Youcaninterpretthiseitherasa‘Google-Amazonutility’thatdirectlymanagesindividuals’behaviourandrelationships,orasavoluntarycommunityofsmartindividualsresponsiblefortheirenergytransition.61CHAPTER18.ElectrifyingTransport:IssuesandOpportunitiesBentleyC.Clinton,ChristopherR.KnittelandKonstantinosMetaxoglouInthischapter,weexaminetheglobalimplicationsofelectrifyingthetransportfleet.Ouranalysiscoversanarrayoftopics,includingvehiclecostconsiderations,infrastructureconcerns,emissionsconsequences,andthepotentialeffectofelectrificationonfueltaxrevenues.Wealsodiscussaspectsoftheelectrificationfrontier,payingparticularattentiontotheroleofelectricityinthemedium-andheavy-dutysectorandforridesharingandautonomousvehicles.Thestockofelectricvehicles(EV)worldwideincreasedby65percentbetween2017and2018toapproximatelyfivemillionvehicles(IEA,2019b).AnexpandingEVfleetrepresentsapotentiallylargetransitioninenergydemandfromtheestablishedliquidtransportfuelsupplynetworktotheelectricitysystem.TheIEAestimatesthistransitioncouldreduceoildemandby2.5to4.3millionbarrelsperdayandincreaseelectricitydemandbybetween640and1110terawatt-hours(IEA,2019a).Suchatransitionrequiresasignificantdeviationfromthestatusquoforautomobileconsumersandproducersalike.Inthischapterwetakestockofthegloballight-dutyvehicle(LDV)ecosystemandhighlightissuesandchallengeslikelytoariseaselectricityexpandsitsroleasatransportfuel.Ourassessmentpaysparticularattentiontotrendsinvehiclestock,fuelmarkets,andrefuelinginfrastructurebeforeturningtoastudyofmarketdynamicsandananalysisofcatalystsandconsequencesofbroadtransportsectorelectrification.Threesuchinquiriesare:1)acomparisonofvehiclecostfactorsandinvestigationofthebreak-evencostrelationshipbetweenoilandbatteryprices;2)anapproximationoftheenergydemandeffectsforarangeofLDVelectrificationscenarios;and3)anestimateoftheforegonefueltaxrevenueattributabletothecurrentEVfleet.Additionally,wediscussthebenefitsofEVsinthecontextofavoidedinternalcombustionenginevehicle(ICEV)emissionsandconcludewithsomethoughtsonelectrificationinothertransportsectorcontexts,namely,medium-andheavy-dutyfreighttransport,andtheroleEVsmayhaveinridesharingandautonomousvehiclenetworks.1.Break-EvenCostsWebuildontheanalysisofCovert,GreenstoneandKnittel(2016)tocalculatethebreak-evenpriceofoilforarangeofbatterycosts.Usinghistoricaldata,wemapmonthlycrudeoilpricestogasolinepricesintheUSandapplytheresultingparameterstoamodelofoperatingcostsforICEVsandEVs.TheresultofthiscalculationisincludedasFigure1.PointsbelowthesolidlinerepresentoilpriceandbatterypricepairswhereICEVsarelessexpensivetooperatethanEVs.Theoppositerelationshipholdsforpointsabovetheline.Toafirstorder,therelationshipisclosetoa1:1mappingbetweenoilpricesandbatterycosts;thisdoesnotbodewellfor62EVs.Atcurrentbatteryprices(approximatelyUSD160/kWh),oilpriceswouldneedtoexceedUSD135/bblforEVstobecostcompetitive.WerepeatthiscalculationforanumberofscenariosrangingfromimpositionofacarbontaxtoincorporationofavoidedmaintenancecostsrealizedbyEVowners.Whilethesedoleadtomorefavourablebreak-evencostlevels,thecomparisonremainsunfavorabletoEVsatcurrentbatteryandoilprices.Wenextmodifyouranalysistoincludeassumptionsuniquetoplug-inhybridelectricvehicles(PHEVs)(dashedline,Figure1)andfindamorefavorablebreak-evenscenarioforthesevehicles,thoughwecautionthisresultissensitivetobaselinePHEVassumptions.1Figure1.BEVandPHEVcostparityfrontier2.EnergyDemandEffectsWeapplyexistingsimulationsofintradayEVchargingpatternsfromtheNationalRenewableEnergyLaboratory’sEVI-ProtooltopubliclyavailabledataonEVownershipandelectricitygenerationinfrastructuretoillustratethepotentialeffectofLDVelectrificationonaselectgroupofpowersystems(Woodetal.,2017)2.OurassessmentofenergyandpowerrequirementsofthesefleetsindicatescurrentadoptionlevelsofEVsposelimitedchallengesonagrid-levelscale,buttheprojectedincreasesinEVadoption–andanylong-termpushforhigh-levelorfullelectrification–willrequirelong-rangeplanningactionsbykeyelectricitymarketparticipants.Theseactionsarelikelytoincludeamixtureofcapacityadditions,infrastructureexpansion,andtheintroductionofload-shiftingoptions(e.g.,smartcharging)andcompatibleincentives(e.g.,timeofuserates)forEVowners.1.Aspartofouranalysis,wedevelopedanonlinetoolforuserstomodifytheseassumptions.Thetoolcanbeaccessedhere:http://ceepr.mit.edu/research/projects/WP-2020-010-tool.2.EVI-Prodataavailableat:https://maps.nrel.gov/cec.633.ForegoneFuelTaxRevenuesAdeclineinrelianceonliquidtransportfuelsnecessarilydecreasestaxrevenuesderivedfromfuelsales,allelseequal.InscenarioswithhighlevelsofEVownership,revenueshortfallsmustberecoupedfromothersources.Weexploretheseissuesinanumberofnationalmarketsandquantifytherequiredscaleofalternativerevenue-generatingmechanisms.ExpandingonthemethodsofDavisandSallee(2019)andaccountingforcross-sectionalvariationinfuelexcisetaxlevels,EVfleetsizes,annualmilestraveled,andICEVfleetefficiency,wedetermineforegonetaxrevenues.OurcalculationsindicateelectricityexcisetaxesorannualfeesforEVownerswouldsignificantlyincreasecurrentcostburdensonEVowners.WhilesuchamovehasthepotentialtodepressEVadoptionrates,moreinformationisneededtoevaluatethesetrade-offs;weareactivelypursuingsuchanassessmentwithongoingwork.4.ConclusionThepushtowardafullyelectrifiedvehiclefleetoffersaseriesofopportunities,butalsofacesmanychallenges.Thischapterexaminesanumberoftheseintheglobalcontext.Resultsofourworkdemonstratethatelectricity’splaceinthefutureportfoliooftransportfueloptionsdependscruciallyonEVcostcompetitiveness,models’availability,andforward-lookingactionsbytheelectricitysupplynetwork.InpreparingfornextstepstowardanelectrifiedLDVsector,stakeholdersandpolicymakersalikewillneedtoconsidertheseaspectsofthemarketalongwithimplicationsforemissionsandtaxrevenuesfortransportinfrastructureinvestment.References1.Covert,T.,M.GreenstoneandC.R.Knittel(2016),‘WillWeEverStopUsingFossilFuels?’,JournalofEconomicPerspectives,30(1),117–138.2.Davis,L.W.andJ.M.Sallee(2019),‘ShouldElectricVehicleDriversPayaMileageTax?’,NationalBureauofEconomicResearchWorkingPaper,No.26072,July.3.IEA(2019a),‘GlobalEVOutlook2019:Scaling-upthetransitiontoelectricmobility’,InternationalEnergyAgency,Paris.4.IEA(2019b),‘WorldEnergyOutlook2019’,InternationalEnergyAgency,Paris.5.Wood,E.,C.Rames,M.Muratori,S.RaghavanandM.Melaina(2017),‘NationalPlug-InElectricVehicleInfrastructureAnalysis’,USDepartmentofEnergy,OfficeofEnergyEfficiencyandRenewableEnergy.64CHAPTER19.ElectrificationofResidentialandCommercialHeatingMathildeFajardyandDavidM.ReinerHeatingandcoolingareresponsiblefor54percentoftheworld’sfinalenergyconsumption,and42percentofglobalCO2emissions1.Owingtothehighlydispersednatureoftheseemissionsinbuildings,effortstolowerheatingandcoolingdemandandassociatedemissionsarerelativelyrecentcomparedtoothersectorssuchaspowerandtransport.Inthebuildingsector,heatingandcoolingmakeup58percentofthesectorenergydemand.Overthepasttwentyyears,spaceandwaterheatingdemandhasremainedrelativelyconstant,owingtosignificantefficiencyimprovementsbalancingthe65percentglobalfloorareaincrease.However,littleefforthasbeenmadetoassesshowthisdemandismet.Heatinginbuildingsisstillheavilyfossilfueldominated,withdirectemissionsfrombuildingstotalling3GtCO2.Inaddition,moreemissionsareassociatedwithanincreasingdemandforcoolingservices:overthesameperiod,coolingenergydemandalmosttripled,andindirectemissionsfrombuildings(whichincludethecarbonfootprintofelectricity)increasedfrom4.8to6.5GtCO2.1.ElectrificationStillatanEarlyStageWithanincreasinglydecarbonisedelectricitygrid,theelectrificationofheating–bymeansofhighefficiencyhousehold-anddistrict-levelheatpumps–offersapotentialalternativetotheincumbentheatingsystem.Heatdemandiselectrifiedinonly11percentofbuildings,mainlyusingconventionalelectricheaters.Renewableheatingalternatives,whichincludeheatpumps,solarthermal,biomassboilersandrenewablepowereddistrictheatingandcoolingnetworks,onlymakeup10percentofcurrentheatingsupply.Whilesalesofthesealternativeshaveexpandedoverthepast20years–fromtwotothreepercentofsalesforheatpumps,andfromfourtosixpercentforrenewables–amuchfastertransitionisrequiredtomeetglobaldecarbonisationambitions.Globaldecarbonisationscenariosforeseearapiddecarbonisationofthebuildingssector,withdirectandindirectCO2emissionsfromthebuildingsectordroppingby88percentinthe2°CIEAFasterTransitionPathwayto2050.By2050,residentialheatingdemandisexpectedtobemetwithbioenergyandsolarthermal(85percentofinstalledheatingcapacity),heatpumpsandnaturalgas,whichwillstillmeet15percentofheatingdemand.Whilethesescenariosarealreadyveryambitious,theadoptionofmorestringenteconomy-widenet-zerotargetswillrequireevendeeperandfasterchangestothesector.1.Unlessotherwisenoted,alldatarefersto2017,whichisthemostrecentyearforgloballyconsistentdata.652.FourChallengestoElectrificationInthiscontext,thisstudyexploresthechallengesandopportunitiestodecarboniseheatinginthebuildingssectorthroughelectrification.Fourkeychallengesandassociatedactionableleverswereidentifiedtounlockthepotentialroleofelectrificationtodecarboniseheating.Drivenbytemperatureriseandagrowingpopulationinemergingeconomies,cooling(aswellasdemandforotherelectricityservices)inbuildingshasrisensignificantlyinthepast20years.Measurestomitigatethisincreaseincludeimprovingapplianceefficiency(viastandardsandtechnologyperformancelabels),improvingbuildingperformance(viaregulationandincentives),andexploitingthecoincidenceofsolarPVproductionandcoolingpeakdemand.Tothisincreasingdemandmustbeaddedtheelectricitydemandcurveandpeakdemandimpactsresultingfromtheelectrificationofaseasonalheatdemandwithhighhourlyvariations,whichcouldposeconsiderablebalancingchallengestothegrid.Opportunitiestoalleviatetheseimpactsincludesynergieswithalternativetechnologies(distributedsolarPV,districtheatingandlarge-scaleheatpumps),enhancingflexibilitywiththermalstorage,andshiftingpeakdemandtooff-peakhourswithsmartmetersanddynamicelectricitypricing.Thereisahighuncertaintyaroundtheadoptionofhighercostheatingtechnologies,efficiencyimprovementsandflexibledemandbehavioursatthehouseholdlevel.Incentivesforthepurchaseandoperationofrenewableheatingtechnologiesatthehouseholdlevelwithsupportmechanisms,reducingthecostofnewsystemswithmarket-basedmeasuresandeconomiesofscale,andhighlightingtheall-yearthermalcomfortbenefitsofreversibleheatpumpsareexamplesofmeasureswhichcouldboostadoptionoftechnologiesanddemand-sidemeasures.Finally,thecostsassociatedwithpowerinfrastructureexpansion(bothgenerationandtransmission)anddecommissioningofanunderutilisedgasnetworkaresubstantial.Improvingefficiencyofgasappliances,repurposingthenaturalgasgridwithgreenergases(i.e.,hydrogen,biomethaneorcarbon-neutralsyntheticfuels),andencouraginghybridheatpumpswhichcandeliverbetterperformancearethreekeyleverstoavoidtheneedforaradicalshiftandstrandedgasassetscosts.Inaddition,electricitysupplysecuritystandardsplayakeyroleinelectricitygenerationandtransmissioncapacityexpansion:revisingstandardssuchasthevalueoflostload(VoLL)couldreducethesystem’scostsassociatedwithahigherelectricityandpeakdemand.Finally,asthesecostsdramaticallyincreasewiththetighteningofdecarbonisationtargets,suchasmid-centurynet-zerotargets,quantifyingthepotentialforCO2removaltooffsetresidualemissionsisanothercruciallevertoconsider.66CHAPTER20.HarnessingthePowerofIntegrationtoAchieveUniversalElectricityAccess:TheCasefortheIntegratedDistributionFrameworkIgnacioJ.Pérez-Arriaga,DivyamNagpal,GrégoireJacquotandRobertStonerEffortstoachieveuniversalaccesstoelectricityinemergingmarketsanddevelopingeconomies–EMDEcountriesorjustdevelopingcountries–arehamperedinlargepartbyfailuresinthedistributionsegment.Theabilityofthepowersectorinlow-accesscountriestomobilisethesubstantialpublicandprivateinvestmentnecessaryforexpandingaccessinfrastructurehingesontheviabilityofdistribution.Webelievethatanewbusinessmodelfordistributionisneededtoexpandelectricityaccessinamannerthatleaves-no-one-behind,tapsintonewoff-gridelectrificationsolutionsandsmarttechnologies,andprovidescustomer-orientedservicestosupportlong-termsocio-economicdevelopment.Tofulfiltheserequirements,theIntegratedDistributionFramework(IDF)approachisproposed.1.AccesstoElectricityandtheDistributionSegmentofthePowerSectorHundredsofmillionsofpeoplearoundthedevelopingworld–atlastestimate,759millionin2019–livewithoutaccesstoelectricity,andmillionsmorehavepoorqualityorunreliablesupply.Theimplicationsoflimitedenergyaccessforsocio-economicdevelopmentarealarming.Accesstoaffordable,reliableandsustainableenergyisimperativetosupportincome-generatingactivities,reducedrudgeryandimproveproductivity,whilealsofacilitatingdeliveryofpublicservicessuchashealthcareandeducation.Endingpovertyislargelycontingentuponendingenergypoverty.Accordingtoallconsultedstudies,globalinvestmentsarenotontracktoachievethisgoal,andundercurrentandplannedpoliciesmorethan670millionpeoplemaystilllackaccessby2030.Reachinguniversalaccessby2030andensuringadequacy,affordabilityandreliabilityofelectricityservicesrequiretailoredeffortsacrossawidevarietyofcontextswheretheelectrificationchallengepersists.The‘economicsofelectricity’hasadifferentmeaninginthesesituations.Theeconomic,technical,socialandpoliticalchallengeistoprovideelectricityforallinsuchawaythatthesupplyofpowercanenableeconomicgrowthandhumandevelopment.Electrificationinvolvesavarietyofactivities,arangeofdifferenttechnologiesandbusinessapproaches,anddiverseactors.Amongthemajorpowersectorsegments–generation,transmission,distribution(includingretail),andsystemoperation–thereisampleevidencethatdistributionisthecriticalbottlenecktoachieveuniversalaccess.Here,theterm‘distribution’encompassesallthe‘last-mile’activitiesnecessarytosupplyelectricitytoend-users,includingnotonlyconventionalon-griddistributionandretailingtasks,butalsooff-gridsolutions(mini-gridsandstand-alonesystems)67thatinvolveassets,suchasgenerationandstorage,whichcommonlyexceedthescopeofdistribution.Failuresinthedistributionsegmentinmanylow-accesscountriesarehavingadramaticimpactonuniversalaccesstoelectricity.Distributioncompaniescommonlyfacesignificantfinancialhurdles,andthisprovokesviabilitychallengesthathinderthemobilisationofthesubstantialpublicandprivateinvestmentneededtoexpandgrid-basedelectricityaccess.Thelackofaproperregulatoryframework,encompassingtheentiredistributionactivity,hasanegativeimpactalsoonoff-gridsolutions,andtherecentgrowthofmini-gridsandstand-alonesystemshasoccurredlargelyinsilos.Distributionhashistoricallyattractedaverysmallshareofprivateinvestmentsintheelectricitysectoramongthosecountriesthathavenotyetachieveduniversalaccess.ThisisespeciallytrueinSub-SaharanAfrica,whereprivatecapitalflowsintotransmissionanddistributionsectorsarevirtuallyzero.Toreachuniversalaccessby2030,newbusinessmodelsfordistributionmustbedefinedthatleavenoonebehind,ensurepermanenceofsupply,integratethevariouselectrificationmodes(on-gridandoff-grid),andalignwithavisionforthelong-term,sustainabledevelopmentofthepowersectorandtheeconomy.2.ValueofIntegration:AdoptingaHolisticViewoftheElectrificationChallengeDevelopingcountriesareunlikelytoreachuniversalenergyaccesswithoutseekingintegrationatdifferentlevels.First,integrationofthethreemodesofelectrification–stand-alonesystems,mini-gridsandlargegrid.Second,integrationoftheincumbent–typicallypubliclyowned–utilitywithanexternalentity,wheretheconcessions,intheirvariousformats,areaconvenientimplementationinstrument.Third,integrationofelectricitysupplyandend-uses,whichiscriticalformaximisingtheeconomicandsocialimpactofaccess.Thisrequiresacross-sectorviewandanin-depthunderstandingofenergyneeds–power,heating/coolingandtransport–insectorscriticalforeconomicgrowthandhumandevelopment(e.g.,healthandeducation).Finally,thefourthlevelofintegrationiscentredonthecoordinationbetweencountriesintransmissionandlargegenerationplanningandoperation,sincethemajorityoftheenergybeingdistributedcontinuestobesuppliedfromthebulkpowersystem.Theopportunitytocombinethethreedominantmodesofelectrification–largegridextensions,mini-grids,andstand-alonesolutions–increasesthenumberofpossiblepathwaysavailabletoattainuniversalelectricityaccess.Yet,thesehavemainlybeendeployedinanuncoordinatedmannerandwiththeinvolvementofdifferententities,whichhastendedtoleadtounhealthycompetitionratherthancomplementaritybetweenelectrificationinitiatives.3.TheIntegratedDistributionFramework(IDF)Universalelectricityaccesscannotbeachievedwithoutanin-depthrethinkingoftheelectrificationstrategyatthedistributionlevel.Thestrategyneedstoresultinviablebusinessmodelsforallstakeholders–utilities,mini-griddevelopersandoperators,stand-alonesystemproviders,andmarketdevelopmentactors–soastoattract68investmentsatthescaleneededtoachieveuniversalaccess.Importantly,thevisionoftheelectrificationstrategyandthedistributionsectorshouldbecompatiblewithasoundvisionofthefuturepowersectorofthecountry.Respondingtothischallengewouldrequireadherencetoaminimumsetofkeyrequirementswhenrethinkingelectrification:•Inclusiveness.Nobodyshallbeleftbehind.Inclusiveelectrificationwithinadesignatedregionrequirestheexistenceofaresponsibledistributionentitythatassumeseffective,notjustformal,responsibilityforservingallcustomers,irrespectiveoftheirlevelofdemandunderminimumqualityconditions.Theregulationofthepowersectorinmostcountriesrequirestheincumbentdistributionutilitiestoprovideuniversalservicebut,giventheexistingdifficulties,thislegalrequirementisnotenforced.Bycontrast,thisisthecentrepieceoftheIDF.Forinstance,inclusivenesscanbeinsertedasahardconditioninaterritorialconcessioncontract.•Mixofelectrificationmodes.Distributionshouldleverageallpossibledeliverymodesinordertofulfilitsuniversalelectrificationobjectiveandselectivelyconsidergridextension,mini-gridsandsolarhomesystems.Geospatialplanningtoolshaveshowngreatpromiseinprovidingdecision-makerswithcost-efficientelectrificationstrategiesthatexploitallthreemodesofelectrification.•Permanence.Solutionsshallbesustainableintime.Distributionpolicyshouldhavealong-termperspectiveand,basedonfinanciallyandsociallysustainablebusinessmodels,beabletolastfordecades.Thisindispensablecomponentofsustainabilityrequiresalong-termvisionandcommitment,aswellasstrongandcontinuedpoliticalsupport.•Flexiblepartnerships.Distributioncompaniesinlow-accesscountriesmustbeopentodevelopingpartnershipswithanyrelevantpublicand/orprivatestructurescapableofprovidingthetechnical,managerialandfinancialsupportthattheyneed.Externalsupportwillbedecisiveinensuringthatbothuniversalenergyaccessandhighqualityofserviceforallisachieved.69CHAPTER21.ReformingChina’sElectricityIndustry:NationalAspirations,BureaucraticEmpires,LocalInterestsXuYi-ChongTheelectricityreformsimplementedinChinaoverthepastfourdecadesrepresentabundleofparadoxicaldevelopments.Theindustrydeliveredunprecedentedprogressinprovidinguniversalaccesstoreliableelectricityservices,includinginthecountry’smostremoteandharshareas.Atthesametime,theefficientuseofresourcesremainsproblematic.Theindustryhasdevelopedtheworld’slargestfleetofrenewable-basedpowerplants(32percentoftheglobaltotal),generating29percentofglobalrenewableelectricityasof2020.Yethalfoftheworld’sinstalledthermalpowergenerationcapacityislocatedinChina.Theindustryhasproducedworld-classtechnologicalinnovation,fromsupercriticalthermalpowerplantstoultra-highvoltagetransmissionnetworks.Yetitalsosuffersfrompoor-qualitycontrol.Moresignificantly,backinthemid-1980stheelectricityindustrywasamongthefirsttobereformedinChinaandtheworldbyloweringentrybarrierstogenerationandintroducingpowerpurchaseagreementsandindependentpowerproducers.In2003,theindustrywashorizontallyunbundled,albeitincompletely,beforeitscounterpartsinmostcountries,includingmanyOECDmembers.Andyet,asoftoday,the‘marketsystem’inChinahasnoindependentmarketoperatorsorregulators,andpricesarenotdecidedbysellersandbuyers.1.TheRoleofPoliticsandPublicPolicyTherootsoftheseparadoxicaldevelopmentsaremultiple.Inthischapter,wefocusonpoliticsandpublicpolicytoexplaintheseseemingcontradictions.Chinaislargeanddiversityisinevitable:whatisconsideredpossibleincoastalprovincesmaynotbefeasibleorevenappropriateforinlandprovinces.Sizematterswhenitcomestoeffectivegovernment.AnothercriticalfactorinexplainingelectricityreforminChinaisthatitstartedwhenthesectorwasatanextremelylowlevelofdevelopment.Thetotalinstalledgenerationcapacityin1995was10percentofthatrecordedin2020.ElectricityconsumptionpercapitainChinawasfivepercentoftheOECDaveragein1980,10percentin1995and50percentin2014.Theeffectsoftherapidelectricityexpansion,especiallyininstalledcoal-poweredthermalcapacity(about50percentoftheworldtotal),werewidelyfeltbyproducersandconsumersinChina.Thisexpansionhadsignificantimpactsonlocalpollution,internationalcommoditymarkets,andglobalclimatechange.Contrarytotheimageofanexclusivelytop-downdecision-makingsystem,policymakingandpolicyimplementationinChinaisperhapsbetterexplainedwithananalogyofherdingsheeporcattlewithAustralianKelpies—wisesheepdogsthathavetheabilitytoherdlivestockwithonlygeneralguidancefromthetop.Theymaystopor70veeralongtheway,buttheygettothedestinationeventually.Thisiswhatmatters.InChina,ageneraldirectionforanygivenpolicyoftenemergesafteranelaborateconsultationprocessduringwhichdebates,bargainingandcompromisestakeplaceamongpowerfulinterests,whetherprovinces(someofwhichhavepopulationsofover100millionandeconomieslargerthanmostcountriesintheworld),bureaucratsinkeygovernmentinstitutions,largestate-ownedandprivatecompanies,orinfluentialformerpoliticians.Thisprocessisnecessarytoensurethebroadestsupportandtherebythebroadestchancesofsuccess.Consequently,ratherthaneradicatingoldrulesandpractices,Chinahasdevelopednewpoliciestosupportgrowthandexpansionoverthepastfourdecades.Thishashelpedtoavoidpowerfulinterestsexertingaveto.2.ThreePhasesofElectricityReformThe40yearsofelectricityreforminChinacanbeartificiallydividedintothreephases.Duringthefirstphase(1984-2002),doubledenergyusagesupportedquadrupledGDPgrowth,withafastdeclineinenergyintensity.Thesecondphase(2002-2015)wasdominatedbytheconvergenceofelectricityexpansionwithindustrialupgradingandinnovation.Thefollowingphase(from2015onwards)hasseenanalignmentofclimateandenergypolicypriorities.Governmenthastwotypesofmechanismstohelpguideplayersinthepreferreddirection:carrots(incentives)andsticks(penalties).Thefirstphase,forinstance,sawaloweringoftheentrybarriersandtheadoptionofadual-pricingsystemtoencourageinvestmentinelectricitygenerationbynewactorswithoutunderminingtheinterestsoftheincumbentswhowere,inturn,askedtooperateundertighterbudgetconstraints.Inthesecondphase,theStatePowerCorporation(averticalmonopoly)wasunbundledintofivegeneration,twogrid,andfourpowerservicecompaniesthatremainedstate-owned.Theirnominalowner–theState-ownedAssetSupervisionandAdministrationCommission(SASAC)–expectedthesecentrally-ownedcorporationstobecomeinternationallycompetitiveintheirsizeandoperation,aswellasininnovation.Theseexpectationsprovedmorerealisticthandemandsmadeofothergovernmentagencies,suchastheMinistryofEnvironmentalProtectionortheStateElectricityRegulatoryCommission,becausetheassessmentoftheCEOs’appointmentandremunerationwasconductedbySASAC.ThiswastheperiodwhentheStateGridCorporationinvestedinresearchandconstructionoftheworld’slargestultra-highvoltagetransmissionnetwork,andwhenHuaneng,agenerationcompany,investedinanexperimentaladvancednuclearreactor.Inthethirdphase,effortstoalignclimatechangeandenergypolicyprioritieshaveseenarapidbuild-upinthecleanenergysectors,fromsolar,onshoreandoffshorewind,andwaterpumps,toelectricvehiclechargingstations.Despitethesepositivedevelopments,oldproblemsremain.Amongthemarewastefulinvestments–theaveragethermalpowerplantutilisationratewas48percentin2020,significantlybelowanaverageof70-75percentinothercountries–andlowenergyefficiency:energyconsumptionperunitofGDPwasnearlythreetimestheOECDaverageand1.7timestheworldaverage.713.TheLongRoadTowardsElectricityMarketsTherecentcalltocreateelectricitymarketsbyallowingprivateinvestmentinretailingservicesanddirect‘sales’fromgenerationcompaniestolargeend-usersisnotanewidea.Thefirsttrialtocreateelectricitymarketswasimplementedin1998-99inseveralregionsofthecountry.RegionalwholesalepowermarketswerepilotedintheNortheastChinagridandtheEastChinagridfrom2002-06.Directpowerpurchasingwasarrangedbetweengeneratorsandafewlargeend-users.Benchmarkfeed-intariffs,differentialpricingfortimesandusers,andothermechanismswereintroduced.Manyciteanincreasingvolumeof‘trade’acrossprovincesorregionsasasignofmarketactivity.Yet,noneofthereformscausedchangestothefundamentalprinciplesoftheChineseelectricityindustry:acombinationofgovernmentpolicyguidelines,marketforces,andbureaucraticdecisionsonpricingandinvestment.Foranymarkettowork,priceshavetosignalwhenandhowinvestors,producers,consumersandintermediariesneedtochangetheiractions.Pricescanberegulated,andinmostcountrieselectricitypricesareregulated,buttheyarebyandlargedecidedthroughexchangesbetweenbuyersandsellers.ThisisnotthecaseintheChineseelectricitysector.ElectricityinChinaisnotaproductlikeothers,becauseitspriceisadjustedaccordingtoacomplexcalculationthattakesintoaccountthetypeofgenerator(thermal,hydro,renewableornuclear,large,mediumorsmall,etc.),end-user(industrial,commercialorresidential)andlocation(coastal,inland,urbanorrural).Asarecentgovernmentdocumentindicates,thiswillbethepracticefortheforeseeablefuture.Whilethischoicehasitsmerits,withoutamarket-basedpricingsysteminvestmentdecisionscanbebureaucraticand,attimes,misguided.4.ConclusionBecauseofthesizeofthecountry,governinginChinaisextremelydifficult.Managingentangleddiversitiesandconflictinginterestsbysettingbroaddirectionshassofarbeenthepreferredmethod,anditwillcontinuetobethecasedespitebureaucraticbickering,provincialandlocalprotectionism,andpowerfulinterests.Thedirectionhasbeenset–carbonpeakby2030andcarbonneutralityby2060.Thechallengesareenormous.Electricityisatthecentreofthemall.Theintroductionofanemissiontradingschemefortheenergysectorsignalsastepintherightdirection.Hopefully,Kelpieswilleventuallydotherest.72CHAPTER22.TheEvolutionofElectricitySectorsinAfrica:OngoingObstaclesandEmergingOpportunitiestoReachUniversalTargetsVivienFoster,AntonEberhardandGabrielleDysonAfricastandsoutfromtherestoftheworldinitsstrugglestodevelopitspowersectorandestablishnewmarketsforpower.Thischapterhighlights:1)thechallengesfacingthepowersectorinAfrica;2)progressinmeetingAfrica’spowerneeds;3)progressinpowermarketreforms;and4)thepotentialforanewwaveofreformspropelledbydisruptiveinnovation.1.Africa’sPowerSectorChallengesOverhalfthepopulationinSub-SaharanAfricastillhavenoaccesstoelectricity.Still,electricitydemandoutstripssupplyinmanyAfricancountries,whichendureperiodicpowercutsandpoorreliability.Thecausesofinadequateelectricitysupplyvaryfrominsufficientgeneratingcapacityandpoormaintenanceofexistinggenerationplants,tounderdevelopedtransmissionanddistributioninfrastructure.Underlyingthesetechnicalshortcomings,governancechallenges–corruption,lackofruleoflaw,politicalinstability,andlackoftransparencyandaccountability–arerife,contributingtothecontestedpoliticaleconomiesthatsurroundthepowersector.Utilitiesareplaguedwithperennialfinancialdeficits,unabletocovertheircoststhroughelectricitysales.OnlytwocountriesinSub-SaharanAfricafullyrecovertheircostofservicethroughtheirrevenues.2.AdvancementsinInvestmentsinGeneration,TransmissionandAccessWhileAfricaisgenerallyshortofpower,progressisbeingmadeinahandfulofcountriesandsomenowhavegenerationsurpluses–Ghana,Ethiopia,KenyaandUgandaamongthem.Aroundhalfofinvestmentinnewpowercomesfrompublicfunding,butthefastestgrowingsourcesofinvestmentarefromindependentpowerproducers(IPP)andfromChina.Traditionally,mostoftheseChineseinvestmentshavebeeninhydroelectricity,butthetrendnow,alsowithIPPs,isincreasinglyinsolarandwindenergy.Soundplanningandeffectiveprocurementframeworksarerequiredtoaccelerateinvestment.Historically,mostpowerprojectswereprocuredthroughdirect,non-transparentnegotiations.Anumberofcountriesexperimentedwithfeed-intariffstoprocurerenewableenergyprojects,butnowreverseauctionsaremorecommonand73aredeliveringeffectivepriceandinvestmentoutcomes.Thetransmissionsub-sectorinAfricahasnotbenefitedfromthesameinfluxofprivateinvestmentasgeneration.Sub-SaharanAfricastillhasacombinedtransmissionnetworksmallerthanthatofBrazil.Ongoingeffortsforregionalelectricityinterconnectionsremainanessentialtoolforsupportingoptimalsystemperformanceonthecontinent,evenasdistributedenergyresourcesanddecentralisedgridsbegintoplayaleadingroleinthepowersystem.Africancountrieswithsmallpowersystemsstandtogainthemostfromadditionaltransmissioninterconnectionstocreateeconomiesofscaleandenhancetheirenergysecurity.Forlargersystems,theopportunitiesforelectricitytradeareespeciallyinterestinginthecontextofgeographicallyvariedenergyresources.Whereassomecountriesbenefitfromamplegasreserves,othershavebuiltorplannedlargehydropowerreservoirs,orneedtodrawonflexibleresourcestobalancedowntimefromvariablerenewableplants.Sub-SaharanAfrica’seffortsonelectrificationhavestruggledtokeeppacewithdemographicgrowth.However,since2015theregionhassignificantlyaccelerateditsrateofelectrification.TheUN’sSustainableDevelopmentGoal7.1–whichcallsforuniversalaccesstoaffordable,reliable,modernandsustainableenergyby2030–hasgalvanisednationalgovernmentsaswellastheglobalcommunityinsupportofintensifiedelectrificationefforts.NewinitiativeshaveemergedsuchastheUN’sSustainableEnergyforAllandtheAfricanDevelopmentBank’sNewDealonEnergyforAfrica.Anumberofcountries–mostnotablyKenya–havemadeimpressivestridesinnewelectricityconnections.3.ProgressinPowerSectorReformsElectrificationchallengeshighlightthepivotalroleplayedbyutilitiesinAfrica’spowersector,whoseperformanceremainsdisappointing.Sincethe1990s,countriesacrossthecontinenthavefacedasuiteofpowersectorreformrecommendationsbasedontheWashingtonconsensusaimedatindependentregulation,restructuringofmonopolypowercompaniesthroughverticalandhorizontalunbundling,andtheintroductionofcompetitionandprivatesectorownership.Todate,nocountryinAfricahasfullyadoptedtheearlierconsensusmodelforpowersectorreforms.WorkingwholesaleorretailpowermarketsarenowheretobefoundinAfrica,withthepossibleexceptionofmodestamountsofcross-bordertradinginsomeoftheregionalpowerpools.Nevertheless,morethanthree-quartersofcountrieshaveestablishedanindependentelectricityregulatorandaroundtwo-thirdshavepermittedprivatesectorinvestmentinIPPs,mostlythroughasingle-buyermodelwiththeincumbentstate-ownedutility,althoughsomecountriesarenowalsopermittingdirectcontractingbetweenIPPsandlargecustomers.Asmallnumberofcountrieshaveunbundledtheirutilities,andevenfewerhavepermittedprivateinvestmentintheirnetworks,mainlythroughconcessionarrangements.744.PotentialforaNewWaveofReformsPropelledbyRapidandDisruptiveInnovationAraftofnewactorsandtechnologiesisbringingunprecedenteddisruptionstotheAfricanpowersector.Theseofferahopeful,albeitdaunting,outlookforthecontinenttomeetitsenergyneeds.Acceleratedinnovationsinpowertechnologies,servicesandmarkets,correlatedwithaseachangeintheglobalenergymix,areupendingrelativepricesandmarketshares,andthelocationandpatternsofenergyproductionanduse.Ascountriesintegrateincreasingquantitiesofvariablerenewableenergygeneration,smartgridswillemergeinanewlandscapeofelectricitynetworksinterspersedwithmini-grids,communitygridsanddistributedindividualgenerationsystems.Thesetrendswillunlockaneedfornewgridmanagementapproachesandrules,includingforutilitybusinessmodels.Africanutilitieswillneedtospeed-upunbundlingeffortsandimprovethecapacityofindependentsystemandmarketoperators.Traditionalregulatorymodelsalsofacenewchallengesintheriseofdistributedenergyresources.Thesetransformationsarebeingsweptalongwithincreasingdigitalisation,thearrivalofproactive,self-generatingconsumers(so-calledprosumers),andtheelectrificationoftransportandothersectors.Africaremainsaglobaloutlierintermsofinadequateinvestmentinpowergeneratingcapacityandnetworks,lowlevelsofelectricityreliability,accessandconsumption,poorutilityperformanceandincompleteregulatoryandmarketreforms.However,theserelativedisadvantagesmayalsofurnishAfricancountrieswithgreateragilitytoreacttothesenewinnovations.Africahasthepotentialtoadoptandadapttotheseinnovationswithrelativelylowersunkcostsandfewerstrandedassets.Therightresponsecancatalysesignificantprogressindeliveringadequate,reliableandcleanelectricitytopowereconomicgrowthandtoimprovethewelfareofitspopulations.

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