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RE-organising

power systems

for the transition

Unless otherwise stated, material in this publication may be freely used, shared, copied, reproduced, printed

and/or stored, provided that appropriate acknowledgement is given of IRENA as the source and copyright

holder. Material in this publication that is attributed to third parties may be subject to separate terms of use

and restrictions, and appropriate permissions from these third parties may need to be secured before any

use of such material.

ISBN 978-92-9260-450-9

Citation: IRENA (2022), RE-organising power systems for the transition,

International Renewable Energy Agency, Abu Dhabi.

ACKNOWLEDGEMENTS

The report was developed under the guidance of Rabia Ferroukhi (Director, IRENA Knowledge, Policy and Finance

Centre) and Ute Collier and authored by Xavier García-Casals, Sara Pizzinato (consultant) and Emanuele Bianco.

The report benefited also from the reviews and comments of experts, including Arina Anisie and Paul Komor

(IRENA), Álvaro López-Peña and Pedro Linares (Comillas Pontifical University), Anna Skowron (World Future

Council), Esnault Benoit (Commission de Régulation de l’Énergie, France), Lucio Scandizzo (University of

Rome “Tor Vergata”), Mahmoud N’daw (ECREEE), Pancho Ndebele (Envelo) and Virginia Echinope (Dirección

Nacional de Energía, Uruguay).

IRENA is grateful for the inputs received from Antonella Battaglini and Antina Sander (Renewable Grid

Initiative), Daniel Chávez and Lavinia Steinfort (Transnational Institute), Frauke Thies (smartEn), John Treat

(Trade Unions for Energy Democracy), Jonathan Cannard, Kea Seipato and Sandra Van Niekerk (Alternative

Information and Development Centre), Kristine Bianchi and Wilson Sierra (Dirección Nacional de Energía,

Uruguay), Laura Izano (SEPSE), María Colom and José Donoso Unión Española Fotovoltaica (Unión Española

Fotovoltaica), Miguel Rodrigo Gonzalo (IDAE, Spain), Natalia Fabra (Universidad Carlos III de Madrid); Sean

Sweeney (CUNY School of Labor and Urban Studies) and Sven Teske (University of Technology, Sydney).

DISCLAIMER

This publication and the material herein are provided “as is”. All reasonable precautions have been taken by

IRENA to verify the reliability of the material in this publication. However, neither IRENA nor any of its officials,

agents, data or other third-party content providers provides a warranty of any kind, either expressed or implied,

and they accept no responsibility or liability for any consequence of use of the publication or material herein.

The information contained herein does not necessarily represent the views of all Members of IRENA. The

mention of specific companies or certain projects or products does not imply that they are endorsed or

recommended by IRENA in preference to others of a similar nature that are not mentioned. The designations

employed and the presentation of material herein do not imply the expression of any opinion on the part

of IRENA concerning the legal status of any region, country, territory, city or area or of its authorities, or

concerning the delimitation of frontiers or boundaries.

ABOUT IRENA

The International Renewable Energy Agency (IRENA) is an intergovernmental organisation that serves

as the principal platform for co-operation, a centre of excellence, a repository of policy, technology,

resource and financial knowledge, and a driver of action on the ground to advance the transformation

of the global energy system. IRENA promotes the widespread adoption and sustainable use of all forms

of renewable energy, including bioenergy, geothermal, hydropower, ocean, solar and wind energy, in

the pursuit of sustainable development, energy access, energy security and low-carbon economic

growth and prosperity. www.irena.org

FOREWORD

Together, we must embark upon a rapid and sustained energy transition

to avoid the deeply disruptive impacts of the climate crisis. As outlined in

IRENA’s flagship World Energy Transitions Outlook 2022, the power sector

lies at the heart of this transition, which requires increased electrification

of end uses and the adoption of variable renewable energy (VRE) such

as wind and solar PV as the main sources of electricity. In this context,

it is essential to establish robust structures to guide the procurement of

electricity and ensure the flexibility required for a just and sustainable

renewable era.

Today’s power systems, structured around large centralised and

dispatchable power plants, require more than ‘quick fixes’; rather, a holistic

approach is required to address all key aspects – from technology and economy to society and the

environment. Otherwise, misalignments between electricity procurement mechanisms, regulations

and policies will continue to hinder a successful energy transition.

These misalignments have drawn considerable political and media attention in recent years, particularly

in response to the sharp decrease in energy demand amid the national lockdowns of the COVID-19

pandemic. While this paved the way for a higher share of variable renewable energy in the power mix,

electricity prices fell to such levels as to create barriers to merchant renewable plants.

Conversely, during the more recent natural gas supply crisis, marginal fossil fuel generators in liberalised

contexts have raised electricity prices to unforeseen levels, diverting the focus of policy actions away

from the barriers to the energy transition posed by low-price events.

Against this background, RE-organising power systems for the transition aims to inform discussions on

the role of power system organisational structures in facilitating and accelerating the energy transition.

It discusses enablers and barriers to the transition, including misalignments inside and outside power

systems, as well as the role of competition and its balance with regulatory and collaborative components.

The report also outlines a power system organisational structure fit for the renewable era that can

support low-cost renewable generation and long-term investments in system adequacy, complemented

by diverse flexibility options to ensure a reliable power system.

I am confident that the insights offered by this report will prove useful in informing much-needed

discussions on this essential aspect of the energy transition.

Francesco La Camera

Director-General, IRENA

/ 188

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RE-organisingpowersystemsforthetransition©IRENA2022Unlessotherwisestated,materialinthispublicationmaybefreelyused,shared,copied,reproduced,printedand/orstored,providedthatappropriateacknowledgementisgivenofIRENAasthesourceandcopyrightholder.Materialinthispublicationthatisattributedtothirdpartiesmaybesubjecttoseparatetermsofuseandrestrictions,andappropriatepermissionsfromthesethirdpartiesmayneedtobesecuredbeforeanyuseofsuchmaterial.ISBN978-92-9260-450-9Citation:IRENA(2022),RE-organisingpowersystemsforthetransition,InternationalRenewableEnergyAgency,AbuDhabi.ACKNOWLEDGEMENTSThereportwasdevelopedundertheguidanceofRabiaFerroukhi(Director,IRENAKnowledge,PolicyandFinanceCentre)andUteCollierandauthoredbyXavierGarcía-Casals,SaraPizzinato(consultant)andEmanueleBianco.Thereportbenefitedalsofromthereviewsandcommentsofexperts,includingArinaAnisieandPaulKomor(IRENA),ÁlvaroLópez-PeñaandPedroLinares(ComillasPontificalUniversity),AnnaSkowron(WorldFutureCouncil),EsnaultBenoit(CommissiondeRégulationdel’Énergie,France),LucioScandizzo(UniversityofRome“TorVergata”),MahmoudN’daw(ECREEE),PanchoNdebele(Envelo)andVirginiaEchinope(DirecciónNacionaldeEnergía,Uruguay).IRENAisgratefulfortheinputsreceivedfromAntonellaBattagliniandAntinaSander(RenewableGridInitiative),DanielChávezandLaviniaSteinfort(TransnationalInstitute),FraukeThies(smartEn),JohnTreat(TradeUnionsforEnergyDemocracy),JonathanCannard,KeaSeipatoandSandraVanNiekerk(AlternativeInformationandDevelopmentCentre),KristineBianchiandWilsonSierra(DirecciónNacionaldeEnergía,Uruguay),LauraIzano(SEPSE),MaríaColomandJoséDonosoUniónEspañolaFotovoltaica(UniónEspañolaFotovoltaica),MiguelRodrigoGonzalo(IDAE,Spain),NataliaFabra(UniversidadCarlosIIIdeMadrid);SeanSweeney(CUNYSchoolofLaborandUrbanStudies)andSvenTeske(UniversityofTechnology,Sydney).DISCLAIMERThispublicationandthematerialhereinareprovided“asis”.AllreasonableprecautionshavebeentakenbyIRENAtoverifythereliabilityofthematerialinthispublication.However,neitherIRENAnoranyofitsofficials,agents,dataorotherthird-partycontentprovidersprovidesawarrantyofanykind,eitherexpressedorimplied,andtheyacceptnoresponsibilityorliabilityforanyconsequenceofuseofthepublicationormaterialherein.TheinformationcontainedhereindoesnotnecessarilyrepresenttheviewsofallMembersofIRENA.ThementionofspecificcompaniesorcertainprojectsorproductsdoesnotimplythattheyareendorsedorrecommendedbyIRENAinpreferencetoothersofasimilarnaturethatarenotmentioned.ThedesignationsemployedandthepresentationofmaterialhereindonotimplytheexpressionofanyopiniononthepartofIRENAconcerningthelegalstatusofanyregion,country,territory,cityorareaorofitsauthorities,orconcerningthedelimitationoffrontiersorboundaries.ABOUTIRENATheInternationalRenewableEnergyAgency(IRENA)isanintergovernmentalorganisationthatservesastheprincipalplatformforco-operation,acentreofexcellence,arepositoryofpolicy,technology,resourceandfinancialknowledge,andadriverofactiononthegroundtoadvancethetransformationoftheglobalenergysystem.IRENApromotesthewidespreadadoptionandsustainableuseofallformsofrenewableenergy,includingbioenergy,geothermal,hydropower,ocean,solarandwindenergy,inthepursuitofsustainabledevelopment,energyaccess,energysecurityandlow-carboneconomicgrowthandprosperity.www.irena.org3FOREWORDTogether,wemustembarkuponarapidandsustainedenergytransitiontoavoidthedeeplydisruptiveimpactsoftheclimatecrisis.AsoutlinedinIRENA’sflagshipWorldEnergyTransitionsOutlook2022,thepowersectorliesattheheartofthistransition,whichrequiresincreasedelectrificationofendusesandtheadoptionofvariablerenewableenergy(VRE)suchaswindandsolarPVasthemainsourcesofelectricity.Inthiscontext,itisessentialtoestablishrobuststructurestoguidetheprocurementofelectricityandensuretheflexibilityrequiredforajustandsustainablerenewableera.Today’spowersystems,structuredaroundlargecentralisedanddispatchablepowerplants,requiremorethan‘quickfixes’;rather,aholisticapproachisrequiredtoaddressallkeyaspects–fromtechnologyandeconomytosocietyandtheenvironment.Otherwise,misalignmentsbetweenelectricityprocurementmechanisms,regulationsandpolicieswillcontinuetohinderasuccessfulenergytransition.Thesemisalignmentshavedrawnconsiderablepoliticalandmediaattentioninrecentyears,particularlyinresponsetothesharpdecreaseinenergydemandamidthenationallockdownsoftheCOVID-19pandemic.Whilethispavedthewayforahighershareofvariablerenewableenergyinthepowermix,electricitypricesfelltosuchlevelsastocreatebarrierstomerchantrenewableplants.Conversely,duringthemorerecentnaturalgassupplycrisis,marginalfossilfuelgeneratorsinliberalisedcontextshaveraisedelectricitypricestounforeseenlevels,divertingthefocusofpolicyactionsawayfromthebarrierstotheenergytransitionposedbylow-priceevents.Againstthisbackground,RE-organisingpowersystemsforthetransitionaimstoinformdiscussionsontheroleofpowersystemorganisationalstructuresinfacilitatingandacceleratingtheenergytransition.Itdiscussesenablersandbarrierstothetransition,includingmisalignmentsinsideandoutsidepowersystems,aswellastheroleofcompetitionanditsbalancewithregulatoryandcollaborativecomponents.Thereportalsooutlinesapowersystemorganisationalstructurefitfortherenewableerathatcansupportlow-costrenewablegenerationandlong-terminvestmentsinsystemadequacy,complementedbydiverseflexibilityoptionstoensureareliablepowersystem.Iamconfidentthattheinsightsofferedbythisreportwillproveusefulininformingmuch-neededdiscussionsonthisessentialaspectoftheenergytransition.FrancescoLaCameraDirector-General,IRENACONTENTSFOREWORD3EXECUTIVESUMMARY12PART1AHOLISTICVISIONOFPOWERSYSTEMORGANISATIONALSTRUCTURESINATRANSITIONCONTEXT2301THENEEDANDURGENCYFORTHEENERGYTRANSITION:ADDRESSINGCLIMATEBREAKDOWN241.1.Theneedtoreshapetheenergymix271.2.Thepowersystemandthewiderpicture311.3.Powersystemorganisationalstructures331.4.Misalignmentsduringthetransition3502THETRANSITION’SIMPLICATIONSFORTHEPOWERSYSTEM362.1.Thecross-cuttingdimensions362.2.Keyelementsoftheenergytransition4203CONTEXTUALISINGPOWERSYSTEMSTRUCTURES543.1.Powersystemgoals553.2.Differentwaystoorganisethepowersystem563.3.Elementsofpowersystemstructures653.4.Supportingthetransition754PART2ENABLINGTHETRANSITIONOFPOWERSYSTEMORGANISATIONALSTRUCTURES7904MISALIGNMENTS804.1.Misalignmentswithinthepowersystem814.2.Misalignmentsbeyondthepowersystem97INFOCUS109Highervolatilityinwholesalemarketpricesastheenergytransitionunfolds.TheSpanishcase10905THEROLEOFMARKETS:ENABLERSORBARRIERS?1165.1.Pre-transitionlearningsaboutmarketsinpowersystems1185.2.Couldcompetitionconstraintransitiongoals?1215.3.Transcendingcompetitionthroughcollaborativeapproaches13206AVISIONFORRETHINKINGPOWERSYSTEMORGANISATIONALSTRUCTURES:THEDUALPROCUREMENTMECHANISM1406.1.Overallview1406.2.Dualprocurement1436.3.Transitioningtodualprocurement168REFERENCES17256FIGURESFIGURES-1.Cross-cuttingtransformationsforafairandjustenergytransitionfromthepower,energy,social,economicandEarthsystems12FIGURES-2.Unequaladvanceindifferentlayersoftheenergytransition,withorganisationalstructureslagging14FIGURES-3.Thedualprocurementconcept19FIGURES-4.Convergenceoforganisationalstructuresfollowingtheliberalisedandpublicownershippathways22FIGURE1.Linearmitigationpathwaysforcomplyingwiththeavailablecarbonbudgets26FIGURE2.Globaltotalprimaryenergysupply,2009and201927FIGURE3.Finalenergyconsumptionbysectorin201928FIGURE4.Sectorcoupling29FIGURE5.Globalnetaddedpowergenerationcapacity,2001to202130FIGURE6.Theembeddednatureofpowersystems31FIGURE7.Elementsandevolutionofthepowersystem33FIGURE8.Cross-cuttingtransformationsforafairandjustenergytransitionfromthepower,energy,social,economicandEarthsystems37FIGURE9.Sharesofrenewableenergyinfinalelectricityconsumption,selectedcountries,2019.55FIGURE10.Powersystemgoals56FIGURE11.Regulatedpowersystem–illustrative59FIGURE12.Liberalisedpowersystemstructures–illustrative61FIGURE13.Verticalunbundlingofthepowersystem–illustrative62FIGURE14.Horizontalunbundlingofthegenerationanddistribution/retailpowersystemlayers–illustrative63FIGURE15.Mainelementsofpowersystemprocurementmechanism66FIGURE16.Marginalpricing69FIGURE17.Scarcityevent70FIGURE18.Averagehousehold(top)andindustrial(bottom)electricitypricesinselectedEuropeancountries,202074FIGURE19.Regulatedpaymentsforrenewablepowergeneration76FIGURE20.Globalweightedaveragepricesresultingfromauctions,2010to2018,andcapacityawardedeachyear77FIGURE21.Renewablespenetrationreduceswholesalepricesundercurrentmarginalpricingallocationmechanisms82FIGURE22.Thecapacitypaymentsfeedbackloop84FIGURE23.Gridservicesandtechnologies85FIGURE24.AveragehouseholdelectricitybillsbycomponentinselectedEuropeancountries,202087FIGURE25.Thegriddeathspiral88FIGURE26.Cost,priceandvalueofelectricity(illustrativeannualaverages)97FIGURE27.IRENA’swelfareindex:Structurewithitsthreedimensionsandsixindicatorsandresultsofitsglobalimprovementby2030and2050duringtheREmaptransitionroadmap99FIGURE28.Differenceinjobsinrenewableenergy,energysectorandeconomywidefrom2017to2050forthetransitionscenario(TES)(leftpanel)andbetweentheplanned(PES)andtransition(TES)scenariosin2050(rightpanel).ResultsforSouthernEuropeandtheGulfCooperationCouncil.1017FIGURE29.GDPgrowthrateasafunctionoftheCO2emissionmitigationratefordifferenttransitionpathwayscharacterisedbythecompoundannualgrowthrateofenergyintensity(EI)andtheemissionsintensityofenergy(EmIE)105FIGURE30.Proportionofwomeninseniorandmiddlemanagementpositionsinselectedcountries,2017108FIGURE31.Monthlyaverageclearedpricesinday-aheadmarket,electricitydemand,renewabeenergyshare,andshareofhourswhenVREsetthepriceinIberia’swholesalemarket,2020-2022110FIGURE32.Variablerenewableenergyaverageandhourlypeaksharesbymonth,2019versus2020111FIGURE34.SupplyanddemandcurvesinthewholesalepowermarketinSpain,12p.m.on16April2020112FIGURE35.SupplyanddemandcurvesinthewholesalepowermarketinSpain,12p.m.on18November2021113FIGURE36.Competitivecomponentsinpowersystemorganisationalstructures118FIGURE37.Evolutionofcompetitionelementsindevelopingcountries’powersectors119FIGURE38.Adoptionofpowersectorliberalisationreformatthegloballevel:ComparisonbetweenOECDandGlobalSouthcountriesonaverage120FIGURE39.Casesofde-privatisedpublicservicesmappedatthegloballevel122FIGURE40.Impactontheenergytransitionofhowtherequiredpowersystemstructureupdatesareaddressed(fixesversusre-designtobefit)143FIGURE41.Unequaladvanceinthedifferenttransitionlayers144FIGURE42.Thedualprocurementproposal146FIGURE43.Energyauctionsandpublicownership:TwoLT-REprocurementpathways152FIGURE44.ST-FlexprocurementtoaddressdeviationsbetweengenerationfromLT-REprocurementandactualdemand157FIGURE45.DifferencebetweenadministrativepricecapsandestimatedVOLLinselectedEUcountries160FIGURE46.Thetwopillarsofdualprocurement(LT-REandST-Flex)asanevolutionfromcurrentexperienceswithinaholisticframework169FIGURE47.Convergenceoforganisationalstructuresfollowingtheliberalisedandpublicownershippathways171BOXESBOX1.Energyaccessandaffordability32BOX2.Systemicchangesintroducedbydeploymentofvariablerenewableenergy43BOX3.Demand,systemflexibilityandelectrificationparadigmchanges45BOX4.Digitalisationandthepowersystemchangesitcantrigger47BOX5.Distributionofgenerationandotherservices:Systemicimplications48BOX6.Evolutionoftheactorlandscape:New,activeandconnectedparticipants51BOX7.The“regulationversusliberalisation”dichotomy57BOX8.Powerpurchaseagreements60BOX9.Unbundlingthepowersystem62BOX10.Transmissionsystemoperatorandindependentsystemoperatorsystems64BOX11.TheBraziliancase68BOX12.Marginalpricingandscarcityevents69BOX13.Aligningpriceandvaluefordistributedgeneration89BOX14.Thecost,priceandvaluedimensionsofelectricity91BOX15.ARE-alignment:Incorporatingcost-benefitevaluationsintotheselectionprocess,Brazil93BOX16.Lackofrecognitionofthesocialandenvironmentalvalueofenergy94BOX17.Fossilfuelsubsidies96BOX18.Pre-transitionmisalignmentsthatcanbemitigatedbytransitioningtowardsrenewables:Thecaseofclimatechangeandairpollution99BOX19.DecouplingenergyandCO2emissionsfromGDPgrowth103BOX20.Adoptionofpowersystemliberalisationreformatthegloballevel120BOX21.Paris:Revertingmorethan30yearsofwatermanagementprivatisation123BOX22.Stateownershipandrenewableenergytechnologyadoption:ThecaseoftheEU124BOX23.Keysandchallengesforsocialvaluecreationwithrenewablepowerplantdeployment128BOX24.Surplusrenewableelectricityexchangeandcollaborativeapproachestoalleviateenergypoverty135BOX25.Co-operationwithcommunity-ledinitiativesinregulatedframeworks136BOX26.Requirementsforevolvingfromcurrentorganisationalstructurestowardsdualprocurement148BOX27.Summaryofthelong-termrenewableenergyprocurementmechanism149BOX28.LT-REprocurementoptionsgobeyondauctions151BOX29.Summaryoftheshort-termflexibilityprocurementmechanism155BOX30.Theendofadditionalregulatedpaymentsandsubsidies?161BOX31.Demand-sideparticipationintheancillarymarket164BOX32.EFRauctionintheUnitedKingdom165BOX33.RampingproductsinCAISO165BOX34.Australia’sembeddednetworks1678TABLESTABLES-1.Thepillarsofdualprocurement:Long-termrenewableenergy(LT-RE)procurementandshort-termflexibility(ST-Flex)procurement20TABLE1.Potentialbenefitsandchallengesofpubliclyownedregulatedpowersystemsandprivatelyownedliberalisedpowersystems125TABLE2.Overviewofsharingactivitiesintheenergysector138TABLE3.Twoapproachestopowersystemevolution142TABLE4.Thepillarsofdualprocurement:Long-termrenewableenergy(LT-RE)procurementandshort-termflexibility(ST-Flex)procurement145910GLOSSARY•Energypoverty:Whenahouseholdisunabletosecurealevelandqualityofdomesticenergyservicessufficientforitssocialandmaterialneeds,impairingitssocio-economicdevelopment.•Energyvulnerability:Thepropensityofbeingunabletomeetessentialenergyservices.Anenergy-vulnerablehousehold,whenanincreaseinpowerpriceoccurs,maylandinanenergypovertysituation.•Griddefection:Theprocessthroughwhichoneormoreusersdefectfromthepowergrid,adoptingdistributedresourcesandstoragefortheirelectricityneeds.•Misalignments:Definedhereastheunintentionalinefficientoutcomesoftheinteractionbetweenrenewablepowergenerationpoliciesandthedesignofthepowersystem’sorganisationalstructure,aswellastheintrinsicincapabilityofcurrentorganisationalstructurestofosterandsustainapowersystembasedonrenewablegeneration.•Powersystemorganisationalstructures:Atermusedtorefertothesystems,institutions,proceduresandsocialrelationsthroughwhichelectricityservicesareexchangedandrewarded.Itencompassesallsystems,fromliberalisedpowersystems(basedprimarilyonmarketmechanisms)toverticallyintegratedsystems.Foraliberalisedpowersystem,theterm“powermarket”isequivalentto“powersystemorganisationalstructure”.Thisreportaimstoinclusivelyaddressallpowersystemstructures,liberalisedandregulated,becausethemaintransitionchallengesarecommontoallofthem.•Pro-user:Anyuserofthepowergridabletobothuseandproduceelectricitywithitsownmeans,alsoreferredtoasprosumer.Theterms“pro-user”and“user”areadoptedtohighlighttheactiveroleofpeopleinthepowersystem,beyondthepassiveroletraditionallyrecognisedas“consumers”.11ABBREVIATIONSBAUbusinessasusualCO₂carbondioxide°CdegreesCelsiusCAPEXcapitalexpenditureCECcustoesperadodecompraCSPconcentratingsolarpowerCVPPcommunity-basedvirtualpowerplantDSOdistributionsystemoperatorEFRenhancedfrequencyresponseEIenergyintensityEMIECO2emissionsintensityofenergyEJexajouleENTSOEuropeanNetworksofTransmissionSystemOperatorsEPCEngineering,procurementandconstructionESCEssentialServicesCommissionEUEuropeanUnionGCCGulfCooperationCouncilGDPgrossdomesticproductGtgigatonneGWhgigawatthourIPCCIntergovernmentalPanelonClimateChangeIPPindependentpowerproducerIRENAInternationalRenewableEnergyAgencyISOindependentsystemoperatorLCOElevelisedcostofelectricityLT-RElong-termrenewableenergyMWmegawattMWhmegawatthourOECDOrganisationforEconomicCo-operationandDevelopmentOPEXoperatingexpenditureOTCover-the-counterPESplannedEnergyScenarioPPApowerpurchaseagreementPVphotovoltaicREMAPIRENA’senergytransitionroadmapSR1.5CIPCCSpecialReportontheimpactsofglobalwarmingof1.5°CST-Flexshort-termflexibilityTEStransformingEnergyScenarioTSOtransmissionsystemoperatorTYNDPTen-YearNetworkDevelopmentPlanforEnergyInfrastructuresTWhterawatthourTWHterawatthourUSDUnitedStatesdollarVIUverticallyintegratedutilityVOLLvalueoflostloadVREvariablerenewableenergy12Powersystemsareattheheartoftheenergytransition,andtheirorganisationalstructureswilldeterminetoagreatextenthowtheenergytransitionprogresses.However,powersystemorganisationalstructuresthemselvesneedtotransition,evolvingfromthefossilfueleratobecomefitfortherenewableenergyera.Thisdimensionoftheenergytransitionhasoftenbeenoverlooked.Discussiononthistopichasbeenmainlylimitedtopowersystemspecialistsfromdevelopedcountries.Asaconsequence,itisoftenbiasedtowardsliberalisedcontextsandisnarrowlyfocusedonthepowersystemlayeritself.However,asuccessfultransitionhingesoncollaborativeeffortswithaglobaldimension,requiringdeep,activeandinformedparticipationfromallcountriesreflectingdifferentsocio-politicalcontexts.Aholisticapproachisneededthataddressestheinteractionsacrossthedifferentsystemiclayers:power,energy,economy,socialandEarth(FigureS-1).Thisreportaimstofillthesegapsbyaddressingthetransitionrequirementsofpowersystemorganisationalstructures,withaholisticvisionandaninclusiveapproachthatisapplicableinbothliberalisedandregulatedcontexts.Forthispurpose,thereportisstructuredaroundtwomaingoals:1)makingthediscussionaboutpowersystemorganisationalstructuresandtheirtransitionrequirementsaccessibletoawideraudience,aswellascontextualisingitwithinasystemicvision;and2)presentinganddiscussingthetransitionchallengesforpowersystemorganisationalstructuresandproposingawayforwardthatmatchestherequirementsneededfortherenewableenergyera.EXECUTIVESUMMARYNote:GHG=greenhousegas;SDGs=SustainableDevelopmentGoals.FigureS-1.Cross-cuttingtransformationsforafairandjustenergytransitionfromthepower,energy,social,economicandEarthsystems•EliminateGHGemissions•Biodiversityconservation•Environmentalstewardship•Addressinequalities•Fostersharedresponsibility•Fairnessandjustice•Buildresiliencetoclimateimpacts•Socialparticipation•Universalaccesstodigniﬁedjobs•Constrainmaterialdemandtoplanetaryboundariesunderfairtrade•Eliminatefossilfuelssubsidies•AlignglobaleconomicrelationshipsandgovernancewithParisAgreementandSDGs•Renewableenergies•Decentralisation•Digitalisation•Flexibility•Universalaccesstosustainableenergyservices•Constrainenergydemandtoplanetaryboundaries•Electriﬁcationofend-useswithrenewableenergies•Fossilfuelsphase-out•Integrationofallelectriﬁedend-usesEarthsystemSocialsystemEconomicsystemEnergysystemPowersystem13Thereportisstructuredintwoparts.Thefirstpart(chapters1-3)addressesthefirstgoal,providingaholisticvisionofpowersystemorganisationalstructuresinatransitioncontext.Itprovidesthesystemicvisionandinclusivecontextforthesecondpart(chapters4-6),whichfocusesonthetransitionchallengesofpowersystemorganisationalstructuresandapotentialwayforward.Hence,thefirstpartofthereportmaybenefitevenreaderswhoarewellacquaintedwiththefundamentalsofpowersystemstructures.PartI:AholisticvisionofpowersystemorganisationalstructuresinatransitioncontextTheenergytransitionisamustandthepowersystemacornerstoneofitThereportlaysoutthecontextualframeworkfortheenergytransitionandtherolethatpowersystemorganisationalstructuresplayinit.Ithighlightstherelevanceofasystemicapproachthatcapturestheinteractionsbetweenthedifferentsystemiclayers(power,energy,economy,social,Earth)andtheroleofpowersystemsinthesedynamics.Despitegrowingevidenceofhuman-causedclimatechange,greenhousegasemissionshavecontinuedtogrow.Ifleftunchecked,thoseemissionscouldwarmtheEarthasmuchas4-5degreesCelsiusonaveragebefore2100,causingsignificantdamagetotheenvironmentandtosocio-economicsystems,withconsequencesforthehumanpopulationsthatdependonthem.Policymakersandsocietyhavetakenstepstoaddresstheclimateemergency,butreducingcarbonemissionsinlinewiththerequirementsofthechallengewillrequireanunprecedentedtransitioninallpartsofsociety,includinginenergy,landuse,urbanlifeandinfrastructureuse;intheindustrialsector;andintheeconomy.Eachoftheseessentialpiecesoftheglobaltransitioncallsforcommittedpolicymakingandenhancedgovernance.Thetechnologicallayeroftheenergytransition–shiftingfromfossilfuelstorenewableenergy,energyefficiencyandflexibility–isthemostadvanced,althoughitisstillinsufficientforsuccessfullyaddressingtheclimatecrisis.Othertransitionlayersarelessadvanced,suchasthesystemicchangeslayerthataddressestheevolutionfromtoday’scentralised,non-integratedenergysystemsinwhichonlyasmallnumberofstakeholdersdirectlyparticipate,towardsmoredistributed,integratedenergysystemsinwhichmanyusersparticipatethroughenhancedgovernance.Progressisbeingmadeinaddressingthislayer,althoughslowly.Athirdtransitionlayerthatunderpinsprogressintheotherlayers,butthatlagsininformeddiscussionaboutitstransitionrequirements,ispowersystemorganisationalstructures(FigureES-2).Puttinginplacetheappropriateorganisationalstructuresfortherenewableenergyeraisessentialtoallowtheothertransitionlayerstoprosper.Theorganisationalstructuresuponwhichoursocio-economicsystemoperatesmaybekeyenablersoforfundamentalbarrierstotheneededtransition.PowersystemswillbegreatlyimpactedbytheenergytransitionAstheenergytransitionunfolds,itwillbringbothchallengesandopportunitiesforpowersystems.Implicationsofthetransitionincludethedominanceofvariablerenewableenergy(VRE)generation,increaseddiversityinflexibilityrequirementsandsources,moredistributedenergyresources,amoreactiverolefortheusersofthepowergrid,andaboostindatagatheringandexchangesupportedbydigitalisation.ContextualisingpowersystemorganisationalstructuresPowersystemorganisationalstructureshaveevolvedalongdifferentpathwaysdependingontheprevailingsocio-politicalframeworks,acrosstimeandjurisdictions.Elementsoftoday’sexistingstructureswillfacilitateaddressingthetransitionrequirements.Aninclusiveapproachisusedthroughoutthereport,acknowledgingthefactthatchallengesandgoalsarefoundacrossdifferentorganisationalstructures,theappropriatetransitionpathwaywillbecase-dependent.Allofthesocio-politicalframeworksarecapableofofferingvalueforasuccessfultransition.14RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONToachieveitsgoals,apowersystemorganisationalstructureshouldanticipateandprocuretheneededcapacityandinfrastructure,aswellasproduceanddeliverelectricitywithintheexistingsocio-economicandenvironmentalboundaries.Today’sstructureswereconceivedandputinplacetomeetthegoalsofthefossilfuelera.Nowtheyneedtoadapttotherequirementsandcontextoftheenergytransition.Thedichotomybetween“regulated”and“liberalised”powersystems,althoughcommonlyused,canbemisleading.Forexample,inrecentdecadesthedeploymentofrenewablesinliberalisedsystemshasoccurredlargelythroughregulatedpaymentsandre-introducedregulationfordedicatedandstate-drivenprocurementofspecifictechnologies,overridingcompetitivemarkets.Thissituationwasnotnew:sincetheoriginofpowersystems,supportmechanismsanddedicatedpolicieshavebeenadoptedfortechnologiesdeemedtobestrategic.Meanwhile,regulatedsystemscanalsoincorporatecompetitivecomponentssuchasauctionedpowerpurchaseagreementswithindependentpowerproducers,ortenderstobuildnewrenewableenergyinfrastructure.Thedeploymentofmerchantpowerplantsisfarfrombecomingacommonoccurrence.Indeed,underthemisalignmentsemergingfromcurrentpowersystemorganisationalstructures,suchdeploymentdoesnotseemfeasibleatthescalerequiredbytheenergytransition.•Non-integrated•Fewstakeholders•Centralised•Unidirectional•FossilfueleraEarthandSocietyEconomyClimate•Integration•Participation•Bidirectional•Distributed•DemocratisedRenewableenergyEnergyeciencyEnergyﬂexibilityRenewableenergyeraTechnologicaltransitionSystemicchangesOrganisationalstructuresWidersystemiclinksandfeedbacksFossilfuelsEnergyTransitionFigureS-2.Unequaladvanceindifferentlayersoftheenergytransition,withorganisationalstructureslagging15ExecutivesummaryPartII:EnablingthetransitionofpowersystemorganisationalstructuresUnderstandingexistingandpotentialfuturemisalignmentsDevelopingpowersystemorganisationalstructuresthatareappropriatefortheenergytransitionrequireshavingaclearerunderstandingofexistingandpotentialmisalignments,1sinceovercomingtheseisthegoalofimprovedorganisationalstructures.Manydiversemisalignmentsexisttoday,withwide-rangingcausesandeffectsacrossthedifferentsystemiclayers.Energysystemsaresetuptoprovideenergyservicestosociety;however,deliveringthoseservicescanresultinundesirableimpactsonsocieties.Importantmisalignmentshaveledtoseriousconsequences.Forexample,climatechangeandairpollutionareamongtheunwantedeffectsthatresultwhentheorganisationalstructuresofthefossilfuelerafailtoproperlyalignthecost,priceandvaluedimensionsofenergy.Althoughtheenergytransitionisexpectedtomitigatebothclimatechangeandairpollution,asthetransitionprogressesnewfundamentalmisalignmentsmayariseandothersremain;ifunaddressed,thesecantriggertransitionbarriersand/orlimitthebenefitsthatsocietymightreapfromthetransition.Misalignmentswithinthepowersectorspurfromdifferencesintechnologicalcharacteristicsbetweenconventionalandtransition-relatedresources.Allpowersystems,fromthemoreregulatedtothefullyliberalised,willfacethem.Althoughrenewableenergysupportmechanismshaveevolvedtobecomemore“system-friendly”overtime,thefundamentaldisconnectbetweenorganisationalstructuresandthespecifictechno-economiccharacteristicsofrenewableshasnotbeenaddressed.Evidenceofsuchmisalignmentshastriggeredregulatorymeasuresaimedatfixingthem.However,byfailingtoaddressthebottom-lineissues,thesetemporaryfixesdonotpreventmisalignmentsfromresurfacingasthedeploymentofrenewablesadvances.AclearexampleofmisalignmentinthepowersystemisthedeclineinelectricitypricesduringperiodsofhighVREpenetration.ThisreducesthereturnsforVREsystemsthatearnrevenuefromwholesalemarketsinliberalisedsystems,andhencediscouragesfurtherinvestmentswithoutappropriatesupport.Today’swholesalepricingstructures(whichrelyonmarginalcosts)arenotappropriateforrenewable-basedpowersystems.Anorganisationalstructurethatreliesonmarginalcostsisunabletosupportarenewable-basedpowersystemoncethecurrentadditionalregulatedpaymentsarephasedout.Themainstreampolicynarrativearguesthatasrenewablesbecomecostcompetitive,suchpaymentsshouldbeended.However,oncetherevenueforVREpowerplantsislimitedonlytothatfrommarginalpricingstructures,theextremelylowwholesaleelectricitypricesthatresultfromhighpenetrationofrenewablescompromisetheverybusinesscasefortheseplants.This,inturn,leadstoanincreasedriskperceptionthatdirectlytranslatesintohighercapitalcosts,hencepreventingrenewablegenerationfromdeliveringitspotentialforlow-costelectricity.Suchasituation–wherethesuccessindeployingrenewableenergyunderminesitsfutureviabilitybecauseofwholesalepricedepletion–isknownasthe“cannibalisationeffect”.Misalignmentsalsomayariseintheflexibilitydimension.Policymakersmustensurethatcapacitymechanismsareusedfortheiroriginalpurpose–tomaintainsystemreliability–ratherthanleadingtotransitionbarriersbykeepingonlinerent-seekingfossilfuelpowerplantsthateventuallywillneedtobephasedoutduringtheenergytransition.Capacityremunerationmechanisms,ifdeemednecessaryforsupportingflexibilityinvestmentstomaintainsystemreliability,shouldbedesignedrecognising1Inthepowersystemlayer,theterm“misalignment”referstothenegativeunintendedconsequencesoftheinteractionbetweenrenewablepowergenerationpoliciesandthedesignofpowersystemorganisationalstructures,aswellastheintrinsicincapabilityofcurrentorganisationalstructurestofosterandsustainapowersystembasedonrenewablegeneration.16RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONthesystemandsocialvaluefromallflexibilityresources(onboththesupplyanddemandsides),withinatransitioncontextandwithintheframeworkofanorganisationalstructurethatisfitforarenewable-basedpowersystem.Powersystemstructuresneedtobedesignedtoprovideelectricitytoallwhilesupportinganambitious,cost-effective,fairandjustenergytransition,spurringinnovationintechnology,enablingalluserstobecomerealactorsofthepowersystem,andcontributingtobuildingtheresilienceneededtonavigatesocio-economicandenvironmentalchallenges.IfVREistobecomethemainsourceofpower,electricitypricesshouldnolongerbedeterminedbasedonhowwellthesystemcompressesfuelcosts.Instead,themaingoalsofthepowersystembecome:1)financingVREplants(whichhavehighcapitalexpenditures,orCAPEX);2)procuringtheneededflexibility.Fosteringparticipationandimprovinggovernancearecornerstonestotriggeringthecollaborativeeffortrequiredforthetransition.Electricitybillingplaysanimportantcommunicationrole.Hence,thebillingstructureneedstobeupdatedtoclearlycommunicatethemeaningandimplicationsofeachcomponenttoendusers,aswellasaligningitwiththecharacteristicsofarenewable-basedpowersystem.Misalignmentsbeyondthepowersystemalsoneedtobeaddressed,usingaholistictransitionplanningandpolicyframework.Mostofthesemisalignmentsexistedpriortotheenergytransition,havinglongco-existedwithfossilfuel-basedpowerandenergysystems.However,today’scriticalenvironmentalandsocialframeworkmakesaddressingthesemisalignmentsfundamentaltoasuccessfulenergytransition.Misalignmentsassociatedwithissuesoflabour,unlimitedgrowthandinequalitywillnotbesortedoutbymerelytransitioningtoapowersystembasedonrenewablesources.Moreover,anunjustenergytransitioncancreatesocialresistance,asisalreadyhappeninginsomejurisdictions.Henceaholisticpolicyframeworkthatspansallofthesystemiclayerswillbeneededtoaddresssuchmisalignmentsandtopreventthetransitionbarriersthattheseissuescouldproduce.Ourcurrentsocio-economicstructuresenteracrisisstagewhenweshiftawayfromtheeconomicgrowthimperative.However,seekingtomaintaintheglobaleconomyonapathofunlimitedgrowthmakesitfarmoredifficulttocomplywithambitiousclimategoalsthatpreventcatastrophicimpactsonoursocio-economicsystem.Henceaddressingstructuralaspectsthatallowoursocio-economicsystemstoprogressandthrivebeyondthegrowthimperativeisbecomingapriority.Asteady-stateeconomythatproperlyaddressesdistributionalaspectsseemsanappropriategoalforhumanactivityonaplanetthathasfiniteresourcesandimpact-bearingcapacity.Addressingtheclimateemergencyrequiresanunprecedentedglobalcollaborativeeffort.Triggeringandmaintainingsuchaneffortrequiresasolidsocialcontractthatleavesnoonebehind.Henceinequalityisanimportantmisalignmentoftoday’ssocio-economicsystemthatcanseriouslyhinderthesuccessoftheenergytransition.Beyondsolidarity,inthecurrentclimatecrisisaddressingthedistributionaldimensionhasbecomeamust.Transitiondynamicsinanunequalandunfairworldwouldleadtomuchoftheworld’spopulationgettingaccesstoverycheapfossilfuelsandrelatedtechnologies,becauseofthereduceddemandforthesefromtheglobalNorth.ThiscouldeasilyreverseanydecarbonisationadvancementsintheglobalNorthastherestoftheworldseekstoreplicateitsfossilfuel-basedeconomicgrowthofthepastdecades.17ExecutivesummarySearchingfortherightbalanceamongcompetition,regulationandcollaborationThethreemaincomponentsshapingpowersystemorganisationalstructuresarecompetition,regulationandcollaboration.2Giventheprevailingroleofliberalisationinshapingorganisationalstructuresinrecentdecades,thesethreecomponentshaveprosandcons,creatingtheneedforacase-dependentbalancethatmaximisestheoveralltransitionbenefitswithineachsocio-politicalcontext.Powersystemstructurescommonlyrangefrom“regulated”to“liberalised”.3Inregulatedstructures,asingleutilityownsandoperatesthefullsetofinfrastructuresneededtogenerate,transmitanddistributeenergy.Inliberalisedstructures,generationandretailofelectricityareopentocompetition,withcustomersbeingabletochoosetheelectricityprovideramongavailablemarketchoices.Inrecentdecades,asustainedglobalefforthasbeenmadetoliberalisepowersystemsworldwide,promotingmarket-based,profit-drivencompetitionprocurementandallocationmechanismsinsystemsthatwereformerlypublic,centrallyplannedandverticallyintegrated.Thishasbeenpartofabroadertrendwhereliberalisationisconsideredthepreferredpathwaytointroduceeconomicefficiencyinmostsectors,includingpowersystems.Inpractice,however,liberalisationreformsofpowersystemshaveproveddifficulttoapplyuniversally,leadingtoawiderangeofhybridsolutionsbetweenliberalisedandregulatedsystems.Theenergytransitionisnowintroducingfurtherhybridisation,forexamplethroughregulatedsupportforrenewablepowerinliberalisedsystemsandthroughcompetitiveprocurementofrenewablepowerinregulatedsystems.Basedonprojections,inafewdecadesmostoftheglobalpopulationwillliveinregionswhereregulatedpowersystemsarecurrentlyprevalent.Henceitisworthwhiletoexplorewhethercompetitive,profit-drivenmarketsaretheonlyvalidoptiontoadvanceprocurementmechanisms,andunderwhichcircumstancesthesecanbeenablersorbarriersfortheneededenergytransition.Notably,thedriversthatinthepastledtothepredominanceofregulatedsystems–suchasintensegridexpansionneedsandapost-WorldWarIIreconstructioncontext–aregainingtractiontodayasthetransitionprogressesandsocio-economicchallengesarehighontheagenda.Competition,togetherwithindependentregulatorsandgoodgovernancemechanismsinfavourablesocio-economicandpoliticalcontexts,hasprovedtocontributetoimprovingtheoverallefficiencyandfinancialviabilityofutilities,whilefacilitatingabetterenvironmentforinvestmentduringthefossilfuelera.However,evenwithinthefossilfuelera,whenprofit-drivencompetitionwasintroducedwithweakerstartingconditions,suchcompetitionhasseldomledtopositiveresults,evenincreasingtheriskforpolicyturnabout.Furthermore,eventhebest-structuredcompetition-drivenorganisationalstructureshaveprovedunablebythemselvestodeliveronkeysocialandenvironmentalimperatives(long-termrenewableenergyadequacy,fossilfuelphase-out,etc.).Additionalpolicymeasureshavebeenessentialtoredirectandpromotetheneededinvestmentsforenergyaccessandtheenergytransition.Moreover,severalcountrieshaveshownthatitispossibletoachievecomparablepowersystemperformancewithoutpushingtheliberalisationagenda.Forexample,bothCostaRicaandUruguayhavecompetentstate-ownedverticallyintegratedutilities(VIUs)guidedbyclearpolicygoals,combinedwithamoregradualandtargetedrolefortheprivatesector.Thisapproachhasallowedregulatedstate-ownedpowersystemstoimprovetheoperationofutilitieswhilemaintainingtheabilitytodeal2Collaborationisdefinedhereastheabilitytoactcollectivelytoachieveacommonsocietalgoal.3Notethatliberalisedstructuresalsorequirestrongelementsofregulationinordertoalignmarketswithpowersystemandsocialgoals,includingaddressingexternalities,tothepointthatsomeauthorsusetheterm“re-regulation”torefertoliberalisationdynamics.However,forthesakeofbrevitythe“regulated”versus“liberalised”nomenclatureisusedinthisreporttodesignatethetwoextremesinorganisationalstructures.18RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONwiththepowersystemasawholeandtocapturewidersocio-economicsysteminteractions.Suchanintegratedapproachoffersadvantageswhenaddressingdeeptransformationrequirementswithinlimitedtimeframes,suchastheenergytransitionthatisneededtoaddresstheclimatecrisis.Inpractice,however,neitherpublicverticalintegratedutilitiesnorliberalisedcompetitivesystemsaresocio-economicallyefficientandsustainablebydefault.Bothcanbecapturedbybureaucracyandinefficiencyorevenbyvestedinterests.Thus,whateverthechosenpathway(regulated,liberalisedorhybrid),asuccessfultransitiondependsonstrong,high-qualitygovernance,invitingtheadoptionofamorepluralistviewregardingtheavailableoptionstodeliverclimate-proofoutcomesineachsocio-economiccontext.Governance,inturn,requiresadvancedformsofcollaborationamongallagents,andspecificallyofsocialparticipationwheresocietycandirectlyandindirectlytakepartindecisionmaking,includingindefiningorganisationalstructuresandaligningthemwiththepowersystem,socialandenvironmentalgoals.Underthecurrentcontext,bothregulatedandliberalisedcomponentsmayhavespacetocontributetotheenergytransitionandtoaddresscurrentchallenges.Henceitseemsworthwhiletosearchforsynergiccombinationsofliberalisationandregulationthatcandeliverforthechallengesaheadindifferentsocio-economiccontexts.TheCOVID-19pandemichasshownthatsocietiescanpursueboldactionincomplexsituationswhentakingstepscollaboratively–butalsothatthiscannotbetakenforgrantedandthatsignificantimprovementsingovernancetoaddressglobalchallengesareneeded.Therefore,beyondregulationandcompetition,powersystemorganisationalstructuresneedtoconsiderhowtofostercollaborationtoacceleratetheenergytransitionwhilemaximisingitssocio-economicvalue.Materialisingtherequiredcollaborativeeffortneededtoaddresstheclimatecrisisrequiresbuildingaframeworkoftrust,wherecitizensperceivethatgoodgovernanceisinplace,thatnoonewillbeleftbehind,andthattheburdenandbenefitsofthetransitionarefairlyshared.Thewayforward:dualprocurementofrenewableelectricityandflexibilityAninitialproposalofawayforwardforpowersystemorganisationalstructuresisthe“dualprocurement”.Thedualprocurementapproachacknowledgesthedifferentcharacteristicsandrequirementsofthetwomainelementsthatthepowersystemneedsforasuccessfulenergytransition–i.e.renewableelectricityandflexibility4–aswellastheneedforholisticintegrationofbothoftheseelementswithinthepowersystemandwiththeothersystemiclayers.4Thereportfocusesontwomainpillarsoftheneededpowersystemorganisationalstructures:procuringrenewableelectricity,andflexibility;hencetheuseoftheterm“dualprocurement”.However,acompletepowersystemorganisationalstructurehasotherelementsbeyondthesetwomainones,suchasancillaryservicesprocurement,whichinturnwillalsointeractwiththetwomainpillars.19ExecutivesummaryThetimehascomeforapowersystemorganisationalstructurethatcansupporttheenergytransitionandthepowersystemsofthefuture.Thegoodnewsisthatitdoesnotneedtobeproducedfromscratch.Theinstrumentsthathaveprovedcapableofsupportingtheenergytransitionupuntilnow,ifintegratedproperly,areappropriatebricksforbuildingtheneededstructure.Forexample,powerpurchaseagreements,feed-intariffsandpublicdirectinvestmentschemeshaveprovedsuitableforsupportingthedeploymentofCAPEX-intensiverenewablepowerplants,minimisingthecostofprocuringrenewablepowerbykeepingfinancecostslow.Meanwhile,temporalandspatialgranularwholesalemarketshaveprovedabletoelicitinvestmentsinflexibleresources.Thedualprocurementapproachtakesintoconsiderationthesepastexperiencesandintegratesthemintoaholisticvisionofhowthepowersystemstructurecouldbemadefitfortherenewableenergyera(FigureES-3).Separately,althoughinaco-ordinatedfashion,dualprocurementprocuresbothrenewableenergyandflexibilitywhilehonouringthedifferentcharacteristicsofboth.Thetwomainprocurementmechanismsarelong-termrenewableenergy(LT-RE)procurementandtheprocurementofflexibility5(ST-FlexandLT-Flex).Aconceptualshiftintroducedinthedualprocurementapproachistomakelong-termelectricityprocurementschemesoneofthetwomainpillars,henceacknowledgingthattheyareheretostay.ByseparatingtheLT-REandST-Flexprocurements,oneofthemainissueswithunlimitedscarcitypricingisdirectlyaddressed:duringascarcityevent,notallgenerationwillberewardedatthescarcityprice;ratheronlythegenerationanddemandcomponentssupplyingtherequiredflexibilitywillberewardedatthisprice,therebyminimisingthechanceofgeneratingwindfallprofits.5Theprocurementofflexibilityislikelytorequirebothshort-term(ST-Flex)andlong-term(LT-Flex)mechanisms,withthemixtureofbothevolvingasthetransitionprogressesandbeingdependentontheprevailingsocio-politicalcontextineachjurisdiction.Thereport’snarrativeassumesthatST-Flexwillbethedominantmechanisminthelongterm,withLT-Flexcomplementingitasrequiredatdifferentpointsintimeandjurisdictions,justascapacitymechanismsaredoingtoday.However,theappropriatemixofST-FlexandLT-Flexremainsadesignvariabletoaligneachpowersystemorganisationalstructureswithitsspecificcontext.FigureS-3.ThedualprocurementconceptDUALPROCUREMENTEXPERIENCEToprovideastableframework:•Supportmechanisms(FIT,FIP,PPA)•DirectpublicinvestmentTomatchsupplyanddemand:•Wholesaleandretailmarkets•CentralisedsystemoperatorsdispatchProcuringRenewablePowerProcuringFlexibilityLONGTERMSHORTTERM20RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONAuctionsordirectpublicinvestmentbecomethebackboneofLT-REprocurement,throughlong-termprocurementmechanismsthataddresstherequirementsofCAPEX-intensivetechnologies.ST-Flexprocurementaddressesprocurementoftheflexibleresourcesneededforthereliableoperationofarenewable-basedpowersystem,andisbasedonmarginalprices,withagranularbiddingformat.EssentialcharacteristicsofthetwoprocurementmechanismsaredescribedinTableES-1.LT-REprocurementST-FlexprocurementBasedonperiodic,long-termproduct-basedallocationmechanisms(auctions,directpublicinvestment,etc.).Basedontheshort-termdimensionofcurrentdispatchmechanisms(balancingmarkets,regulateddispatch,etc.).Procuresrenewableelectricity(VREanddispatchablerenewables)andenablesrenewableenergysupplyadequacywiththeadequateanticipation.Procuresflexibility(demand-sidemanagement,distributedenergyresources,storage,dispatchablerenewables,power-to-X,vehicle-to-grid,etc.)andenablesflexibilitysupplyadequacy.Designedtomatchsupplyanddemandasmuchaspossibleinthelongterm(capturingtemporalandlocationalvaluetothepowersystem).Matchessupplyanddemandintheshortandveryshortterm(capturingtemporalandlocationalvaluetothepowersystem).Drivenbylong-termloadforecastwithinintegratedenergyplanning.Drivenbyshort-termandvery-short-termdeviationsbetweenthescheduledload/renewableenergyproductionandrealdemand/production.ProvidesasafeinvestmentenvironmentthatminimisesfinancecostsforCAPEX-intensivetechnologies.Liberalisedsystems:Allowspricestovaryfromveryhightolowandevennegative,andallowsforadditionalregulatedpaymentsifneeded(especiallyduringthetransitionperiod:LT-Flex).Regulatedsystems:Providesanenablingframeworkfordeployingandoperatingtherequiredflexibilitycapacity.Designedforthecharacteristicsofrenewableenergytechnologies.Designedforthecharacteristicsofflexibilityresourcesincludingdispatchablerenewablepower,storage,demandresponse,vehicle-to-gridandpower-to-X.Recognisesthespatialandtemporalvalueofenergy.Recognisesthespatialandtemporalvalueofflexibility.Theeconomicsignalsofdualprocurementshouldreachtheretailrates(orprices)ofalluserstopromotetheirparticipationinsystemoperation,whilesimultaneouslyaddressingdistributionalissuessothatcollaborativeengagementisachievedinajusttransition.Society-widecollaborativegovernance(publicorprivate),promotingandacknowledgingsocialvaluecreation:Enableseffectivesocietalanduserparticipationinplanningandoperation,fosteringtherequiredcollaborativeframeworkforsocialvaluecreation.TableS-1.Thepillarsofdualprocurement:Long-termrenewableenergy(LT-RE)procurementandshort-termflexibility(ST-Flex)procurement21ExecutivesummaryLT-REprocurementisdesignedtomatchsupplyanddemandasmuchaspossibleinthelongterm,inboththetemporalandspatialdimensions,usingrenewableenergyandfacilitatingtheinvestmentsneededtoguaranteeadequateelectricitysupplyinthesystem.ST-Flexprocurementisdesignedtomatchsupplyanddemandintheshortandveryshortterms,allocatingflexibilityresourcestomeetthedeviationsbetweenthescheduledloadandrenewableenergyproductionandthereal-timeloadandproduction.ST-Flexprocurementisbasedontheshort-termdimensionofcurrentmarginalistallocationmechanisms(short-termwholesalemarkets,balancingmarkets,short-termcost-basedmarkets,regulateddispatch,etc.)modifiedtobemoreflexibleandresponsive.Itenablestheactivationofdemand-sideresources,storage,theappropriateaggregationofdistributedenergyresources,andsectorcouplingwhenneeded,andfacilitatestheinvestmentsneededtoensureflexibilitysupplyadequacy.BothLT-REandST-Flexprocurementrecognisethespatialandtemporalvaluesofelectricityandflexibility.Theyalsopromoteandacknowledgesocialvaluecreationbeyondthepowerandenergysystems.Demandplaysacriticalroleinbothprocurementmechanismstoshapelong-termforecastsandtoactivelyprovideflexibilityservices.Therefore,inthisproposalusersareenabledtoparticipateintheprocurementmechanismsdirectlyorindirectly,becomingdecisionmakersandinformationprovidersindesignandplanning,aswellasactorsinprovisioningbothrenewableelectricityandflexibilityatdistributedandlargescales.Conduciveretailratesandpricesareessentialtofacilitatedistributedinvestmentinrenewableenergyorflexibilityassetsandtoactivateitsserviceswhenneeded.Therefore,thedualprocurementconceptshouldgobeyondthegenerationandflexibilityallocationmechanismsandreachtheretailsphere.Appropriatelysharingeconomicsignalswithallactorsenhancestheirparticipationinthedesignandoperationofthepowersystem.Withinthedualpowersystemstructure,usersmaycontractwithrenewableenergyproducersforlong-termcontracts,adjustingtheirdemandtotheLT-REavailabilityasfaraspossible,andacceptingenergyathigherpricesfromtheST-Flexprocurementmechanismwhenneeded.Throughtheappropriateaggregationoftheirdistributedenergyresources,userscanparticipateinbothprocurementmechanisms,receivingafairremunerationfortheircontributionstosystemoperation.Theexistingsocio-economiccontexthasprovedtobecriticalforshapingcurrentpowersystemorganisationalstructures.Thedualprocurementproposalappliestobothliberalisedandregulatedsystems,aswellashybridsystems,witheachjurisdictionrequiringitscontext-specificmixofcollaboration,regulationandcompetitionforitsimplementation.Indeed,implementationofthedualprocurementproposalshouldfocusonimprovinggovernancetoovercomethecurrentfailuresofbothliberalisedandregulatedsystems:•Themostliberalisedversionswouldimprovebytakingmeasurestoavoidmarketfailuressuchasmarketpowerabuse,elementsofspeculativeactionorignoringexternalities,andimprovinggovernancetoreachabetteralignmentwithsocialvalue.•Moreregulatedversionswouldbenefitfromopeningtothewidediversityofstakeholdersandresourcesthatcouldparticipateinthetransition,workingtogetbetteraccesstoinformationonthecostsofpowerandflexibilityplants,andimprovinggovernancetotriggeractivesocialinvolvement.22RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONInbothcases,thereisaneedtocreatenewwaysofaddressingprosperity,balancingenvironmentalandhumanrightstogetherwiththeeconomicperformanceofthedualprocurementmechanisms.Inthelongrun,acertaindegreeofconvergenceintheimplementationofthedualprocurementproposalunderregulatedorliberalisedcontextsshouldbeexpected,sincetheysharethemainaimandthemeanstoimprovehowtoreachit(FigureES-4).Organisationalstructureconvergence:AlignedeconomicandsocialgoalsDierentsocial,economicandpoliticalstartingpointsEvolution:BuildingonstrengthsandovercomingshortcomingsImprovedgovernancePublicownershippathwayLiberalizedpathwayFigureS-4.ConvergenceoforganisationalstructuresfollowingtheliberalisedandpublicownershippathwaysThesystemicchangeapproachaddressestherequirementsofthestructuresneededbyrenewable-basedenergysystems,identifyingtherootsourcesofmisalignmentswhiletakingintoaccounttheinteractionswiththewidersocio-economicandEarthsystems.Thisholisticapproachalignstheenergytransitionwithwidersocio-economicimperativesbyputtinginplaceorganisationalstructuresthatarecapableofprovidingaffordable,reliable,renewableenergytoall,withtherequiredclimateambition,whilehelpingtoreduceinequalities,equitablysharebenefitsandburdens,andbuildtheneededsocio-economicresiliencetonavigatetheclimateimpactsthatcannolongerbeavoided(i.e.afairandjusttransition).Suchasystemicapproachbuildsonimprovedgovernance(participation,transparencyandaccountability)thatalignsdecisionmaking,institutions,agentsandinstruments(insidethepowersystemandbeyond)tomakethetransitiongoalsareality.Thedualprocurementproposalismeanttobeastartingpointfordiscussion.Furtherworkisneededtoadvanceandrefinetheseconcepts,incorporatingbothcountry-andregion-specificcontexts.Thisreporthighlightstheneedtoadvancethistransitiondimensionandtoinformnecessarydiscussionsinaninclusiveway.23AHOLISTICVISIONOFPOWERSYSTEMORGANISATIONALSTRUCTURESINATRANSITIONCONTEXTPART124Despitegrowingevidenceofhuman-causedclimatechange,globalemissionsofcarbondioxide(CO2)havecontinuedtogrow,increasing1.5%annuallyonaverageduringthelastdecade(GlobalCarbonProject,2022).Thegapbetweenobservedemissionsandthereductionsneededtomeetinternationallyagreedclimateobjectivesiswidening(UNEP,2020).Ifleftunchecked,thoseemissionscouldcontributeasmuchas4-5degreesCelsius(°C)ofplanetarywarmingonaverageby2100,causingsignificantdamagetotheenvironmentandtosocio-economicsystems,withconsequencesforthehumanpopulationsthatdependonthem.Theyear2020wasoneofthewarmestonrecord,andtheeffectsofclimatechangehavebecomeincreasinglyapparent,withwildfires,droughts,stormsandglacialmeltingintensifying(IPCC2018,2014;UNEP,2020).THENEEDANDURGENCYFORTHEENERGYTRANSITION:ADDRESSINGCLIMATEBREAKDOWN125Recognisingtheurgentnatureofthecrisisandtakingactiontoambitiouslymitigategreenhousegasemissionswouldreducethescaleoftheadverseeffects,bettersecuringthewell-beingofourplanetandtheprosperityofitsinhabitants.Meanwhile,delaysinundertakingeffectivemitigationactiongreatlyincreasethechallengesoftransition.Ifeffectivemitigationeffortshadstartedby2000,stabilisingglobalwarmingat1.5°Cwouldhaverequiredaveragemitigationratesofaround4%peryear,whereasstartingtheseeffortsby2019wouldhaverequiredaveragemitigationratesofaround19%peryear6(UIO,2020).Anotherwaytograsptheurgencyoftherequiredtransitionisbyconsideringlinearmitigationpathwaysthatarecompliantwiththeavailablecarbonbudgets.AsshowninFigure1,alinearmitigationpathwaystartingin2020wouldhavetobecompletedby2026tocomplywiththecarbonbudgetcompatiblewith1.5°Cwarmingat66%likelihood,by2033tocomplywiththebudgetfor1.5°Cat50%likelihoodandby2060tocomplywiththebudgetfor2°Cat66%likelihood.ThiswouldmeanannualreductionsinCO2emissionsof7.1gigatonnes(Gt),3.2Gtand1.1Gt,respectively(LeQuéré,2020).TheseemissionreductionscanbecontextualisedwiththeexpectedeffectsofCOVID-19on2020emissions.Inthewakeofthepandemicandconsequentlockdowns,anestimated8.8%lessCO2wasemittedinthefirstsixmonthsof2020thaninthesameperiodin2019.Insomeindividualcountries,dailyglobalCO2emissionsreachedpeakreductionsnearlyfourtimeshigher(-26%)duringthefirsthalfof2020.6ThisisassumingtheIntergovernmentalPanelonClimateChange’s(IPCC)SR1.5Ccarbonbudgets(basedonaveragesurfaceairtemperatureandwithoutincludingunaccountedEarthsystemfeedbacks)andconsideringapproximatelyexponentialdecaypathwaysthattakeintoaccounttheinitialinertiaassociatedwithsocietalandinfrastructuralchange,andhencehaveannualmitigationratesthatgraduallytakeoffduringthefirstyearsofthetransition.Theorganisationalstructuresuponwhichoursocio-economicsystemoperatesmaybekeyenablersoforfundamentalbarrierstotheneededtransition.26RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONReducingcarbonemissionsinlinewiththerequirementsforavoidingclimatebreakdownisonlyconceivableifthereisanunprecedentedtransitioninallpartsofsociety,includinginenergy,landuse,urbanlifeandinfrastructureuse;intheroleoftheindustrialsector;andintheeconomyandgovernance(IPCC,2018).Eachoftheseessentialpiecesoftheglobaltransitioncallsforcommittedpolicymakingandenhancedgovernance.Inthistighttransitioncontext,payingattentiontoexistingorganisationalstructurestoavoidadditionalbarrierstotransition(andassociateddelays)isparamount.Thetransitionintheenergysector(alsoknownasthe“energytransition”)iscriticaltolimitclimatebreakdown,astheenergysectoraloneaccountsformorethan70%ofglobalgreenhousegasemissions(ClimateWatch,2020).Allcredibleenergytransitionscenariospointinthesamedirection:themainingredientsofasuccessfulenergytransitionarerenewableenergyandenergyefficiency,incombinationwithelectrification.However,theseingredientsarestillnotprevalentintheglobalenergymix.Moreover,theenergysectorisembeddedwithintheeconomyandsuppliesitsneeds.Properlymanagingtheevolutionandstructureoftheeconomyisparamounttoachievingtherequireddecarbonisationrates.Theorganisationalstructuresuponwhichoursocio-economicsystemoperatesmaybekeyenablersoforfundamentalbarrierstotheneededtransition.Toooftentheseorganisationalstructuresaretakenforgrantedanddonotreceiveenoughattentionwhenplanningtransitionroadmaps.Thisreportfocusesononekeyorganisationalstructure:thepowersystem.Asthereportshows,powersystemsareatthecentreoftheenergytransition,andtheirorganisationalstructuresinfluencehowandtowhatextentrenewableenergytechnologiesaredeployed.FIGURE1.Linearmitigationpathwaysforcomplyingwiththeavailablecarbonbudgets0510152025303540451960198020002020204020602080Historic2C@67%1.5C@50%1.5C@67%GtCO/yrBasedonhistoricCO2emissionsfromGlobalCarbonProject(2022)andoncarbonbudgetsfromtheIntergovernmentalPanelonClimateChange’s(IPCC)SR1.5C,basedonsurfaceairtemperature,includingIPCCestimatesofEarthsystemfeedbacks(IPCC,2018)andfactoringintheimpactof2019updatesonsea-surfacetemperaturemeasurements(Hausfather,2018).27Theneedandurgencyfortheenergytransition:AddressingclimatebreakdownTheanalysisaimstosetthesceneforundertakinganinformeddiscussionabouttheneedandoptionstotransitionpowersystemorganisationalstructures,whilekeepingaholisticapproachthatrecognisestheembeddednatureofpowersystemswithinenergy,economic,socialandEarthsystems.Followingtheintroductorychapter,chapter2explorestheimplicationsoftheenergytransitionforpowersystems.Chapter3presentstheprevalentpowersystemstructures,andchapter4discussesthemisalignmentsbetweenthesestructuresandtheenergytransition.Chapter5delvesintotheroleofmarkets,andchapter6introducestheconceptof“dualprocurement”asapowersystemorganisationalstructurethatisfitfortheenergytransition.1.1.THENEEDTORESHAPETHEENERGYMIXInadditiontodeployingthepotentialforenergyefficiencyandaddressingthestructuralsocio-economicelementsthatdriveincreasesinenergydemand,successfullyimplementingtheenergytransitionrequiresdeeplyreshapingtheenergymixwithinshorttimeframes.Thepowersectorwillplayaprominentroleinthis,withelectricityprovidingsolutionstodecarbonisealargeshareofenergyenduseswithrenewables,and,consequently,therelativeweightofthepowersectorintheenergysystemincreasing.PriortotheCOVID-19pandemic,energysupplyandusewereincreasingsubstantiallyeveryyear.Theglobaltotalprimaryenergysupplygrew18%between2009and2019,to606exajoules(EJ).Fossilfuels(coal,oilandnaturalgas)accountedfor80.9%ofthetotalin2019(downslightlyfrom81.6%in2009),whereasrenewableenergyaccountedforonly14.1%in2019(85.5EJ)(Figure2).However,thisisupfroma12.6%sharein2009,showingthegrowingroleofrenewables.Nuclearenergyprovidedtheremainderoftheglobalsupplywith30.3EJin2019.9%2%2%23%31%27%14%5%81%610Exajoules512Exajoules9%1%2%21%34%28%CoalOilFossilfuelsNaturalgasNuclearenergyRenewableenergyHydropowerWind,solar,etcBiofuelsandwaste12%6%82%FIGURE2.Globaltotalprimaryenergysupply,2009and2019Source:IEA,2021a.28RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONEnergyisconsumedinthreemainsectors:industryandtransport,eachaccountingfor121EJoffinalenergyconsumptionin2019,andtheresidentialsector(88EJ).Othersectors(commercial,fishing,agriculture,etc.)togetheraccountedfortheremaining60.5EJ(Figure3).FIGURE3.Finalenergyconsumptionbysectorin2019Source:IEA,2021a.020406080100120140EJIndustryTransportResidentialOtherElectricityHeatRenewableenergyFossilfuelsRenewableelectricityisbeingdeployedatarapidrate(IEA,IRENA,WHO,UNSDandWorldBank,2020),asrecord-settinglowcostsdrivethegrowthinrenewablepowergenerationtechnologies.Four-fifthsofthesolarphotovoltaic(PV)andwindprojectsslatedforcommissioningin2020wereexpectedtoproduceelectricitycheaperthananyfossilfuelalternative(IRENA,2020a).Electricitycurrentlyaccountsforbetween3%and33%offinalenergyconsumption,dependingonthesector.Theacceleratedelectrificationofendusesprovidesakeypathwaytoadvancetheenergytransition,inadditiontoofferingimportantefficiencybenefits.Electrifiedendusescanalsobecomesourcesofflexibilityforthepowersector.RenewableelectricityasatransitionenablerAsrenewableelectricitygenerationbecomescheaperandscalable,theelectrificationofenduses(bothdirectandindirect7)becomesacost-effectiveandenvironmentallyfriendlysolutiontoprovideenergyservices–whilesimultaneouslyofferinganopportunitytoincreasetherateofenergytransition.Theelectrificationofendusesandthesubstitutionofotherenergysourcesandcarrierswithelectricityisusuallyreferredtoas“sectorcoupling”(Figure4).7Indirectelectrificationreferstotheuseofelectricitytoproduceanotherenergycarrier,suchasgreenhydrogenore-fuels.29Theneedandurgencyfortheenergytransition:AddressingclimatebreakdownSectorcoupling,inthiscontext,involvestwoaspectsofenergysystemplanningandoperation.First,anenergysourceislinkedtoatypeofservice(e.g.theelectrificationofheatandtransport).Second,newlinksarecreatedbetweenenergycarriers(e.g.electricityisusedtocreateasyntheticfuelthatcanthenbeusedtoprovideaservice).Thissecondtypeofcouplingallowstheindirectelectrificationofprocessesthatcannotbeelectrifieddirectly(e.g.industrialprocesses).Anenergytransitionbasedonrenewablesbringsahugeincreaseinthescopeforsectorcoupling,andcouldunlockhightransitionratesandflexibilityresources(IRENA,2020b;IRENAandSGCC,2019;IRENA,IEAandREN21,2018;IRENACoalitionforAction,2019).Electricityisaversatileenergycarrierthatcanbeusedforalmostallendusesandhastheadvantageofreducingairpollutioncomparedtotraditionalcombustiondevices(e.g.stovesorcars).Combinedwiththelowcostofrenewablegeneration,renewableelectricityrepresentsalow-costoptiontodecarbonisetheenergysector.Atthesametime,solarPVandwindgeneration(knownasvariablerenewableenergy,orVRE)isuncertain,dependingonweatherconditions.HavingahighshareofVREinapowersystemposesincreasedsystemintegrationchallenges.Sectorcouplingsolutionshelptomitigatethesechallengesbyprovidingflexibleelectricitydemand,whichcanfollowgenerationpatterns.Thisincludestheuseofactivedemandmanagement,energystorageandgreenhydrogen.Sectorcouplingwithrenewableelectricitycreatesavirtuouscycle,whereelectrificationdrivesnewusesforVREwhilefacilitatingitsintegrationinthepowersystem,whichthendecreasesthecostsofVREgenerationandacceleratestheswitchtoelectricityforenduses.Thesolutionofelectrificationusingrenewableelectricityastheprincipalenergycarrieracrossalldemandsectors(transport,industryandbuildings)iscentraltomostenergytransitionscenarios.FIGURE4.SectorcouplingELECTRICITYSUPPLYSYSTEMHEATING/COOLINGGENERATIONGreenhydrogenElectricitystorageTransmissionanddistributiongridThermalstorageIndividualorcollectiveheating/coolingdistributionsystemHeatpumps/ACElectricboilersGeothermalandsolarheatHeatboilersCo-generationplantsRenewableenergyplantsThermalpowerplantsFUELSUPPLYFossilfuelsBiomassSyntheticfuelsFuelElectricityHeatSource:IRENA,IEAandREN21,2018.30RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONTherecentevolutionofthepowersectorandthechallengesaheadThepowersectorhasbeenleadingtheenergytransition,withthehighestratesofrenewablesdeploymentacrosssectors.Appropriatesupportpoliciesandreductionsintechnologycostshaveenabledthisevolution.Annualrenewableenergydeploymentinthepowersectorincreasedaround11-foldduringthenearlytwodecadesbetween2001and2019,risingfrom16gigawatts(GW)to176GW(Figure5).Deploymentwasinitiallydrivenbyhydropower,withwindtakingtheleadinaround2005andsolarPVinmorerecentyears.By2020,thetotalglobalrenewablepowercapacitywas2639GW.Theaddedcapacityofrenewableshassurpassedthatofconventionalgeneration(fossilfuelsandnuclear)everyyearsince2012,withtheexceptionof2014.ThesignificantgrowthinwindandsolarPVcapacityduringthelastdecadehasresultedinanincreasingshareofVRE.Whereasin2001VRErepresented43%oftheaddedrenewablecapacity,in2019itrepresented89%.Despitethesestrongtrends,boththecurrenttotalinstalledcapacityofrenewablesandannualdeploymentratesarelaggingbehindwhatisrequiredforanenergytransitionthatisconsistentwithglobalclimatetargets.Inthiscontext,itisparamountthatpolicymakersfosterthedeploymentofrenewableenergyinthepowersector(and,thankstosectorcoupling,inotherenduses)byputtinginplacepowersystemorganisationalstructuresthatarefitforrenewablesandcapableofenablinghightransitionrates.Thepowersystemorganisationalstructuresthatareprevalenttodayweredevelopedfortheeraofconventionalelectricitygeneration–i.e.forlarge,centralised,dispatchableandmostlyfossilfuel-basedgenerationwithhighvariablecosts.Thiscallsforscrutinyoftheexistingpowersystemrules,regulationsandmarketstructures,toupdateandreformthemtothechallengesoftherenewableenergyera.Thenextsectiondelvesbrieflyintodefinitionsofthepowersector,itsroleinthebroaderpictureandthemainaspectsofthesectorthatwillbeprevalentinplanningandimplementationoftheenergytransition.FIGURE5.Globalnetaddedpowergenerationcapacity,2001to2021Source:IRENA,2021a.501502500100200300200120022003200420052006200720082009201020112012201320142015201620172018201920202021HydropowerSolarphotovoltaicWindBioenergyOtherRenewablesNon-RenewablecapacityGW/yr31Theneedandurgencyfortheenergytransition:Addressingclimatebreakdown1.2.THEPOWERSYSTEMANDTHEWIDERPICTUREEnergyisacatalystandenablerofsocio-economicprosperity.Communitydevelopmentrequiresreliable,adequateandaffordableenergyservices.Electricityandotherformsofenergyhelpbringvitalservicestohouseholds,improvingthequalityoflifeandincreasingtheopportunitiesforeducation,healthcare,informationandsocialisation.Accesstoaffordableenergyallowsindustriestodevelopandthrive.Theenergysystemisthusfullyembeddedintheeconomicsystemandisoneofitsenablers;theeconomyinturnisembeddedinsocietyandtheEarth.Multiplelinksandfeedbacksexistbetweenthesesystems(Figure6).The“powersystem”physicallyentailsallcomponentsrelatedtotheproduction,conversion,deliveryanduseofelectricity.Itisembeddedintheenergysystem,withmultiplelinksandfeedbackswithothercomponentsoftheenergysystem.Theselinksandfeedbackswilllikelybecomeevenmoreprominentasthetransitionprogressesandastheenergysystemisfurtherintegratedthroughsectorcoupling.Theenergytransitionthusinfluences,andisinfluencedby,elementsexternaltotheboundariesoftheenergyandpowersystems.Thereisaneedforasystemicapproachandaholisticperspectivetounderstandthesesystemicinteractions.Theenergytransitionmustharnessallthepotentialandsynergiesoftheseinteractions.Powersystemswillplayapivotalroleintheenergytransition.Failuretoexploitthesynergiesbetweenthepowersectorandthebroaderenergysector,economyandsocietywillresultnotonlyinalostopportunitytomaximisethebenefitsoftheenergytransition,butalsoinbarrierstoitsfullachievement.FIGURE6.TheembeddednatureofpowersystemsEnergySystemPowerSystemPowerSystemEnergySystemEnergySystemPowerSystemEconomyEconomySocietyEarthBringingeveryoneonboardtounderpinthedeeptransformationsneededforasuccessfulenergytransitionrequiresproperlyaddressingdimensionsofjusticeandfairness.32RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONHowever,thetechnologiesrelatedtotheenergytransitiondiffergreatlyfromthoseonwhichthecurrentpowersystemswerebased.Thestakeholdersinvolvedindefiningandoperatingthepowersystemwillalsolikelyevolveduringthetransition.Hencetheorganisationalstructuresofpowersystemsneedtoberethoughtinordertoalignthemwiththecharacteristicsofrenewable-basedenergysystems.Theenergytransitionalsoneedstoaddressothersocio-economicchallenges,suchasenergyaccessandenergypoverty(Box1),withpowersystemorganisationalstructuresplayinganimportantrole.Bringingeveryoneonboardtounderpinthedeeptransformationsneededforasuccessfulenergytransitionrequiresproperlyaddressingdimensionsofjusticeandfairness.Itisthusessentialtounderstandthehistoricevolutionofpowersystemsandhowtheyneedtofurtherevolvetoalignwiththeneedsoftheenergytransitionandpeople’sneeds.Powersystemorganisationalstructuresmustaddressaccessandaffordabilitychallengesasanintegralpartoftheirsocialvaluescopeandtopreventtransitionbarriers.Box1.EnergyaccessandaffordabilityModernenergyservicesplayacrucialroleinanysociety,bringinglight,warmthandmeansofcommunicationandinformationtohouseholds,aswellassupportingsocialservicesandeconomicactivity.Still,alargepartoftheworld’spopulationdoesnothavefullaccesstoenergyservices.Whilesomeregionsareengagingintheelectrificationofheatingandtransport,withdigitalisationplayingagrowingrole,anestimated756millionpeople(around10%oftheworld’spopulation)didnothaveaccesstoelectricityservicesin2019,eventhoughnearly1billionpeoplegainedelectricityaccessbetween2010and2019.Dramaticcostreductionshavemaderenewabletechnologiesthemosteconomicalandreliableoptionforoff-gridelectrification.Thismakesitpossibletoleapfrogtheneedforstand-alonefossilfuelsolutions,whileincreasingtheaffordabilityofoff-gridelectrification.Ifproperlyplannedandmanaged,thisalsoopenstheopportunitytosustainablyevolvefromstand-alonesystemstominigrids,whichcanbecomeafunctionalpartofnationalpowersystemsoncetheyaregridconnected.Theenergyaccesschallengegoesbeyondelectricityaccess.Worldwide,anestimated2.8billionpeoplestilldependontraditionalbiomassforbasicenergyneedssuchascookingandheating.Andevenmanyhouseholdsthatareconnectedtoelectricityinfrastructureremainunabletoaffordthefullarrayofmodernenergyservices,whichhaslong-termeffectsonthewell-beingofoccupants.Energypovertymaycausepeopletofallbelowthepovertyline,insteadofbeinganeffectofpoverty,inparticularwhenenergycostsincreasetonotablelevelsandimpactahousehold’ssocio-economicdevelopment.Energypovertyandvulnerabilityarecommonacrosscountriesdespitedifferentpowersystemorganisationalstructures.Moreover,someofthetrendsthatcouldunfoldalongsidetheenergytransition,suchasevolvingpricingmechanismsandlowersocialprotections,maycausearesurgenceofenergypovertyincertainareasasenergy-vulnerablepopulationscrosstheenergypovertyline.Forexample,inSoutheastEurope,thereisagrowingwarinessabouttheriskthatpowermarketliberalisationandthecostsofrenewableenergydeploymentschemesmayincreaseenergypricestounsustainablelevelsforenergy-vulnerablehouseholds.IRENA’senergytransitionwelfareindexhasoneofitsfivedimensionsdedicatedtoevaluatingenergyaccessprogression,includingbothbasicenergyaccessandprogressionalongtheenergyaccessladder.Duringthediscussionofthe2050EnergyRoadmap,theEuropeanCommissionstated:“energypovertyisoneofthesourcesofpovertyinEurope”.Source:IRENA,2019a.33Theneedandurgencyfortheenergytransition:Addressingclimatebreakdown1.3.POWERSYSTEMORGANISATIONALSTRUCTURESWhenpowersystemswerefirstdeveloped,electricitywasproducedclosetothepointofdemand,whichwastypicallyanindustrialload.Ascitieswereelectrified,distributiongridsandlatertransmissiongridsconnectedtheurbancentreswithrelativelydistantpowergenerators.Gradually,meshednetworkswithmultiplegeneratorsprovidingelectricitytovariousloadsweredeveloped,leadingtothefirstnationalgrids(Figure7).Asphysicalpowersystemsevolved,thewaythatelectricitywasprocuredandallocatedchanged.Whereasattheonsetbilateralagreementsbetweentheproducerandtheuserwerethenorm,theadventofgridsconnectingmultiplegeneratorstomultipleusersmademorecomplexpowersystemorganisationalstructuresnecessary.Currentpowersystemorganisationalstructuresaredifferentiatedinmultipleways,duemainlytothecontext-specifichistoricalevolution,maturityandpredominanceofmarketorregulatoryparadigms.Animportantdifferentiatingelementisthedegreeofcompetitionwithintheorganisationalstructure.Whereasatthebeginningofthe20thcenturyverticallyintegratedregulatedmonopolieswerecommonplace,sincethe1980svariouselementsofcompetitionhavebeenintroducedworldwide.Theserangefromfullyunbundledandliberalisedsystemsinboththewholesaleandretailoperationstopowerpurchaseagreementsbetweenaregulatedutilityandprivatecompanies.Theexpectationwasthatcompetitionwouldincreasetheefficiencyandefficacyofrelativelysimplerpowersystemsthantoday,characterisedbycentralised,dispatchablegenerationwithlowtechnologicaldiversityandpassivedemand(Batlle,RodillaandMastropietro,2021).However,theadoptionofcompetitioninpowersystemshasnotbeenappliedinauniformwayworldwide,reflectingdifferencesinnationalbackgroundsandpoliticalobjectives.Similarly,regulatedsystemsdifferintheirregulation,goalsandownershipstructures.Forexample,eveninthecaseofmonopoly,theutilitycanbestate-owned,withaministryinchargeofitsoperations,orprivatelyownedandheavilyregulated(asinJapan).FIGURE7.ElementsandevolutionofthepowersystemEarlypowersystemsFirstdistributionsystemsMeshednetworks34RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONOnemisconceptionregardingtheliberalisationofthepowersystemstructurestemsfromtheideathatliberalisationisaone-wayprocess.Instead,manyfactorsinfluencetheprocess,includingevolvingtechnological,political,socialandenvironmentalcontexts;constantrenegotiationsbythepartiesinvolved;experiences;failures(environmentalimpactandotherexternalities,riskaversion,informationasymmetries,etc.);andobjectives.Manypowersystemshavetakenstepsbackintheliberalisationprocess,toensuresystemadequacyandreliabilityandtoaddressspecificenergytransitionchallengesthatcouldnotbeprovidedbytheliberalisedsystems(Batlle,RodillaandMastropietro,2021).ThiswasthecaseinBrazilandotherLatinAmericancountries(IRENA,2016a),aswellasinEuropewiththeintroductionofcapacitymechanisms.Hencetheorganisationalstructureofthepowersystemmaychangeinresponsetosystemneedsandpoliticalobjectives.Theurgentsocio-politicalimperativeofdecarbonisingthepowersystemintroducesstronghigh-levelconstraintsandentailsnewdisruptivetechnologies,withanoverallchangeinthewayelectricityisgenerated,distributedandconsumed;altogetherthisincreasessystemicdiversityandcomplexity.Sofar,thedeploymentofnewtechnologies,inparticularrenewableenergypowerplants,hasbeendrivenbypro-activepolicymaking(regulation)thatprovideddedicatedsupportmechanisms.Thissupportwasoriginallyaimedathelpingtechnologiesprogressalonglearningcurves.However,policysupportnowplaysthemainfunctionofaddressingtheinabilityofcurrentorganisationalstructurestodealadequatelywiththecharacteristicsofthesetechnologies.Powersystemorganisationalstructuresneedtoevolvetosupporttheenergytransition.Delaysinaddressingthere-designsoforganisationalstructureswillcausebarriersthatwillultimatelyhinderorhampertheextentoftheenergytransition.Theeffectoftheinteractionbetweensupportmechanismsandprevalentpowersystemstructuresisdescribedinthenextsectionandinmoredetailinchapter4.Onemisconceptionregardingtheliberalisationofthepowersystemstructurestemsfromtheideathatliberalisationisaone-wayprocess.Instead,manyfactorsinfluencetheprocess,includingevolvingtechnological,political,socialandenvironmentalcontexts.35Theneedandurgencyfortheenergytransition:Addressingclimatebreakdown1.4.MISALIGNMENTSDURINGTHETRANSITIONAdvancingtheenergytransitionundercurrentpowersystemorganisationalstructureshasrequiredimplementingadditionallong-termmechanismsfortheprocurementofrenewableelectricitygeneration.Successfuldeploymentinstrumentshavemainlytakentheformoffeed-intariffs,feed-inpremiums,greencertificates,auctionsanddedicatedpowerpurchaseagreements.Currentlythechiefprocurementmechanismisthroughcompetitivelong-termcontracts(auctionsandtenders).Thesehaveprovedtofunctionwellforpricediscoveryandreduction,tothepointthattheyarenowwidelyusedtoachieveothertechnicalandsocio-economicobjectives,beyondsimplecostcompression(IRENA,2019b).Theseinstrumentswereconceivedprimarilyasfinancialinstrumentstolowertheriskofinvestmentinrenewableelectricitygenerationassets.Earlyon,theriskmitigationaddressedmainlythehighcostsanduncertaintiesfromtechnologiesintheinitialstagesoftheirlearningcurves.Thesemechanismshavesuccessfullyfosteredthedeploymentofhighsharesofrenewableenergytechnologies(solarPVandwindinparticular)inmanycountrieswheretheyweremarginalonlyafewyearsago.Renewableenergytechnologieshavematured,withdecreasingcosts(IRENA,2020a)andincreasedinvestorconfidence.However,evenindevelopedmarkets,merchantinvestmentsstillstruggletobedeployedatthenecessaryscaleandpacetomeettheemissionreductiontargetssetundertheParisAgreementonclimatechange.Insomeregionsoftheworld,thisslowpaceofdeploymentisstilldueinparttoimmaturestructuresandhighrisks.However,itisincreasinglyclearthatsomepowersystemstructuresarestrugglingtosupportthedeploymentoflargesharesofrenewableenergy.Thisisnotunexpected:thesestructuresweredesignedforthefossilfuelera8andthereforewereoptimisedtodealwiththecharacteristicsofcentralised,dispatchable,mostlyfossilfuel(withhighoperationcosts)plantswithinamuchsimplertechno-socialcontext.Theincreasingdeploymentofrenewablesmayhaveadirectimpactonpowersystemsby,forexample,loweringtheaveragepriceofwholesalemarketsandincreasinggridcosts.Thisreportassessesthedynamicsbehindtheseaspectsunderthelensof“misalignments”.Misalignmentsmayhavetheeffectofhaltingorslowingtheenergytransition(see“InFocus”section).Inafewcaseswheremisalignmentshavebecomeevident,energyauthorities,regulatorsorpolicymakershavefoundsolutionstotemporarilyaddressthem.Itiscrucialtounderstandtherealcausesofmisalignments,whichoftenmayresideintheverydesignofthepowersystemstructure.Thisreportdelvesintoalltheseaspectsandproposesawayforwardtoovercomechallengesandsuccessfullyadvancetheenergytransition.8“Fossilfuelera”referstotheperiodfromtheinceptionofpowersystemstotheenergytransition.Itischaracterisedbythepresenceoflargecentralisedpowerplants.Theseincludenuclear,hydropowerandfossilfuelplants,whichhaverepresentedbeenthedominanttechnologiesyinmostpowersystems.36Fortheenergytransitiontocontributetoaddressingclimatechangeandsustainabilitychallenges,aholisticapproachthatpaysattentiontoalllayersofthesystemandtheirinteractionsisneeded.Thischapterdescribesthecontextinwhichtheenergytransitionwillunfold,highlightingcross-cuttingsystemicdimensions,anddifferentelementsanddynamicsatplay.Powersystemorganisationalstructuresarethemselvestheproductofthetransformativeprocessesthatthewiderenergyandsocio-economicsystemshavebeenundergoing,andoftheirinteractionwiththepowersystem.Now,duetotheurgencyoffacingtheclimateemergency,organisationalstructureswillneedtoanticipateandnotonlyadapttothefutureparadigmshiftstransformingsocietiesandtheEarth,sothattheycanhelpfacilitatethetransition.2.1.THECROSS-CUTTINGDIMENSIONSToday’sprevalentorganisationalstructureshavenotbeenreflectingmostoftheeffectsofpowergeneration,transportanduseonthewidersocio-economicandenvironmentalsystems.Forinstance,theyhavealloweduserstowasteenergy,orgeneratorstochoosepollutinggenerationtechnologies.Buttheenergytransitiondoesnotexistasastand-aloneprocess.Figure8summarisesthedesirablecross-cuttingtransformationsthattheenergy,social,economicandEarthsystemswouldneedtoundergoTHETRANSITION’SIMPLICATIONSFORTHEPOWERSYSTEM237atthesametimeasdeliveringtheenergytransition,ifitistobeajustandresilienttransformation.Ifpowersystemstructurescontinuetobeblindtowidersystemicinteractions,thenbarriersthreateningtoderailtheenergytransitioncouldarise(seechapter4).Thisisespeciallyrelevantgiventhatthecurrentenergytransitionisnotdrivenjustbytechno-economicconsiderations,aswasthecasewhentheworldmovedtofossilfuels.Forthecurrenttransition,afundamentaldriveristheloomingclimatecrisisanditssocio-economicimpacts.Thetinycarbonbudgetsthatremaintopreventglobalwarmingbeyond1.5°Cto2°C(seechapter1)requirearapidtransitioninaworldthathaslimitedremainingresilience(becauseofextremebiodiversitydegradationandprofoundsocialinequalitiesandexclusion).Note:GHG=greenhousegas;SDGs=SustainableDevelopmentGoals.FIGURE8.Cross-cuttingtransformationsforafairandjustenergytransitionfromthepower,energy,social,economicandEarthsystems•EliminateGHGemissions•Biodiversityconservation•Environmentalstewardship•Addressinequalities•Fostersharedresponsibility•Fairnessandjustice•Buildresiliencetoclimateimpacts•Socialparticipation•Universalaccesstodigniﬁedjobs•Constrainmaterialdemandtoplanetaryboundariesunderfairtrade•Eliminatefossilfuelssubsidies•AlignglobaleconomicrelationshipsandgovernancewithParisAgreementandSDGs•Renewableenergies•Decentralisation•Digitalisation•Flexibility•Universalaccesstosustainableenergyservices•Constrainenergydemandtoplanetaryboundaries•Electriﬁcationofend-useswithrenewableenergies•Fossilfuelsphase-out•Integrationofallelectriﬁedend-usesEarthsystemSocialsystemEconomicsystemEnergysystemPowersystemPowersystemorganisationalstructuresaretheproductofthetransformativeprocessesthatthewiderenergyandsocio-economicsystemshavebeenundergoing,andoftheirinteractionwiththepowersystem.38RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONRapidtransitionratesalwaysentailsocio-economicstress,especiallyaroundthe(unequal)shareofbenefitsandburdensofthetransformation.Communitiesthatarealreadyimpoverishedandlivingindegradedecosystemspresentlimitedresiliencetofurthereconomicandecologicalstressthatcouldbelocallyinducedbythetransition,althoughtheoverallimpactisexpectedtobepositiveinthelongrun.Ifnotaddressed,pre-existinginequalitiesincreasetheriskofsocialoppositiontothetransitionorsocialpolarisationaroundthetransitiontrade-offs(NGFS,2021).Inthiscontext,ignoringsystemicinteractionsisnotanoption.Aholisticapproachtotheenergytransitioncansupportsocietiestofacetheclimatecrisiswhilesimultaneouslycreatingbetteropportunitiesforwidespreadprosperity(IRENA2020b;2021b).Articulatingsuchanapproachrequiresgaininginsightsaboutsystemicinteractionsanddevelopingorganisationalstructuresthataddressthem.SocialparticipationWiththeenergytransitiontakingplacealongsidetheunfoldingoftheclimateandbiodiversitycrises,societieswillrequirerenewed,improvedandadaptedgovernancetosteertheprocess,managinguncertaintyandrisks.Henceitiscrucialtoengagecommunitiesasactivechangeagentsratherthanconsideringthemjustaspassiveconsumers(O’Brien,2018).Socialparticipationwillbekeytoensurethattheenergytransitionalignswithsharedprosperitygoals,therebymaximisingitssocialvalue.Socialparticipationindecisionmakingisessentialsothatcommunitieshaveasayintheirenergyfuture,especiallywhendecisionsontrade-offsaretobetakenandthetransitionbenefitsandburdenshavetobedistributed.Moreover,theincreasingshareofdistributedenergyresources(bothgenerationandflexibility)bringsthepotentialfortheenergytransitiontofacilitatesocialparticipationandimprovedgovernance.Materialisingthispotential,however,requiresappropriateorganisationalstructuresandenablingpolicyframeworksthat,themselves,aretheproductofparticipationandgovernance.Forexample,regardingthecontributionofcitizenstosystemflexibilitythroughdemandresponse,itisessentialthatdemandmanagementwillnotbeappliedinaninvasiveormisinformedway,alteringlivingconditionsorexposinguserstoexcessivequantityandpricerisks.Anotherexampleisenergycommunities,atoolforsocialparticipationinrenewableenergyandenergyservicesprojectsthathasrecentlybeenintroducedinEuropeanUnion(EU)legislation.Organisationalstructureshavebeenprevalentlydesignedforincumbents,andmanyMemberStatesarestillexperimentingwithhowtocorrectlydesignthemtobefitforenergycommunities’participation.Auctionsdesignisoneexample(IRENA,2019b).Socio-economicsystemchallengesTheenergytransitionalsomustinteractwiththeprevalenteconomicset-up,whichisbasedonglobalisationandtheextractionofincreasingamountsofnaturalresourcestofeedunprecedentedlevelsofconsumption.Inthelast50years,theglobaleconomyhasgrownfour-foldandinternationaltradenearly10times(IPBES,2019),whichhasledtoasharpincreaseindemandforbothenergyandmaterials,aswellastogreaterdependenceofregionalandlocaleconomiesoninternationalexchanges.39Thetransition’simplicationsforthepowersystemEconomicdynamicsbasedongrowthandresourceextractionareputtingrisingburdensonsocietiesandtheecosystemsonwhichtheydepend,outpacingefficiencyeffortstoreduceenergyuse,materialdemandandwastegeneration.Increasingly,globalisedsocio-economicsystemsintroduceaninternationaldimensiontotheenergytransition,requiringconcertedactionbeyondnationalborders.Globalsocio-economicinitiativesarestrugglingtotakeoffwiththeneededurgencyanddepth.Globalgovernanceimprovementsareneededtoaligneconomicgovernancewithclimateandsustainabilitygoals.Organisationalstructuresforsustainableenergysystemswillhavetoaddressthechallengesfromthisinheritedcontext.OneexampleareinternationaltradeagreementsthatwillneedtobealignedwiththeneedtodecarbonisetheglobaleconomyandSDGs.FossilfuelstrandedassetsTocomplywiththegoalofavoidinghighsocio-economicimpactsfromclimatechange,abigshareoftoday’sexistingandplannedfossilfuelassetswillneedtobestrandedduringtheenergytransition9–i.e.phasedoutbeforecompletingtheirusefuleconomiclife.Thismayaffectawiderangeoffossilfuelassets,fromtheinfrastructureneededforextractionandprocessing,totheinfrastructureusedforenergytransformation(suchaspowerplants),allthewaydowntointernalcombustionenginevehiclesandtheinfrastructurerequiredfortheirmanufactureandmaintenance.Althoughestimatesvarywidely,IRENA(2020b)assessedthevalueofassetsatriskofstrandingtobebetweenUSD11.8trillionandUSD19.5trillionby2050,dependingonthepaceofthetransition.Hencethesocio-economicimpactsfromthisstrandingprocesscanbeextensive,andthepoliticaleconomycomplex.Thephasingoutoffossilfuelassetswillbeentangledwiththedeploymentoftheinfrastructureneededforarenewable-basedenergysystem.Thisisalreadyintroducingpowerfuldynamicsthat,unlessproperlyaddressedbyorganisationalstructures,canintroducesignificantbarrierstothetransition.Acaseinpointforthepowersectoriscapacitymarketsandcontractualmechanismsthatentrenchdispatchablefossil9TheobjectivesoftheParisAgreementimplythatnearlyallprovenfossilfuelreservesandassociatedinvestmentswillbecomestrandedresources(BosandGupta,2019;GuptaandArts,2018;Rozenberg,Vogt-SchilbandHallegatte,2014;WassermanandCramer,2016)andthatanyfurtherdelayimpliesanincreaseinstrandedassets.Workersinstallingsolarpanels,Shutterstock40RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONfuelgenerationandpreventthedevelopmentanddeploymentofflexibilityelementsthataresuitedforarenewables-basedpowersystem(seechapter4formoreonthisandotherrelatedmisalignments).Strandingfossilfuelassetsislikelytohavedeepsocio-economicconsequences,suchasthoseresultingfromthedecisionsofwhowillbebearingtheburdenoftheassociatedeconomiclosses.Iftheburdenisplacedonprivateinvestorsthatexpectedareturnontheirfossilfuel-relatedinvestments,strongresistancetothetransitionmaybeexpected.Iftheburdenissocialised,governmentfiscalbudgetswillbereducedandfewerresourceswillbeavailable10tosupportthetransitionandtoaddressitspotentialregressiveimpacts,whichcouldalsotriggerbarrierstotransition.ForcountriesintheGlobalSouth,strandedfossilfuelassetshavefurtherramifications.Countriesthatcurrentlyproducefossilfuelsintheseregionsareofteninthehighendofthecost-supplycurveandhencewillbethefirsthitbyareductionindemand.OtherGlobalSouthcountrieshaverecentlydiscovereddomesticfossilfuelresourcesandhaveexpectationstobecomewealthyeconomiesbyexploitingthem(MenasAssociates,2017).However,investingintheseresourceswouldintensifyclimatechange(towhichthesecountriesareespeciallyvulnerable)andslowthetransitioninthesecountriesbylockinginobsoleteinfrastructure.Inthenearfuture,thiswouldproducestrandedassetsthatwillcosttaxpayersmoneyandlimitthecapabilityofcountriestoaddresssocio-economicdevelopmentneeds.Theissueofchoosingadifferentdevelopmentpathawayfromfossilfuelshasshort-termeconomicimplicationsforthesecountries,thusraisingthequestionoftherolethatincreasedinternationalcollaboration,includinginternationalfinancialcompensation,canplay(IRENAandAfDB,2022).EarthsystemlimitsFinally,allthepower,energy,economicandsocialsystemsareembeddedintheEarthsystem,whichsetsthephysicallimitsthatnoothersystemcantrespass.Pastandcurrentfailuresinmakingdecisionsaccordingtoenvironmentallimitsareattherootoftoday’sclimateandbiodiversitycrises.Thus,correctingthisblindnesstoEarthsystemlimitsisfundamentalforasuccessfulenergytransition,whichisoccurringonaplanetthatisalreadyunderseverestresscausedbyclimatechange,airandwaterpollution,soildepletion,massivebiodiversitylossandnaturalresourceoverconsumption.Humanityhascrossedseveralplanetaryboundaries(includingrelatedtoclimatechange),increasingtheriskofgeneratinglarge-scaleabruptorirreversibleenvironmentalchanges(Steffenetal.,2015;Steffen,W.etal.,2018).Already,75%oftheEarth’slandsurface,66%ofitsoceansandmorethan85%ofitswetlandsareahaveexperienceddeeptransformations.Thisisnegativelyimpactingthewell-beingofatleast3.2billionpeople,pushingtheplanettowardsasixthmassspeciesextinctionandcostingmorethan10%oftheannualglobalgrossdomesticproduct(GDP)inthelossofbiodiversityandecosystemservices11(IPBES2018;2019).Thisunderminessocio-economicresilienceforadaptingtoafast-changingclimateandreducesnature’scapacitytoabsorbCO2(IPBESandIPCC,2021;IPCC,2018).Theenergysystemhascontributedgreatlytothisdegradationthroughair,waterandsoilpollution;greenhousegasemissions;deforestation;andhabitatdestructionfromfossilfuelexploitation.10Thisisespeciallytrueformonetarynon-sovereigncountriesorcountrieswithastrongdependenceonforeigncurrency.Monetarysovereigncountriesissuingtheirowncurrencycouldinprincipleincreasethedeficitasneededbyprintingmoney(aslongastherightpoliciesareinplacetocontrolinflation),asindicatedbyModernMonetaryTheory,butinheritedpolicyframeworksstillintroducestronglimitationstoincreasingdeficits.11Ecosystemservicesaredefinedasthebenefitstohumansprovidedbyhealthyecosystems,suchasnaturalpollinationofcrops,cleanair,extremeweathermitigation,humanmentalandphysicalwell-being,pathogenscontainment,etc.41Thetransition’simplicationsforthepowersystemBecausethewindowofopportunitytostabilisetheglobaltemperaturetosafelevelsisclosingquickly,theenergytransitionmustbedeployedrapidly,astheconsequencesofnoactionwouldbecatastrophic.Proposingprogressive(linear)changesinthecurrentsocio-economicsystemisnolongersufficienttoachievetherequiredemissionreductions.Theneededstepchangesrequireaneffectivere-organisationofnationalandinternationalgovernancetobemoreeffectiveinaddressingtheglobalsocio-environmentalchallenges(Biermannetal.,2012;O’Brien,2018;Rockströmetal.,2017;Steffen,W.etal.,2018).Evenunderthemostambitiousscenariosofmitigation,severeimpactsonecosystems(andthesocietiesthatdependonthem)areexpectedtounfold.Buildingresilience–thecapacitytoadaptandrecoverquicklyfromimpacts–emergesasafundamentalelementofatransitionstrategy.WhentheinterlinkageswiththeEarthsystemareproperlyaddressed,theenergytransitioncanhelptoreducepressureonecosystemsbycuttingemissionsofgreenhousegasesandotherpollutantswhileprovidingtheconditionsforasharedprosperity.Thismeansinparticularrealigningprivateandpublicincentiveswiththesegoals.Energysystemscanalsorelievetheirdirecteffectonbiodiversitywhendesignedtoprioritiseenergyefficiencyandmaterialsavingsandtominimiseenvironmentalimpacts.Recognisingthefeedbackloopsbetweenallthesystemsatplayunveilstheneedtopreventunsustainabletechnologicalpathwaysinthenameofdecarbonisation.Thisisthecase,forinstance,ofnuclearpower,wherethelackofappropriatewastemanagement,accidentrecords,insufficientcivilliability,extremelylongdevelopmenttimesandlackofsocialcontrolmakeitaninappropriatesolution,eventhoughitdoesnotproduceCO2initsgenerationphase.Intrusivegeoengineeringfixesareanothercaseinpoint(MycleSchneiderConsulting,2019).AwidevarietyoftransitionpathwaysAwidevarietyofpathwaysareavailabletoarenewables-basedenergysystem.Thetechnologymixandtransitionspeedcanbeadjustedtoaddressdifferentrealities,includingcosts,technicallimits,resourceavailability,etc.Ultimately,itwillbetheinteractionsamongthedifferentstakeholders,reflectingtheirinterestsandthediversepoliciesputinplacetoshapethetransition,thatwilldeterminetheoutcome(Figure8).Focusingtheenergytransitionnarrowlyonpowersystemsmayconstrainitsbreadthandthespeedofdeploymentbykeepingimportantcross-cuttingdimensionsunattended.Organisationalstructuresthatareunabletocapturethecompletepictureofthetransitionwouldriskprojectingintothefuturethemisalignments(chapter4)inheritedfromthepast.Social,economic,energyandpowersystemswillhavetojointlyservetheobjectivetokeeptheEarthahabitableplanet,providingtheconditionsforathrivingsocietywithasharedprosperity(Biermannetal.,2012;O’Brien,2018;Rockströmetal.,2017;Steffen,W.etal.,2018).Powersystemorganisationalstructuresmustservethisvision.Cross-cuttingdimensionswerealreadyatplayinthesestructuresinthepast,butnow,undertheclimateurgencyandresiliencerequirement,properlyaddressingthemisanimperative.Powersystemorganisationalstructures,consequently,mustadequatelyprocureanddistributeelectricitytoendusersthroughthebestoptionstoreducegreenhousegasemissionsintheshortestpossibletime,contributingtohaltingbiodiversitylossandfosteringclimatejusticeandsharedprosperity.42RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITION2.2.KEYELEMENTSOFTHEENERGYTRANSITIONAstheenergytransitionunfolds,changesareexpectedindifferentdimensions,withsignificantimplicationsforthepowersystem.Thenextsectionsexploredeeperinsightsonkeychangesinducedbyorhappeninginparallelwiththeenergytransition,discussingtheirimplicationsforthepowersystemorganisationalstructuresofthefuture.RenewableenergytechnologydeploymentRenewableenergysources,togetherwithenergyefficiencyandincreasedelectrification,arethekeyoptionsfordecarbonisingtheenergysystem.Althoughdispatchablerenewableenergytechnologies–suchasconcentratingsolarthermalpower(CSP),geothermal,hydropowerwithreservoirsandsustainablebioenergy–areavailable,thesecontributeonlyasmallshareofplannedcapacitydeployment.Bycontrast,variablerenewableenergysources–specificallywindandsolar–arethedefaultoptionsfornewcapacityataglobalscale,thankstotherapidreductionintheircosts,challengingtheprevalentpowersystemstructures.In2020,VREaccountedfor91.3%oftherenewableenergyinstalledcapacityaddedworldwide(Figure5).VREpowerplantshaveveryspecificcharacteristicsthatmakethemdifferentfromotherelectricity-generatingtechnologies:•VREexhibitsvariablehourly,dailyandseasonalgenerationpatternsandmaynotalwaysbeavailablewhenneeded.Thisvariabilitycallsforadditionalsystemflexibility:theabilityofthesystemtomatchdemandandgenerationatanytime.•VREgenerationisuncertain:generationcanbepredictedbasedonweatherforecasts,but,whileforecastingisimprovingrapidly,adegreeofuncertaintyregardingtheactualproductiontendstoremain.•VREislocation-constrainedandmaybeconcentratedinspecificareaswithhigherresources.Thiscanleadtohotspots,whichmayrequireadditionalinfrastructure,aswellastopotentialconflictsforlanduse.Moreover,hotspotscanincreasesystemvulnerabilitytoweatherevents.•Themodularnatureofsolarpanelsandwindturbines(andincreasinglyotherrenewableenergytechnologies)allowsforamoredistributedgeneration,beingabletorapidlydeployatdifferentcapacityandfinancingscales,withdifferentownershipstructures(e.g.smallco-operativesorownersinsteadofthetraditionallylargeutilities)andatdifferentgeographicallocations.•VREgeneratorshavelowoperatingcosts.Whengenerationisremuneratedbasedonthemarginalcostofthemostexpensiveactivegenerator,VREgenerationdecreaseswholesalemarketprices.Althoughthismayappearasapositivedevelopment,itisnotnecessarilygoodnewsbecauseitcanintroducemisalignmentsasthetransitionunfolds(seechapter4).•VREgeneratorsarenon-synchronouspowertechnologies12–thatis,theyhaveapowerelectronicinterfacewiththegrid,ratherthanarotatingmassthatisdirectlyconnectedviaanelectro-mechanicallink.Undercertaincircumstances,thismayposechallengestothemaintenanceofsystemstability,whichtraditionallyreliesonthe“inertia”providedbysynchronousgenerators.Whilethisinvolveschangesintheapproachtoshort-termsystemregulation,syntheticinertiaoptionsareavailabletoprovidegridstabilitywithnon-synchronousVRE(RGI,2020).Thesecharacteristicshaveresultedinafundamentalchangeinthewayelectricityisgeneratedandusedandinhowpowersystemsareoperated.12However,otherrenewableenergytechnologies–suchashydropower,CSP,geothermalandbiomass–aresynchronous,withgenerationcharacteristicsverysimilartofossilfuelpowerplantsintermsoftheservicestheycanprovidetothegrid.43Thetransition’simplicationsforthepowersystemBox2.SystemicchangesintroducedbydeploymentofvariablerenewableenergyFrombaseloadtoflexiblesystems.MoreflexibleandintegratedpowersystemsareneededtomaximisethevalueoflowmarginalcostVREand,atthesametime,guaranteegridreliability.Undertheseconditions,baseloadplantslosethevaluetheybroughtinthepast.Existingbaseloadgenerationplants,unabletooperateinaflexiblemode,becomeabarriertowiderpenetrationofVRE(IRENA,2015).Makingfossilfuelgeneratorsmoreflexible,asproposedbyincumbents,mayhinderthetransitionbyblockingthedeploymentofflexibilitycompatiblewitharenewable-basedpowersystem.Powersystemstructuresneedtoprocurecarbon-neutralflexibilityforthesystem:batteries,power-to-X,ordemand-sidemanagement,forexample.Frommarginalcoststolowoperationalcosttechnologies.Mostrenewableenergytechnologiesarecharacterisedbyhighinvestmentcosts(capitalexpenditures,CAPEX)andverylowoperationalcosts(operationalexpenditures,OPEX).Atincreasingsharesofrenewablepower,electricityprocurementmechanismsbasedonmarginalpricesprovetobeunabletosimultaneouslysupportthelarge-scaledeploymentofrenewableenergysourcesandreaptheirpotentialbenefitsintermsofcosts,magnifyingmisalignments(seechapter4).Fromprice-basedtovalue-basedprocurement.Thereareinsufficientpricesignalstobringaboutthephase-outoffossilfuelsandthediversificationofrenewableenergytechnologiesandplantlocationsattheneededpace.Thescopeofprocurementmechanismsneedstobewidenedfromminimisingpricetomaximisingsystemandsocialvalue.Avalue-drivenelectricityprocurementsystemisneededtobettercapturethegeographicalandtemporalvalueofVREsourcesaswellasthevaluefromthetechnologyandownershipdiversitylinkedtoit.Conceptualproposalsinthislineareintroducedinchapter4.Afocusonvaluerequiresinternalisingthenegativeimpactsofthepowersystemactivitiesonsocietiesandtheplanetandsustainablepracticesofproductioninalleconomicsectors,aimingatdeliveringprosperity.Powersystemorganisationalstructures,throughtheirinteractionwiththesocio-economicsystem,mustplayaroleinfosteringandsupportingthisshift.44RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONConsideringastrongpenetrationofVRErevealshowfarcurrentpowersystemorganisationalstructuresarefarfromoptimaltomanagearenewable-basedsystem.Box2summarisesthemostprominentchangesinducedbythedeploymentofVREsourcesanditsimplicationsintermsoforganisationalstructures.Electricitydemand,powersystemflexibilityandelectrificationPowersectorsarecalledtointegrateanincreasingnumberofelectrifiedloadsduringthetransition,suchas,forexample,mobilityorthecoolingandheatingsectors.Thatthesenewloadsarealreadyefficientandflexiblewhenconnectedtothepowersystemhasimplicationsforthescaleandcostsofthenewintegratedrenewable-basedsystem.Theelectrificationofend-usesectorsbringsnotonlynewdemandtothepowersystemthatcanbeflexible,butalsonewactorsthat,inturn,candeliverservicesofcarbon-neutralflexibility,suchasdemand-sidemanagement,energystorage,smartchargingofelectricvehiclesandrenewablepower-to-Xsolutions(i.e.renewablepower-to-heatandrenewablepower-to-hydrogen).Ontheonehand,today,powersystemflexibilityisensuredmainlybylargedispatchablepowerplants,largeinterruptibleloadsorinterconnections.Thephase-outoffossilfuelplantsduringtheenergytransitionchangesthecurrentlyavailableflexibilitypool,whichinanycaseisinappropriateforaVRE-basedpowersystem.Ontheotherhand,thereisstillmuchroomtointroducegreaterefficiencyincurrentusesofelectricity,openingspaceforthenewloadstobeelectrifiedandreducingoverallenergydemand.Deployingenergyefficiencyinthepowersectorisanessentialinstrumentforreducingoverallfinalenergydemand.Reducingdemand,inturn,isbeneficialtoadaptthespeedoftheenergytransitiontoclimateurgencyrequirementsandtoreduceitsimpactonbiodiversityandsocieties(seechapter4).However,in2018theworlddemanded10timesmoreenergythanitdidin1919,whentheglobalpopulationwasone-quarterthesize.Economicgrowthhasoutpacedallenergyefficiencyeffortsmadeinrecentdecades.Becausethemaindriversofenergydemandareinthesocio-economicsystem,beyondthepowersector,acollaborationbetweenallthesystems,andtheirgovernanceandorganisationalstructures,isessentialtogivethecorrectsignalstoconstraineconomicexpansionandtofavourefficientenergyusesandtheelectrificationofend-usesectors.Hencenewsystemstructureswillneedtobeabletospeaktotheenergyandsocio-economicsystems,beyondthepowersystem,tosupportkeyparadigmchanges,asdescribedinBox3.Deployingenergyefficiencyinthepowersectorisanessentialinstrumentforreducingoverallfinalenergydemand.Reducingdemand,inturn,isbeneficialtoadaptthespeedoftheenergytransitiontoclimateurgencyrequirementsandtoreduceitsimpactonbiodiversityandsocieties.45Thetransition’simplicationsforthepowersystemBox3.Demand,systemflexibilityandelectrificationparadigmchangesFrompassivetoactivedemand.Powersystemsweredevelopedwithalargelyinflexibleandpassivedemandinmind,whetherindustrialorresidential.Theconcurrentevolutionsofdigitalisation(seebelow),VREandotherdistributedenergyresourcesleadtoashiftwhereusersandenergydemandcantakeanactiveroleinthepowersystem.Demand-sidemanagementwillbeanimportantcomponentinthisnewparadigm.Toactivateeffectivedemand-sideresponse,ineitheracentralisedordistributedway,organisationalstructureswillneedanincreasedfocusondemandanditsdiversity,providingclearsignalsandframeworkstounlockitspotential(i.e.conducivepricing,tariffsandcharges,adaptedmechanismsforindustrialandresidentialactivation,proceduresfitforthedifferentflexibilityoptions).Engagingusersinthistaskwillrequiretransparent,participatorygovernance,whereoperationproceduresareunderstandabletoeverydaypeople.Anintegratedenergysystem.Theprogressinrenewablepowergenerationtechnologiesbringsopportunitiestoincreasetheuseofrenewableelectricityasavectortodirectlyandindirectlydecarboniseend-usesectors,wherethepenetrationofrenewableslagsgreatly.Withdirectelectrification,electrifiedend-usetechnologiescanthenbecomesourcesofadditionalflexibilitybyadjustingtheirdemandprofileandmakingtheirstoragecapacity(electricalorthermal)availabletothepowersystem.Withindirectelectrification,renewableelectricityisusedtoproduceintermediatefuels(hydrogen,syntheticfuels)tobeusedinend-usesectors,whichgreatlyincreasessystemflexibilitybyusingintermediatechemicalstorageasabufferbetweendemandandgeneration.Organisationalstructureswillneedtofostercollaborativeframeworksthatunlockallthesynergiesthatbecomeavailablethroughsystemintegrationandsectorcoupling.Aggregationisstrength.Inarenewable-basedpowersystemanimportantshareoftheflexibilityresourcesisdistributed,bothspatiallyandintermsofownership,whichcallsforusers’involvementinpowersystemplanningandoperation.Aggregatorsandtheappropriateaccompanyingregulationfacilitateharnessingthisflexibilitypotential(IRENA,2019c),butmanyregulatoryenvironmentsandtheirorganisationalstructuresstilldonotfullyrecognisetheroleofaggregatorsandlimittheirparticipationintheprocurementofenergyandflexibility.Harvestingthefullpotentialofimplicitdemandresponse.Potentiallyeveryuser,withtheappropriatetarifforvalue-recognitionmechanism,canshiftdemandintimeandcontributetopeak-shaving,scarcitymanagementorshiftingpowerdemandtoaccommodatepowersystemneeds(e.g.avoidingcurtailment).Time-of-usetariffs–inwhichthepriceofelectricityvariestoreflectthevalueofelectricityforthewholesystemindifferentperiods–whensuitablydesigned,actaskeyenablerstoincentiviseuserstoadjustdemandorinjectionofexcessproductionofdistributedenergyresourcestothegridwhenitismorevaluableforthesystem.Thereareseveraloptionstodesigntariffstructures.Tofacilitateeffectivesocialengagement,residentialretailtariffsneedtobethoughtfullydesigned,alsoincorporatingdistributionalconsiderations,bothtochoosethebestoptionandtoaccompanyitwithmitigationmeasurestoavoidleavinganyonebehind.Rethinkingcurrentplanstoavoidstrandingassets.Powersystemorganisationalstructureshavetofosterandsupportthedeploymentandoperationoftheappropriatesourcesofflexibilityforarenewable-basedintegratedpowersystem.Thisinvolvesdeployingnewsourcesofsustainableflexibilitywhilesimultaneouslyphasingoutfossilfuel-basedsourcesofflexibilitythatcouldbecomebarrierstotransition.Preventinganyadditionalinvestmentsinfossilfuel-basedflexibilityresourceswouldminimisestrandedassetsandtheirassociatedsocio-economicimpact(BosandGupta,2019).Inturn,thiswouldrequireglobalfiscalandfinancialinstrumentsandanincreaseindevelopmentco-operation.46RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONDigitalisationDigitaltechnologiessupportedbytheInternetofThings,artificialintelligenceandbigdataanalysisareintroducingnewapplicationsinthepowersector,changingtheboundariesanddynamicsofthesystem.Theyarehelpingtoimprovereal-timevisibilityofthewholesystemoperation(generation,demand,networkuse,distributedflexibilityresources,planningandforecastingofVREproduction)andenhancingthecontrolofpowersystems,hencefacilitatingtheintegrationofrenewablegenerationanddistributedflexibility.Whenproperlyused,theseinnovationsalsocreatetheopportunitytodesignbetterservicestoimprovesystemperformance,tooptimiserenewableassets,toallowdeeperenergysavingsandflexibility,andtoboostgovernanceandcitizens’participation(IRENA,2019c).Therefore,digitalisationisalsopotentiallya“gamechanger”ofthepowersystemundertheappropriateconditions.Thechangesitcanintroduce(Box4)needappropriateorganisationalstructurestoreapitspotentialbenefits.Efficiencyandelectrification.Electrificationoffinalenergydemandcontributestobothenergyefficiencyimprovementandsystemintegration.Hence,twotrendsaretobefoundduringthetransitionofpowersystems:decreasingoverallenergydemandlinkedtoefficiencyimprovementandincreasingelectricitydemandbecauseofthehigherdirectandindirectelectrificationofend-usesectors.Theneedforhightransitionratesaddsfurtherelementstothedynamicevolutionofelectricitydemandduringthetransition.Organisationalstructuresthatfavorbothenergyefficiencyandelectrificationneedtobeinplace.Buttomakeelectrificationarealalternativetofossilfuels,electricitypricescannotbemuchmoreexpensivethanthefossilfuelsitismeanttoreplace.Fromaproduct-basedtowardsaservice-basedeconomy.Ultimately,energyisdemandedtoprocureaspecificservice,notsimplyforthesakeofconsumingenergy.Service-basedapproachescanleveragethetransitionbyfurtherreducingenergydemandbeyondefficiencygains.Asanexample,accesstomobilityservicesinsteadofindividualownershipofcarscanenhancetheefficiencygainsofswitchingfromcombustionenginestoelectricvehicleswhilesimultaneouslyreducingmaterialrequirementsandindustry’senergydemand(reducedmanufacturing)andcitizens’welfare(fewercarsontheroads).Trendstowardsaservice-basedeconomyintroduceamoregeneralquestionontheroleofpropertyrightsasopposedtoaccesstoenergyservices.47Thetransition’simplicationsforthepowersystemDistributionofgenerationandotherservicesOneofthefundamentalsforthesuccessofanambitiousenergytransitionisbroaderengagementofsocietiestoactivelyparticipateinshaping,governing,building,financingandoperatingthedifferentelementsoftheenergysystemwhilealigningthemwiththeclimateandresilienceimperative.Distributionofenergytechnologiesisakeyenablerinthisrespect,offeringgreaterflexibilityandopportunitiesforlocalcompanies,municipalities,communitiesandindividualstogetinvolved.Despitethegreatercomplexityinoperatingdistributedenergyresources,theycanprovidecost-effectivesolutionstonetworkcongestionsatboththedistributionandtransmissionlevels,helpingtoaddressthetechnicalchallengesthatincreaseddeploymentofVREanddistributedgenerationandflexibilitymaycause.Inanenergyaccesscontext,distributedrenewablesoftenprovidethequickestandcheapestwaytobringelectricityaccesstounservedpopulations.Box4.DigitalisationandthepowersystemchangesitcantriggerFromone-eyedsystemstofullvisibility.Theaccessanduseofdigitaldataallowforfullvisibilityoftheelectricalsystem,incontrasttoanalogsystems.Visibilityopensthedoortoaccurateandreal-timecontrolofsystemstatusandperformancesothatitcanbemanagedandusedmoreefficiently(electricalnetworks,vehicles,storage,demandforenergyorservices,distributedresources,etc.).Enhancedmonitoringandcontrolcapabilityopenthedoortoefficientmanagementandoperationofpowersystemswithhighercomplexity(distributedgeneration,flexibilityanddemand,highVREpenetration,increasednumberofactors,etc.),improvingthepredictabilityoftheirbehaviour.Italsohelpsregulatorsmonitorandconfirmtheinformationprovidedbystakeholdersregardingtheregulatedactivitiestheycarryout,increasingtheircapacitytoimplementandmanageeffectiveregulationandsufficient,fairtariffs.Recognisingthevalueofdata.Foralltheseopportunitiestoberealised,qualityand(near)real-timedataaccessisanessentialpre-requisite.Addressingwhatisaproperuseofthesedataandwhataretheassociatedeconomicandethicaltrade-offsrequirespropergovernanceandaddressingtheissuesofdataownership,value,privacyandsecurity.Democraticandfairframeworksforthegatheringanduseofdataareakeyelementforenablingstakeholders’trustwhich,inturn,isessentialforreapingthepotentialbenefitsofdigitalisation.Moreactiveandprice/tariff-responsivedemand.Digitalisationisfacilitatingthecollectionofdatanecessaryforamoreaccurateestimateofthevalueofservicesprovidedtothepowersystemwithbetterspatialandtemporalgranularity.Thisallowsdemandtobemoreandmoreresponsivetopowersystemneeds,andtomakeitincreasinglyinterestingforuserstoactivelyparticipateintheirprovision.48RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONBox5.Distributionofgenerationandotherservices:SystemicimplicationsAlevelplayingfieldfordistributedandcentralisedenergyresources.Bothcentralisedanddistributedsolutionshavedifferentiatedrolesandbenefitsfortheenergytransition;abalancedmixofbothcentralisedanddistributedoptionscanbringsocialandenvironmentalbenefitswhilebeingaffordable.Failingtocreatealevelplayingfieldfordistributedandcentralisedenergyresourceswouldresultinsignificantbarrierstothetransition,withunintendedinefficiencies(forinstanceintermsofland,energyormaterialuse)andcosts(MIT,2016).Collaborationandcoherenceamongallstakeholders.Co-ordinatedandcoherentactionsareanessentialingredienttoenablethetransition.Distributedassetsbringanincreasedcomplexityinsystemoperationatallvoltagelevels.Enhancedcollaborationandreal-timecommunicationamongallstakeholdersinvolved(VIUs,systemoperators,generators,transmissionsystemoperators,independentsystemoperators,distributedsystemoperators,aggregators,endusers,marketoperators,etc.)wouldenabletheneededefficiencyandco-ordinationininfrastructureandresourceuse.Withtherightcollaboration,thesystemevolutioncanbesteeredtowardsanintegratedpowersystemwherebothdistributedresourcesandgridassetsplaytheirrole.Distributedresourcesasasolutionforgridreinforcementdeferral.Non-wirealternativestosubstantialinvestmentsingridreinforcementemergefrominnovativedistributedresourcesoperation.TurningflexibilityresourcesintovirtualpowerplantsorvirtualpowerlinesthroughaggregationmakesitpossibletointegratelargeVREsharesatboththedistributionandtransmissionlevels,reducingtheriskofcongestionandthusreducingtheirimpactongridreinforcement(IRENA,2019c).Inareasnotservedbyelectricitygridsorwhereserviceisunreliable,distributedrenewableenergytechnologiesmakeitpossibletoimproveenergyaccessbyprovidingcleanandcost-effectiveoptionsformechanicalpower,electricitygeneration,heating,coolingandcooking,inbothurbanandruralareas.Distributedrenewablesalreadyprovideelectricitytobetween5%and10%ofthepopulationinseveraldevelopingcountries(REN21,2021).GridreinforcementdeferralwouldbenefitfromorganisationalstructuresresponsiblefortheremunerationofdistributionactivitiesthatareabletogivethegridoperatortheincentiveormandatetomakethemostofDERs.Quickeranddeepertransition.Everyprivateorpublicspacecanpotentiallycontributetotheenergytransition.Engagingcitizens,companiesandadministrationsindistributedrenewableenergy,energyefficiencyandflexibilitycancontributegreatlytoachievinghighertransitionrates.Takingintoaccountspaceandsavingsavailability,around50%ofEUcitizenswouldbeabletoproducerenewableelectricitythroughself-consumptionorenergycommunities,amountingtoaround45%ofelectricitydemandby2050.Around83%ofthemcouldprovidedistributeddemandresponseandenergystorage(CEDelft,2016).Thesefiguresincluderesidences,smallandmedium-sizedenterprises,andpublicbuildingsorfacilities.Distributedenergyresourcescanbeoperatedtogether,creatingasizeablecapacitysimilartothatofaconventionalgenerator.Thisaggregationcanbecalleda“virtualpowerplant”(IRENA,2019d).Virtualpowerlinesconsistoflarge-scalestoragesystems“connectedtothegridattwokeypoints:oneonthesupplyside,storingsurplusgenerationfromrenewablesthatcouldnotbetransmittedduetogridcongestion;anotheronthedemandside,chargedwhenevergridcapacityallowsandthendischargedwhenneeded”(IRENA,2020c).49Thetransition’simplicationsforthepowersystemForthepotentialofdistributiontoemerge,neworganisationalstructureshavetorecogniseandaddresstheimplicitandexplicitbiasofcurrentpowersystemsconceivedunderacentralisationparadigm,hencerecognisingthesystemimprovementsthatdistributionmaybringabout(Box5).Evolutionoftheactorlandscape:New,activeandconnectedparticipantsEnergyutilities,inrecentdecades,havebeeninchargeofdeliveringenergytohouseholds,publicservices,businessesandindustries,playinganimportantroleinimplementingthecurrentenergysysteminbothregulatedandliberalisedenvironments.Asdiscussedintheprevioussections,thecharacteristicsofthenewelementsoftheintegratedrenewables-basedpowersystemenableand,atthesametime,requireamoregranularparticipation.Beforetheenergytransitionstarted,thestructureofpowersystems(centralised,generation-focused,mostlyfossilfuel-based)determinedtheroleofstakeholdersandtheirinteractions.Inbothregulatedandliberalisedsystems,thesewerebasedonacentralisedcontrolofinformation,separatedrolesalongthevaluechain(asdetailedinchapter3)andalmostunilateralinteractionswithusersrestrictedtoacustomerrole.Inprevalentpre-transitionpowersystems,thedialogueaboutthepowersystemhasbeenconductedasanexpert’sconversationwherelarge-scalestakeholdersparticipatedirectly,andtheregulatorandpolicymakersareinchargeofrepresentingtheinterestsofpassiveusersandthepublic.Withtheinceptionoftheenergytransition,newmodelsthatenabletheempowermentofusersarebeingexploredbymeansofdistributed,aggregatedandpeer-to-peermodelsofdecisionmaking,operation,financeandownershipofrenewableenergyandflexibility.Examplesofmodelsthatcanchannelsocialactivationintheenergytransitionincludenetbillingschemesforresidentialself-consumptionintheEUandcommunity-led100%renewableoff-gridpowersystemsinruralareasinmanydevelopingcountries,suchasThailandandthePhilippines(Kubli,LoockandWüstenhagen,2018;MarquardtandDelina,2019).Additionally,companiesandentitiesthatmanageassetsthatcouldcontributetothetransition(suchasback-upstoragesystems,electricvehiclefleets,trains,informationandcommunicationtechnologies,industrialprocesses,etc.)arenowexploringoptionstogetmoredirectlyinvolvedinthepowersectorthroughemergingbusinessopportunities.Thiswillinevitablyleadtotheentryofnewactorsaswellastoadeeptransformationofthecorebusinessoftraditionalactors,affectingallkindsofcurrentorganisationalstructures.Thistrendisreinforcedbyincreasedactivity“behindthemeter”,13pushingthelimitsbetweenthepowersystemandtheprivatedomain,withuserenergydecisionshavingincreasingimplicationsfortheoverallenergysystem.Theentryofnewactorswithdifferentactivitiesandobjectivesmakesitincreasinglyessentialtoestablishmechanismstoalignthemallwiththeultimategoaloftheenergytransition:toambitiouslymitigategreenhousegasemissionsandcreatecommunityresilience.Collaboration,intendedastheabilitytoactcollectivelyinthepursuitofacommongoal,isoneofthekeystotriggersynergiesandpreventbarriers.Henceinadditiontoexpertprocessesandregulationandmarket-drivendecisionmaking,involvingpeopleandtheircommunitiesactivelyindecision-makingprocessesandensuringthattheirvoicesareincludedadequatelyinthedesignofpoliciesthataffecttheirlivesandlivelihoodsisanessentialelementintheunfoldingenergytransition,bringingpublicinteresttotheforefront.Therefore,abroaderco-ordinationtoachievemoreholistic,dynamicandambitiousorganisationalstructuresarises.13Theterm“behindthemeter”referstoenergyresources,whethergeneration,storageorflexibility,thatdirectlysupplyhomesandbuildingswithoutpassingbytheelectricitygrid.Theresourcesarelocatedontheuser’ssideoftheelectricitymeterasopposedtoanythingthathappensonthegridside,whichisdeemedtobein“frontofthemeter”.50RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONTheentryofnewactorschallengesthepre-transitionpowersysteminmultipleways,bothinliberalisedandregulatedset-ups.Theincreasinglydistributednatureofpowersystemsdisruptsthe“top-down”structureoftraditionalutilitiesandincumbents.“Pro-use”orpeer-to-peerelectricityexchangeandtheriseofrenewableenergy-basedelectrificationwillalsoshapehowusersinteractwithutilities.Duringtheinceptionoftheenergytransition,incumbents(utilities,unions,transmissionanddistributionsystemoperators,decisionmakers,etc.)willneedtoadapttoanewtechnologicalandgovernancesituation,aligningwiththeenergytransition’sambitionandresiliencegoals.Theywillsharethestagewithnewactorsthataredefiningtheirroleinachangingenvironmentwheretherulesarestilllargelydominatedbyincumbents,althoughregulatorsareworkingtotranslateexpectationsofagents’diversificationintorealitythroughadaptingregulation.Duringthedefinitionofroles,newdynamicswillarisebetweenoldandnewactorsofpowersystems,includingpossibleconflictswhendefiningone’sniche.Onlysomeoftheoldandnewactorsandtheirrelationshipswillsurvivepost-transition,dependingontheirandpolicymakers’abilitytoadapttothedecentralised,integrated,participatoryandrenewable-basedenergysystem.Thosewhowillnotadapttothenewsystem,norcollaborateinsupportingthetransformativeprocess,willeventuallyeitherbecomebarrierstothetransitionitselforloserelevanceanddisappear.Dependingonthegovernanceandorganisationalstructuresadopted,differentmixesofregulation,participationandcollaborationamongactorswillbeputinplace,withimplicationsforboththestakeholderlandscapeandtheconfigurationofthenewenergysystem.Hencepowersystemstructureswillneedtosupportthegreaterdiversityofactorsthattheenergytransitionbringsaboutandtheparadigmshiftsthatthisintroduces(Box6).Powersystemorganisationalstructures,inbothregulatedandliberalisedcontexts,havebeendesignedtomeetpowersystemgoals.Thismeansthatasthefunctionsofpowersystemschange(inresponsetonewemerginggoals),theirorganisationalstructuresalsochangetoperformthenewfunctions.Solarpanelsontheroofofalocalmarket,ColdHubs51Thetransition’simplicationsforthepowersystemBox6.Evolutionoftheactorlandscape:New,activeandconnectedparticipantsFrompassiveuserstonewactors.DigitalisationandthemodularityofVREandflexibilityresourcesenabledecentralisationandmultilateralrelations(exchangeofinformation,energyandresources).Whenaccompaniedbyconduciveregulation,formerlypassiveagentsbecomeabletoexpresstheirpreferencesandvaluesthroughtheiropinionandchoicesregardingregulations,demand,productionandprovisionofservicestothepowersystem.Consequently,thepreviouslyseparatedspacesofusersandproducersbecomeblurred,ashasalreadyhappenedinothersectors.Challengesareaheadtoimplementinclusiveandtransparentmodelsformeaningfulparticipation(includingdataprocurementandmanagement)thatbuildtrustinsteadofunilaterallyextractingvaluefromusers.Trustismostlyneededfordevelopingthefullpotentialofthenewmultilateralinteractions.Organisationalstructureswillneedtoanticipateandseektopreventnewactorsfacingdifferentlevelsofinformationandentitlementcomparedtoincumbents,especiallyintheinitialstagesofthetransition.Fullinclusionandtransparency.Inadigitalisedanddistributedsystem,decision-makingprocedurescanbeeasilyshared,directlyinvolvingcitizensinpursuingthepublicinterest.Itisimportanttodesignorganisationalstructurestakingintoaccounttheactiveparticipationandinvolvementofallstakeholders,preventingpowerdynamicsbetweenincumbentsandnewcomers.Threegovernanceprinciplesareessentialtomakeparticipationreal:anon-discriminatoryenvironment,whichiskeyforengagementandcollaborationamongactors;controlandtransparencytoavoidasymmetricinformation;andparticipationbasedonasolidlegalbasisthatrecognisestheaddedvalueofparticipation.Fromunilateraltomultilateralexchanges.Theincreasinglydistributednatureofpowersystemactorscandisrupttraditional“top-down”structuresandcallsforamoreactiveandcollaborativepowersystemplanning,managementanduse.Thesemultilateralinformationandenergyflowsposechallengesforgovernanceandthedesignoforganisationalstructures,especiallywhendealingwithretail.Fromcompetitiontocollaboration.Collaborationamongabroadspectrumofexistingandnewplayersinsideandoutsidetheenergysystemgreatlyenhancesthechancesofsuccessbyjointlyaddressingthemulti-levelchallengesoftheenergytransition.Astheneedforunlockingsynergiesbetweenactors,resources,regulationsandsystemsincreases,marketcompetitionalonefailstodrivetheenergytransition.Thesamehappenswithpowersystemregulationwhenitisnotinformedbythewidersocio-economicandplanetarydimensions.Collaborativeapproachesareexpectedtoplayapivotalroleindrivingthetransitioninbothregulatedandliberalisedenvironments(IRENA,2020c).Somecommunity-focusedprojectsaddressthesocialresponsibilitydimensionoftheenergytransitionwithinnovativesolutionsbasedoncollaboration.Examplesspanfromthecrowdfundingofsolar-sourcedstreetlightninginneighbourhoodswherethepowerserviceisnotreliabletofacilitatesafemovements;tosocialengagementmodelsforcommunity-basedvirtualpowerplants;tocollectiveclimatelawsuitsagainstgovernmentsandcompaniestoalignpolicyanddecisionmakingwithplanetarylimits.52RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONFromresponsibilitytoempowerment.Puttingtoworkthesharedsocialresponsibilitytoactivelyaddresstransitionchallengesrequiressocialempowerment.Empowermentisamulti-dimensionalsocialprocessthatassistspeopleandcommunitiesingainingcontrolovertheirownlives,enablingpeople’sabilitytoenforcechange(power)andclaimone’srightsbyactingonissuestheyconsidertobeimportant.Tofacilitatecollectiveempowerment,acommonlevelplayingfieldisneededthatconsidersthatnewactorscanhavedifferentlevelsofexpertisecomparedtoincumbents.Citizens’empowermentcanbefacilitatedindifferentways,withmeasuresthatinclude(amongmanyothers):energyeducation;participationinpolicymaking;engagementinenergyorinfrastructureplanning;initiativestofundrenewableenergyinstallations(includingthoseintheGlobalSouth,attendingtotheequitydimensiondrivenbyhistoricalresponsibilityfortheclimatecrisis);community-ownedmodernrenewableenergygeneration;peer-to-peerfinanceofenergyefficiencymeasures;andsharedrenewableenergy-poweredvehiclefleets.Indevelopingandemergingeconomies,socialempowermentcaninvolvecollaborativesolutionstothelackofaccesstosustainableenergy,suchasminigridsbasedonsolarhomesystemsandpeer-to-peerarrangements.Mostimportantly,empowermentmakespossibleinitiativesoutsidethenaturalscopeofutilitiesandincumbents,increasingthediversityandhenceresilienceofthesystematthesametimetofosterdisruptiveinnovation.Distributedinnovation.Newactors–frommunicipalitiesandtherecyclingindustrytoaggregatorsandclimatescientists–bringnewexpertiseandideas,improvingtheinnovationabilityofthepowersector,especiallywhendealingwithinformationandcommunicationstechnology,digitalisation,smartcontracts,sectorcoupling,regulation,participationmechanismsandinnovativewaysofcapturingthefullsocialvalueofpower.Community-focusedanddistributedinitiativescandeliverinnovationthatcomesfromtheedgesofthesystem(peri-systemic),locallytailoredbutpotentiallyscalabletonewmodelsororganisationalstructures,withtheaimofaddressingcollectivelythelocalorglobalsocial,environmentaloreconomicchallenges,whileaddressingtheresponsibilitydimensionofafairandjustenergytransition.Blurringthelinesbetweenpublicandprivatetowardscollectiveinitiatives.Collectiveinitiativesmaybringinsightfulknowledgeonhowtoincorporatesocio-environmentalobjectivesintothepowersystemset-up.Atthesametime,theycanexplorehybridsolutionsbetweenliberalisedandregulatedsystems.Collectiveinitiativesmayfitwithinaliberalisedmarketframework(crowd-lending,collectivepurchases,carsharing/pooling,etc.),evolvewithinthecommonsdimension(non-profitinitiatives,financingrenewableenergyatzerointerestordirectingthebenefitsforthecommongoodofthecommunity)orhaveelementscommontoboth(suchasretailerswhooptimisetheircustomers’contractconditionstoreducetheirbillsinareaswithhighincidenceofenergypoverty).Community-focusedprojectsandpro-usershavethepotentialtohelpthesystembyimprovingitsresiliencewiththeirdistributedassetsandcreatingnewdynamicsofsolidarityandmutualsupport.Byrecognisingaltruistic,co-operative,andcollaborativeengagements,organisationalstructurescanincreaseboththepowersystemandsocialresilience.53Thetransition’simplicationsforthepowersystem54Ifoneofthemaingoalstodayistohavemostly(ifnotentirely)renewables-basedgeneration,thentorealisethefullpotentialandpositivecontributionofrenewables,powersystemorganisationalstructuresmustbetunedtothecharacteristicsandrequirementsofrenewableenergy.Sincechallengesspurfromdifferencesintechnologicalcharacteristicsbetweenconventionalandtransition-relatedresources,allpowersystems,fromthemoreregulatedtothefullyliberalised,willfacethem.Insomesystems,theshareofrenewableenergyinthepowersystemhasalreadygrownsubstantially(Figure9).Thankstopro-activepolicymaking,manycountrieshavereachedVREsharesupto20%,andexamplesexistofsystemswithhighsharesofVRE(above30%)incountriesorregionssuchasDenmarkandUruguay.Whilethedeploymentofrenewablesisprogressing,theadaptationofpowersystemorganisationalstructuresislagging.AlthoughforlowsharesofVREthisisnotanissue,lackofanticipationcanproducebarrierstotransitionasthedeploymentofrenewablesprogresses.Manyofthepotentialmisalignmentshavejustbeguntoshowup.Pro-activepolicymakingshouldforeseetheseimpedimentstotheenergytransitionand,takingstockofdifferentcountries’experiencesandacademicresearch,plantheredesignofpowersystemorganisationalstructuresintimetoavoidfuturehurdles.UnderstandingthebasisofCONTEXTUALISINGPOWERSYSTEMSTRUCTURES355FIGURE9.Sharesofrenewableenergyinfinalelectricityconsumption,selectedcountries,2019Source:IRENA,2021a.0%10%20%30%40%50%60%70%80%90%100%AlbaniaBhutanNepalParaguayIcelandCostaRicaNorwayUruguayUgandaTajikistanKyrgyzstanLithuaniaBrazilNewZealandDenmarkAustriaElSalvadorColombiaCanadaCroatiaSwitzerlandSudanPeruBelizeSwedenMontenegroPortugalPanamaHondurasMyanmarLatviaFinlandChileTürkiyeVietNamGermanyRomaniaItalyIrelandUKSpainOtherREVREPowersystemorganisationalstructures,inbothregulatedandliberalisedcontexts,havebeendesignedtomeetpowersystemgoals.Thismeansthatasthefunctionsofpowersystemschange(inresponsetonewemerginggoals),theirorganisationalstructuresalsochangetoperformthenewfunctions.thedesignoftheseorganisationalstructuresisessentialtounderstandwhatmeasureswillbeneeded.Thenextsectiondelvesintothecentralaspectsofpowersystemorganisationalstructures.3.1.POWERSYSTEMGOALSThepowersectorisvitalbothfortheeconomyandforcitizens’well-being.Theoperationalgoalofthepowersystemistoguaranteethesupplyofelectricitytousers,withtheultimateobjectiveofprovidingthehighestpossiblesocialvalue.Electricityis,however,apeculiarcommodityinthatitmustbeusedalmostinstantaneouslyaftergeneration.Additionalgoalsrelatetohowthiselectricityissupplied,andtheyhavetechnical,economic,environmentalandsocialdimensions(Figure10).Policyobjectivesdeterminethedifferentgoalsandtheirrelativeimportance.56RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONEnergyauthoritieshavebeensetupbycountriestoco-ordinateandregulatepowersystems,eveninthemoreliberalisedcontexts.Theseauthoritiessettherulesofpowersystemsandmaybeenergyministriesorsomeformofthird-partyentities(suchasARERAinItaly),receivingtheirmandatefromthecentralgovernment.Inthecaseofaverticallyintegratedstate-ownedutility,theauthoritymaybewithintheutilityitself,whichcanthenself-regulateinasituationoftotalorpartialmonopoly.ThegoalsandconstraintspresentedinFigure10giveshapetopowersystemregulations.Forexample,technicalgoalsmaychangethedefinitionofancillaryservices,whileeconomicandsocialgoalsmaychangethewayancillaryservicesareprocured.Withoutproperregulationbeingimplemented,bottom-linegoalswillnotbeachieved,andconstraintswillbetransgressed,withthesupplyofelectricitynotprovidingsocialvalue.3.2.DIFFERENTWAYSTOORGANISETHEPOWERSYSTEMUltimately,toachieveitsgoals,apowersystemstructureshouldbeabletoprocuretheneededcapacityandinfrastructurewiththerequiredanticipation,aswellastoproduceanddeliverelectricitywithintheexistingsocio-economicandenvironmentalboundaries.Therearedifferentwaystoorganisepowersystems.Prevalentpowersystemstructuresrangefromfullyregulatedtosignificantlyliberalisedones.Infullyregulatedstructures,asingleutilitywithinaregionownsandoperatesthefullsetofinfrastructureneededtogenerate,transmitanddistributeenergy.Infullyliberalisedforms,thegenerationandretailofelectricityareopentocompetition,withcustomersbeingabletochoosetheelectricityprovideramongavailablemarketchoices.FIGURE10.PowersystemgoalsTechnicalconstraintsGeographicallimits,technologycapabilitiesetc...EconomicconstraintsLimitedfundings,environmentalandsocialboundaries,ratepayerslimitsEnvironmentalconstraintsBiodiversityandhealthimpacts,COemissionsSocialconstraintsRequirementforstableeconomicactivityandlivelihood,digniﬁedjobs,appropriategovernancedesire,distributionalimpactsTechnicalgoalse.g.powerquality,reliability,safetyEconomicgoalse.g.containmentofpricesforendusers,faircompetition,fostersustainableeconomicactivityEnvironmentalgoalse.g.controloflocalpollutants,energyeﬃciency,electricitydecarbonisation,sustainableuseofresources,minimiseimpactsonnaturalspacesSocialgoalse.g.guaranteeelectricityaccesstoeveryone,consumerprotection,limitmarketpower,transparancy,maximisesocialvalue,fostergovernance,universalaccesstosustainableenergyservicesMainoperationnalgoal:supplyelectricitytousers57contextualisingpowersystemstructuresPowergridsarestronglyregulatedduetotheirconditionof“naturalmonopoly”.However,inliberalisedstructures,strongelementsofregulationarealsoneededtoalignmarketoutputswithpowersystemgoals.Whiledispatchofpowerplantsmayvaryacrosspowersystemmodels,theoverallphysicsatthebasisofthepowersystemdoesnotchange:energystillflowsfromgeneratorstousers,passingthroughtransmissionanddistributiongrids.Thefollowingsectionspresentsomeofthemainmodelsofcurrentpowersystemstructures.Thishigh-levelclassificationhidessomenuances,sincethelevelofcomplexityofactualpowersystemsbringslargedifferencesinorganisationalstructureevenwithinthesamemainmodel.However,itprovidesanadequateconceptualframework.Notably,allcurrentpowersystemstructuresweredesignedandoperatedaccordingtothegoalsofthefossilfuelera.Nosystemhassofarachievedaformthatfitstherequirementsoftherenewableenergyera(e.g.todealwithveryhighsharesofdistributedandvariablerenewables).Theanalysisfocusesonregulatedandliberalisedsystems,asthetwomostwidelyusedclassificationsofpowersystems.Nevertheless,Box7discusseswhythe“regulatedversusliberalised”dichotomycanbemisleading.Box7.The“regulationversusliberalisation”dichotomyTheprocessexperiencedsincethe1990s(inparticularintheGlobalNorth)ofopeningpowersystemstoprivatecompetitioniscalled“liberalisation”andsometimesalsoreferredtoas“deregulation”.Liberalisationinvolvesmakingspaceforprivateactorstoparticipateinthedifferentpowersystemtasks.Proponentsofderegulationpresenteditasasolutiontotheinefficienciesofgovernmentregulationandpowersystemmanagementbythestate.Theoft-statedrationaleforderegulationisthatmorecompetitionandmoreinformationcouldleadtohigherefficiencyandlowerpricesoverall.However,liberalisationofpowermarketsandtheentranceofcompetition,evensinglebuyermodels,doesnotnecessarilyresultinlessregulation.Onthecontrary,thecomplexityofelectricitytradinganddispatching,theneedtomaintainthesystemoperation,theimportanceofelectricityforacountry’seconomy,customerprotectionrequirements,thepresenceofimportantmarketfailures(e.g.environmentalexternalities)andthealignmentofmarketforceswithsocialvalueintroducescomplexregulationrequirementsfortheliberalisedmodel.Energyauthoritiesarenecessarytodesignandimplementthisregulation,andestablishingthemisitselfanon-trivialtask.Energyauthoritiesshouldbeindependentandempoweredtoact,whilebeingsubjecttooversightandgovernance.Inmanycases,energyauthoritiesmustimposesanctionsonoperatorsthatfailtocomplywiththerequirementsoftheregulatoryframeworkorthatdonotimplementtheenergyauthority’sdecisions.Regulationinliberalisedmodelsisalsoneededtosafeguardtheinterestsofinvestorswhileprotectingusers,insuchawaythatthesystemattractsinvestmentswhilemakingsurethatprivatecompaniesdonotabusetheirposition,whichbyitselfcanresultinacomplexequilibrium.Regulationandtheroleofenergyauthoritiesisalsocrucialforelectricityretailing.Thisregulationcanentailcontrolovertheproductallowedtobesold,thecommercialtacticsusedbyretailers,theguaranteeofaccesstoelectricityforall,thetreatmentofenergydata,meteringactivities,informationsharingrequirements,etc.58RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONRegulatedpowersystemstructuresHistorically,thepowersectorwasdominatedbyVerticallyIntegratedUtilities(VIUs).Theyhadamonopolyoverallactivitiesinthegeneration,transmissionanddistributionofpowerwithinthesystem’sgeographicaldomainofoperation.Thismodelstillpersistsinsomepartsoftheworld,includinginpartsoftheUnitedStates,AfricaandAsia.Regulatedutilitiescanbepubliclyorprivatelyowned.Theflowofelectricitypassesfromgenerationtothetransmissiongrid,andthentodistributiongrids.Operationsaresupervisedbyasystemoperator,whichmanagestheentiregridfromoneormorecontrolcentres.Inregulatedsystems,theutilityisassuredafairreturnonitsinvestment(atalllevelsofgeneration,transmission,distributionandsupply),onceitconformstotheregulatoryguidelinesIntroducingcompetitionintheretailsegmentofpowersystemswasexpectedtoimproveendogenouspowersystemcostrecovery,toopenthedoortoinnovativeandmoreuser-orientedretailingstrategies,andultimately,throughoverallsystemefficiencyimprovements,toreducethefinalpricethatuserspayforelectricity.Currentretailstructures,wheredistributioncompaniesandretailershavetheincentivetosellmoreandmoreenergy,alsoshowtheirlimitsincapturingthevalueofenergysavings,flexibilityanddistributedresources,whichmayintroducebarrierstotransition(seechapter4).Theprevailingretailingstructurestodaystillarenotuseroriented.Usersnormallycannotselectandprioritisefromwhichgeneratorstobuyelectricityonthebasisoftheirownpreferences(includingenvironmental,sustainabilityandsocialcriteria)(OpenUtility,2016).Oneofthebiggestshortcomingsofretailpowermarketshasbeentheirfailuretoengageusers(Poudineh,2019),whichwouldopenthespaceforalternativeapproachestoemerge,suchaspeer-to-peerelectricitymarketsandlocalmatchingplatforms(Mujeeb,HongandWang,2019;ParkandYong,2017).Moreover,eveninthemostliberalisedsettings,stateorpubliccontrolpersistsovermanyelementsofthepowersystemthatarevitalforitssmoothoperationatreasonablecosts.Theseincludetransmissionassets(state-controlledtransmissionsystemoperators),systemandmarketoperations(controlledbypublicorprivatebutheavilyregulatedoperators)anddistributiongrids(oftenownedbylocalutilities).Transmissionordistributiongridsmaybeprivatelyowned,viaconcessions,butstateorpubliccontroloverthesestrategicassetspersiststhroughstrongregulation.Finally,renewableenergydeploymentinliberalisedsystemsinrecentdecadeshashappenedmainlythankstoregulatedpayments(seesection3.4),whichreintroducedregulationfordedicatedandstate-drivenprocurementofspecifictechnologies,overridingcompetitivemarkets.Ontheotherhand,regulatedsystemscanalsoincorporatecompetitivecomponentssuchasauctionedpowerpurchaseagreementswithindependentpowerproducers(IPPs)ortenderstobuildnewinfrastructure.Forthesereasons,the“regulatedversusliberalised”dichotomy,althoughcommonlyused,canbemisleading.Regulationissettoremainatthecoreofanypowersystemorganisationalstructure,asafundamentalcomponenttosteerpowersystemstowardssocialvaluecreation.Thus,bywayofclarification,whenregulatedorganisationalstructureset-upsarementionedinthisdocument,itisnotunderstoodthatthesearetheonlyonestobeguidedbyregulation,butratherthoseinwhichregulatedgenerationandretailoperationsarenotopentocompetition.Source:EEU,2020;Kessides,2004;OFGEM,2020;Thomas,2004.59contextualisingpowersystemstructuresandpracticessetbytheenergyregulator.Theenergyauthoritysetsthetariffsforallusers.Userspaytheregulatedtariffstotheutility,whichisthesolevendorofelectricity.Otherrevenuestreamsfedbygeneraltaxationmaycomplementthosefromregulatedelectricitytariffs(Figure11).VerticallyIntegratedutilitymodelTheVIIUmodelofferedalow-risksolutiontofinancethekickstartofnationalpowerindustries,inatimewhenelectricityprovisionwasunderstoodforemosttobeapublicservice.Verticalintegrationreferstotheintegrationofthelayersofgeneration,transmission,distributionandsupplyintoonesingleutility.VIUs,freedfromthehassleofprofitmakingandcompetition,couldfocusonbuildinguppowersystems.Theinvestmentsrequiredlargecapitalforinfrastructure.Alocalmonopolyandastableandgrowingdemandminimisedrisksandmaximisedtheabilitytoharvestthebenefitsofeconomiesofscaleininfrastructure.SinglebuyermodelInmanycountries,VIUscannowpurchaseelectricityfromindependentpowerproducers(IPPs)asasinglebuyer.AnIPPownsandoperatesoneormorepowerplantsandsellstheiroutputtothelocalutility,whichbuyselectricityasagreedinapowerpurchaseagreement(Box8).Therearenodirectchangesforusers,astheVIUremainstheonlyretailerofelectricity,butusersmayexperienceindirectimpactsfromthesinglebuyermodelthroughretailpricingandsocialimplicationsofelectricityprocurementcosts.FIGURE11.Regulatedpowersystem–illustrativeSYSTEMOPERATORRETAILERUSERSDSOTAXGenerationTransmissionandsystemoperationsDistributionandretailVerticallyintegratedutility:ownsandoperatesthefullpowersystemMoneyEnergyInformation60RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONThesinglebuyermodelintroducesalayerofcompetition,sincethesinglebuyer(whichcanbeapublicbodyortheVIUitself)canusecompetitivebiddingprocessestoallocatepowerpurchaseagreements,forexampleviaauctions.Theseauctionshaveabiddingframeworkandtermsofreferenceproducedbythesinglebuyerandthegovernment.Throughthem,thesinglebuyerorthegovernmentcanintroduceprocurementgoals,whichcangofarbeyondpriceminimisation(IRENA,2019b).Insomecountries,suchasinPakistan,thesinglebuyermodelhasbeenimplementedasafirststageinpowersectorreformtowardsincreasingcompetition(liberalisation).Inothercases,suchasSouthAfrica,thesinglebuyermodelhasbeenusedtoattractprivatefinancingofnewgenerationcapacity.Box8.PowerpurchaseagreementsThesinglebuyermodelmainlyreliesonpowerpurchaseagreements(PPAs).Thesearebilateralcontractsbetweenageneratorofelectricity–sometimesreferredtoasanindependentpowerproducer(IPP)–andabuyerofelectricity,whichmaybetheutility,aretaileroralargeconsumer.ThePPAdefinesallthecommercialtermsforthesaleofelectricitybetweenthetwopartiesandisusuallylimitedintime.ManyformsofPPAsareinusetoday,andtheyvaryaccordingtotheneedsofthebuyerortheseller,andofthefinancingcounterparties.Inanycase,thePPAisregulatedbytheenergyauthorityandthenationalutilityortransmissionsystemoperator,whichneedtobeinformedandinsomecasestoauthorisethePPAs.ThisisbecauseelectricitytransactedthroughthePPAneedsthetransmissionanddistributiongridstobeexchanged.PPAsembedsignificantriskre-allocationcomponents,withtheirimpactsinthepriceseenbyusersdependingontheirbalance.PowerplantoperationalandinvestmentrisksaretransferredtotheIPP,whichwillpriceitintoitsPPAoffer.Thelong-termnatureofthepricingmechanismreducesrevenuerisksfortheIPP,sincepurchasedquantitiesandpricestendtobeestablished.Inthepuresinglebuyermodel,thePPAissignedbetweenanIPPandthestateutility,whichactsasbuyer.Inothermodels,buyersofelectricitycanalsoberetailersofelectricity(whobuyitfromtheIPPtothensellittofinalconsumers),largeconsumersoraggregatorsofsmallusers.PPAsreducemarketpricerisksforusers,whichiswhylargeconsumersfrequentlysignthem.Moreover,insecuringalong-termbuyerandelectricityprice,PPAscanreducepowerplantinvestmentcostsbyreducinginvestors’risksandhencethecostofcapital.PPAsbetweenprivatepartiesalsoallowuserstoknowtheelectricitysourceandtofostertheenvironmentalorsocialvalueofelectricityproduction.Manycorporateconsumersofelectricityfromabreadthofeconomicsectorsareincreasinglyturningtorenewablesastheirpreferredenergychoice,usingPPAstoensuretherenewableoriginofthepurchasedelectricity.PPAshavebeenusedinbothregulatedandliberalisedstructures.Inregulatedorganisationalstructures,PPAsintroduceacompetitivecomponentinwholesaleelectricityprocurement.Inliberalisedorganisationalstructures,theyintroducearegulatedcomponentinwholesaleelectricityprocurement.61contextualisingpowersystemstructuresLiberalisedpowersystemstructuresThecreationofcompetitiveelectricitymarkets,aimingtoinduceefficienciesbyintroducingcompetition,isatthecoreofliberalisedmodelsforthepowersystem(seechapter5andbox7).Liberalisedmodelscanimplytwodifferentmarkets:thewholesalemarketandtheretailmarket.Thelatterissometimesnotcompletelyimplemented,withprotectedusers(usuallyresidentialhouseholds)havingelectricitysuppliedbyaregulatedretailer.LiberalisedmodelsnecessitatetheverticalandhorizontalunbundlingoftheVIU(Box9),aswellastheprivatisationofsomeorallformerlystate-ownedgenerationassets(Figure12).Liberalisedsystemshaveamarketoperator(insomecasesoverlappingwiththesystemoperator)thathastheroleofcollectingbidsfromgeneratorsandbuyersofwholesaleelectricity(retailersandlargeconsumers),andtoorderthemonthebasisoftheireconomicoffersandclearthemarketineachtradingperiod(e.g.hourorquarter-hour).Thesystemoperatordeterminesthefinalphysicaldispatchofthepowerplantsoncethewholesalemarketiscleared.FIGURE12.Liberalisedpowersystemstructures–illustrativeSUPPLIERSDISTRIBUTORSGenerationcompanyAGenerationcompanyBGenerationcompanyCSYSTEMOPERATORMARKETOPERATORUSERSMoneyEnergyInformation62RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONBox9.Unbundlingthepowersystem“Unbundling”isastructuralreformthatinvolvestheseparationofcorefunctionsperformedbytheVIU.Verticalunbundlingistheorganisationalseparationofthemainpowersystemoperations(generation,transmissionanddistribution/retail).Thegenerationfleetwouldbegiventooneorseveralgenerationcompanies,whiletheoperationsofthetransmissionassetswouldbegiventothetransmissionsystemoperator(TSO)ortoanindependentsystemoperator(ISO),andthephysicalassetsmaybeownedbyanothertransmissioncompany.Distributiongridswouldbeassignedtomultipledistributionsystemoperatorsactingindifferentgeographicalareas,oftenoverseenbylocaljurisdictions,whichininitialstagesoftenactalsoasretailerstofinalconsumersandtariffcollectors(Figure12):eachdistributionsystemoperatorcontrolsandoperatesthedistributiongridunderitssupervision.Horizontalunbundlingofthegenerationlayeristheseparationofgenerationintodifferententities,whichmaybeeitherprivateorstate-ownedcompaniesand,withinaliberalisedpowersystem,competetogenerateelectricity(Figure13).Theretailactivitycanbesplitamongdifferentretailers(nolongertiedtothedistributionoperations)thatinliberalisedsystemscompetetosupplyelectricityandotherservicestousers.Retailersreselltheelectricity(thattheyboughtinthewholesalemarket)tousersintheretailmarketandcompetetogainmarketsharesofusers.FIGURE13.Verticalunbundlingofthepowersystem–illustrativeDistributor/supplierADistributor/supplierBGenerationcompanyTransmissionandsystemoperationscompany63contextualisingpowersystemstructuresWholesalemarketAwholesaleelectricitymarketiswherecompetinggeneratorsoffertheirelectricityoutputtoenergyretailersandlargeconsumers.Energyauthoritiesandpolicymakersdesignedwholesalemarketstoaddresstheissuesdeemedmorerelevantatthetimeoftheircreation.Thisledtodifferentdesigns,mirroringjurisdictions’differencesintermsofgeography,powersystemtopologyandpolicymakers’objectives.Themarketoperatorisanindependentregulatedentitythatconductsmarketclearingthat,inturndeterminesmarketpricesforenergygeneration.Asidefromenergygeneration,powerplantscalledbythesystemoperatortoperformancillaryorbalancingserviceshaveanotherrevenuestreamassociatedwiththeseservices.AdditionalregulatedremunerationsforgenerationcanalsobeDriversforunbundlinghavebeenvarious.Onemajoreconomicreasonforunbundlinghasbeenthereductionofagencycostsarisingfromover-orunder-investment.Horizontalunbundlingoftenhasbeenenactedtoincreasecompetitioningenerationandretail,withtheexpectationofthisincreasingefficiencyandreducingoverallcoststofinalusers.Verticalunbundlingisrequiredfirsttopreventcrossfinancingofregulatedandnon-regulatedactivitiesandtopreventmarketpowerpositionsbyjoininggenerationandretail;moreover,itcanallowfornon-discriminatoryaccesstoelectricitygridsandgreatertransparencyonfinancialmanagementandaccountingwithinthesystem.Theroleofregulationinunbundlingistoguaranteegovernanceandalignmentwithsocialvaluecreation,improvingtransparencyandsupervisionoftheactivitiesofalltheplayers(publicorprivate).FIGURE14.Horizontalunbundlingofthegenerationanddistribution/retailpowersystemlayers–illustrativeSupplierASupplierBSupplierCDistributorATransmissionandsystemoperationscompanyDistributorBGenerationcompanyAGenerationcompanyBGenerationcompanyC64RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONintroduced(suchascapacitymechanisms,feed-intariffsorothers).Howthemarketoperatorworksvariesacrossjurisdictions.Twomaingroupsareworthmentioning,however:transmissionsystemoperator(TSO)systemsandindependentsystemoperator(ISO)systems(Box10).RetailmarketLiberalisationofretailactivitywasproposedaftertheintroductionofcompetitivewholesalemarketsasameanstopassonthepotentialbenefitsofcompetitiontoendusers.Theretailelectricitymarketplaysakeyroleinliberalisedpowersystemsasretailersbecomethemaincontactpointbetweenendusersandthepowersystem,aswellasoneofthemainmeansforuserstoinfluencethepowersystem.Inliberalisedretailmarkets,enduserscanbuyelectricityfromprivateretailersofelectricity,whopreviouslyboughtelectricityinwholesalemarkets,infuturemarkets,orfromtheirownassetsorfromIPPsviaPPAs.Retailersdifferentiateamongthemselvesthroughprices,tariffstructuresandothervalue-addedservicesthattheycanprovidetofinalusers,includingthesustainabilityoftheelectricitytheysell.Box10.TransmissionsystemoperatorandindependentsystemoperatorsystemsInTSOsystems,typicalofEurope,themarketoperatorandtheTSOareclearlyseparatedentities.TheTSOisanentity(state-ownedorotherwise)responsibleforcontrollingandoperatingthetransmissiongrid.TheobjectiveoftheTSOistoguaranteepowersystemsecurityinrealtime.Themarketoperatorhastheroleofcentrallytradingelectricityandcalculatingelectricityprices,clearingthemarketbasedonbidsfromgeneratorsandbuyers,butwithoutconsideringnetworkconstraints.Everyday,themarketoperatorpassesthegenerationscheduletotheTSO.If,aftertrading,thenetworkisforeseentobecongested,theTSO,givenitsroletomaintaingridsecurity,can“re-dispatch”,meaningthatitrequirespowerplantstoadjustthepowerfeed-intoavoidorresolvecongestions.Allofthesere-dispatchmeasuresresultinextracostsforconsumers:whenaTSOtellspowerstationstolimitproduction,itmuststillcompensatethemforthepowertheywouldhavebeenpaidfor,andpowerstationsthatTSOsasktoproduceextrapowerdosoatcostshigherthanthemarketprice.AnalternativesolutionisgivenbyISOsystems,characteristicoftheUnitedStates.TheISOconductsthetwofunctionsofmarketoperatorandsystemoperator.TheISOcollectsthecomplexbidsandtheinformationofallresourcesinthegrid,aswellasthestateofthetransmissionsystem,andinstructspowerplantswhenandhowtooperateinordertominimisecostsandgridcongestions.Thiseliminatesthenecessityforre-dispatchingfoundinTSOsystems,andofferswiderroomforoperationaloptimisation.Thishappensatthesakeoftransparencyandrequiringmorecomplexbidsforparticipants.ISOshaveahighdegreeofcentralisation,withdirectcontroloverthesystemresourcesatanypointintime.Hence,ISOsneedtohavehightemporalandgeographicalvisibilityofthepowersystem(Green,2007;NeuhoffandBoyd,2011).Insomecases,theentitymaybeknownbyotherterms,suchasregionaltransmissionorganisation(RTO).Forthepurposeofthisreport,ISOsareintendedtolumptogethercaseswheresystemoperatorsactalsoasmarketoperators65contextualisingpowersystemstructuresFinalusers,throughtheirbills,areexpectedtocoverthecostsofthewholepowersystemandtheeconomicprofitsofthedifferentagentsservingit(bothregulatedandliberalisedactivities).Notably,thisincludesallpowersystemactivities(generation,transmission,distributionandretail).Forthisreason,electricitybillsincludedifferentcostitems,someofthemvariablebasedontheamountofelectricityconsumedandothersfixedasafunctionofthecontractedcapacity,orperuser.Inmanycases,finalusers,inparticularresidentialones,havetheoptiontobuyelectricityfromastate-ownedorprivatelyownedregulatedenergyretailer,whichoffersregulatedrates.3.3.ELEMENTSOFPOWERSYSTEMSTRUCTURESPowersystemorganisationalstructureswillneedtochangeinordertohostlargesharesofrenewableenergy(seechapter4).However,thetransitionofthepowersectorbuildsonitsexistingelements,developedandimprovedovertime.Thissectiondescribestheelementsofthepowersystemtoenableabetterunderstandingoftheremainingsections:what,whyandhowchangesshouldbeintroducedtoevolvefromthefossilfueleratotherenewablesera.Whyspecificstructures?ElectricitycharacteristicsElectricityhasuniquecharacteristicsthatrequirespecificorganisationalstructures.Thesecharacteristicsarethefollowing:1)Electricitycannotbelargelystored.Mostoftheenergyproducts(biomass,coal,oil,gas,etc.)canbestored,whichallowsretailerstosmoothoutpeaksindemandandpricesbydrawingdownstoreswhenpricesarehighandbuildingstoreswhenpricesarelow.Electricitycanbeconvertedandstoredinhydropowerpumpedstorageplants,inbatteries,andashydrogenorheat,butthestoragecapacityaroundtheworldisverysmallcomparedtotheinstalledcapacity.Moreover,anyenergystorageimpliesalossofelectricity,resultinginlesselectricitydeliveredthanproduced.2)Constantmatchofsupplyanddemand.Inapowersystem,supplyanddemandmustmatchinanymoment,orthewholesystemorpartofitwouldcollapse.Thisconstraintrequiresaconsiderablelevelofsystemoperatorcontrolovergeneratorsanddemand.3)Electronsarenon-distinguishable.Electricityservedtothefinalusersisanentirelystandardisedproduct,andrenewableorfossilfuelgenerationcannotbedistinguishedatthesocket.Henceswappingbetweenretailersdoesnotchangethecharacteristicsoftheelectricityserved,althoughitcanindirectlyinfluencegeneration.Forthesamereason,acredibledesignofrenewableelectricitycertificationisachallengingissue.4)Therearenosubstitutes.Power-drivenequipmentcannotreceiveanythingbutstandardisedelectricityasaninput.Migratingtoanotherformoffinalenergyispossibleonlywith(oftenexpensive)equipmentsubstitution,whichisnotalwaysanoptionineitherhouseholds,commercialbuildingsorindustry.Somesectors,suchasinformationtechnology,cannotuseanythingbutelectricity.5)Massiveimpactonsociety.Along-standingfailureofthepowersystemwillleadtoimmediateandseverewelfareandeconomicimpacts.Governmentsacttoavoidtheriskofpowerindustryfailure.6)Largeenvironmentalimpact.Powergenerationhasanimmediateenvironmentalimpact,andregulationexistsinmanyinstancestolimitthisimpact.Moreover,electricitygenerationplaysacrucialroleingreenhousegasemissions,andattemptstodealwiththeclimateemergencyhavesofarfocusedmainlyonthepowersector.66RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONGiventhesepeculiarcharacteristics,powersystemsandtheirorganisationalstructureshavebeenconceivedtobeabletodeliverelectricitytofinalusersinacontinuousway,drivenbydemandandwithlittlecontroloverusers’behaviour.Forthesereasons,comparisonswithothersectors,suchastelecommunications,fallshortindescribingpotentialsolutions.TheprocurementmechanismsToguaranteeareliablematchingofdemandandsupplyateachpointintime,anypowersystemstructureenvisagesmultipletradingorallocationmechanisms(Figure15).Thesearedesignedtograduallyreduceuncertaintyandthemismatchbetweengenerationanddemand,sothatthesetwobecomeperfectlymatchedateachpointintime.Supplyarrangementscanhappenyearsinadvance,usingPPAswithIPPs,capacitypaymentsorpublicprocurementofgenerationplants,toguaranteetheforecastedelectricitysupplyneeds.Closertoactualdispatch,procurementmechanismshavebeendesignedtomatchproductionandtheremainingconsumptionofelectricity(notcoveredbythelong-termsupplyarrangements)withdifferenttimeframes,allocatingtheprovisionofgenerationandservicesacrosstheavailableportfolio.Day-aheadprocurement(marketorotherwise)iswhenmostofthearrangementsarebeingmade.Still,uncertaintyremains,suchthatclosetorealtime(afewminutesbeforedispatch)additionalactionsareneededtosettlethelastdifferencesbetweensupplyanddemand.Havingfullsystemcontrolovertheveryshorttermbeforedispatch,systemoperatorsprocurethesystemservicesneededforareliablesupply.Systemservicesareusedtomaintainthegrid’sabilitytoproperlyoperateevenwithverylast-seconddeviations.Themainelementscomposingpowersystemorganisationalstructuresaredescribedinthenextsections.FIGURE15.MainelementsofpowersystemprocurementmechanismSystemservicesEnergyCapacityYears/monthsahead60minutesaheadDeliveryTimeaheadCapacityprocurementSystemservicesprocurementDayaheadprocurementClosetorealtimeprocurementLongtermcontractsDayaheadBalancing/realtimemarketSystemoperationsBasedon:IRENA,IEAandREN21,2018.67contextualisingpowersystemstructuresEnergyprocurementLong-termcontractsInregulatedsystems,theinvestmentinpowerplantsbyVIUsisbasedonlong-termplanning.Powerplantsreceiveapre-establishedregulatedremuneration(giveneachpowerplant’stechnicalcharacteristicsandcostfunctions)foritsproductionalongitswholelife.Long-termprocurementofelectricityinbothregulatedandliberalisedsystemsalsomayhappenthroughPPAs,whenregulationallowsthisoption(Box8).ThePPAscanbesignedbetweenanIPPandaVIU,asintheaforementionedsinglebuyermodel.Inthiscase,contactsandriskallocationarestandardisedandregulated.Whenthepowerpurchaseagreementsarebetweenprivateentities,anddonotfollowastandardisedformat,thiscancreateaso-calledover-the-counter(OTC)market.IntheOTCmarket,counterpartiesreachanagreementanddirectlytradeelectricityamongthemselves.Thesecontractsinfluenceactualoverallsystemdispatching,andthesystemoperatorneedstobenotified.Finally,long-termenergyprocurementmayalsohappenthroughsupportmechanismsforrenewableenergyprovidingadditionalregulatedpayments,suchasfeed-intariffsandauctions.Inthesecases,along-termPPAorfeed-intariffcontractissignedforaregulatedpayment.Thesearediscussedinsection3.4.Theeffectsofsuchcontractsontheoverallpowersystemarediscussedinchapter4.Hencelong-termprocurementelectricitymechanismsarealreadypresentintoday’spowersystemorganisationalstructures,butinmostcases14theyaffectonlyasmallshareoftotalsystemenergy.Chapter6presentsaproposalforanorganisationalstructureadequateforarenewable-basedenergysystemthatuseslong-termprocurementmechanismsasoneofitsmainpillars.Short-termprocurementShort-termprocurementreferstotheactivitiestoselectthepowerplants’generatingelectricity(dispatch),fromoneweektoonedaybeforedelivery.Someuncertaintyremainsaftertheshort-termprocurementmechanismcommitsgenerators:thegoalofthesemechanismsistoallocatethebulkofthegenerationandleaveonlysmalladjustmentsasthedeliverymomentapproaches.Staggeredallocationmechanismsareoftenusedtograduallyreduceuncertaintyintheneededdispatch.Whileeachpowersystemstructurehasitsownsuiteofdecision-makingprocesses,somecommonaspectscanbefound.Regulatedsystems:UnitcommitmentInregulatedsystems,unitcommitmentistheprocessthroughwhichaVIUdecideswhichofitspowergeneratingunitsshouldoperateatanygiventime.Unitcommitmentaimsatsupplyinganestimateddemandprofileatthelowestcost,giveneachpowerplant’stechnicalcharacteristicsandcostfunctions,consideringsystemdetailssuchaspowerplants’start-upandshut-downtimingsandcosts,thehydrologicalrestrictionsandthegeneratingcapacitytobeheldinreserveforsystemservices.UnitcommitmentisappliedbytheVIUwithindifferenttimescales,dependingonsystemcharacteristics.Forexample,theIndonesianutilityPLNrunsseveralunitcommitmentschedules,fromonemonthtoonedaybeforedelivery,foreachofthemaineightislands.14Theexceptionwouldbefullyregulatedsystems,oftencombiningpublicinvestmentandcompetitiveIPP’s’powerpurchaseagreementsforVREtechnologies.68RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONHybridsystems:MarketsbasedonauditedcostsInsomecases,thedecisiononunitcommitmenthappensviaanotherregulatedoperation,withadecision-makingprocedurethattakesintoaccounttheauditedcostsofgeneratingunits.Inthesecases,somelevelofliberalisationmaybeinplace,withprivategeneratorsabletoselltoamarketoperatortheirpowerproduction.Theschedulingofpowerplants,however,dependsonanalgorithmbasedonthe‘‘auditedcosts’’,meaningasetofinformationgatheredbythemarketoperatorataplantlevel.Themarketoperatordecides(usingsimulationtoolsthatuseasinputstheauditedplantcosts)howplantswilloperate,onthegroundsofmarginalpricingtoreduceoperationcostsandmedium-tolong-termoptimisationcriteria.ApracticalexampleisBrazil(Box11).Regulatorsthatfavouranauditedcost-baseddesignarguethatthisismoreappropriateforsystemswithasmallnumberofgenerationfirms,sinceiteliminatesthepossibilitiesforgeneratorstobehavestrategicallyinabid-basedmarket,whichisamainconcerninsuchmarkets(seenextsection).Liberalisedsystems:Bid-basedmarketsBid-basedmarketsarethecornerstoneofliberalisedmodels,inbothISOandTSOmodels.Insuchmodels,generatorscompetetoselltheirenergytoasetofpotentialbuyers,whichincludelargeconsumers,poolsofsmallconsumers,andprivateorstate-ownedretailers.Sinceinliberalisedsystemsthemarketscloseonedaybeforedelivery,theyareknownasday-aheadmarkets.Thedesignofday-aheadmarketshasbeenpermanentlyevolvingovertime,inparttoaddresssomeofthechallengesoftheenergytransition(seechapter4).Differentcountrieshavedevelopedavarietyofmarketmodels.Alltheliberalisedmodels,however,arebasedonmarginalpricing(Box12).Allmarketsclearthepricesforacertaintradinginterval(fromfiveminutestoonehour)bymatchingbidsofgeneratorsandbuyers.Thiscanbeachievedindifferentways,withsimpleormorecomplexbiddingstructures,withportfoliobids,withauniformnationalprice,orwithzonalornodalprices,etc.Box11.TheBraziliancaseInahydropower-dominatedpowersystem,asinBrazil,powerplantschedulingisguidedprimarilybywaterlevelsinthevariousreservoirs,withtheobjectiveoflimitingtheriskofpossiblewatershortagesinthefuture.VREsourcesaredispatchedfirst,sincetheydonothaveanyfuel-relatedcostanddonotimpactwaterreservoirs.Theuseofhydropowerisdecidedviaatrade-offbetweenavoidingtheneedformoreexpensivethermalpowerplantsandtheriskofdrought.TheOperadorNacionaldoSistemaEléctrico(ONS)setsthepowerplantschedulingtominimisetotalcostsusingsimulationmodels.ONSusesthe“DESSEM”modeltodeterminethedailydispatchscheduleoneweekahead,in30-minuteblocks,takingintoaccountallinformationongenerationplants,gridconstraintsandover-the-counter(OTC)exchanges.69contextualisingpowersystemstructuresBox12.MarginalpricingandscarcityeventsMARGINALPRICINGMarginalpricingisatthecoreofcurrentliberalisedpowersystems.Foreachtradinginterval,whichcouldspanfromonehourtofiveminutes,allthegeneratorsarestackedinacurve–thesupplycurve–dependingontheirbids(ortheinformationregardingtheirmarginalcostsstructureauditedbythemarketoperatorincost-basedmodels).Thedemandcurve,composedbythebuyers’bids(whichindicatesthevolumeofelectricitydesiredandtheamounttheyarewillingtopay)meetsthesupplycurveatacertainpoint,whichdeterminesthecapacitycommittedandthewholesaleprice.Theelectricitypriceateachmomentintimeisthemarginalprice(setbytheresourceinthesupplycurvethatwouldsatisfyapossibleincrementofelectricitydemand–themarginalresource).Allselectedgenerators,marginalorotherwise,thenreceivethissamewholesaleprice(Figure16).Thesupplycurveisbuiltindifferentwaysincost-basedmodelsandinbid-basedmodels.Incost-basedmodels,thesystemoperatorisinformedaboutthecostincurredbyallgeneratorsandbuildsthesupplycurve(meritorder)basedonthisinformation,whichallowsforminimisingthesystemoperationalcosts.Withinbid-basedmodels,theclearanceofthewholesalemarketisconductedindifferentwaysinISOandTSOmodels.IntheISOmodel,theISOrequiresresourceoperatorstosubmitcomplexmulti-partbidstorepresentthedetailedoperationalandopportunitycostsaswellasthetechnicalconstraintsoftheirunits.Withthesedata,togetherwithinformationaboutgridcapabilitiesandconstraints,theISOcalculatestheleast-costdispatchmixofthepowerplants,usinganalgorithmthataimstofindthebestsolutionforeachnodeateachpointintime,andtakingintoaccountboththeelectricitysupplyandthesupplyofancillaryservices.IntheTSOmodel,wholesalemarketswereinitiallyenvisionedassimpleelectricityauctions,withoutcontrolovertheactualtechnicalfeasibilityoftheclearedschedule.Oncethemarketiscleared,ifthesystemoperatoridentifiespotentialgridcongestion,itcanre-dispatchgenerationtokeepthesystemreliable.Nowadays,manywholesalemarketsalsoallowcomplexbids.DispatchedcapacityCapacity(MW)VREHydropowerCoalDemandGasOil/peakingplantWholesalepriceEnergyprice(USD/MWh)MarginalresourceFIGURE16.Marginalpricing70RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONIngeneral,undercompetitiveconditions,bidsreflectmarginalcost,acombinationofoperational(wherefuelisthemaincomponent)andopportunitycosts.Inthisway,ageneratorissuretoatleastnotincurlosses.Ifapowerplantisselectedtoparticipateandisnotthemarginalresource,thedifferentialbetweenthewholesaleprice(themarginalpriceofthemarginalresource)anditsmarginalcostprovidesanincomebufferthatallowsrecoveryofthefixedandinvestmentcosts.Ifapowerplantisselectedtobethemarginalresource,itshouldnothaveeithergainsorlosses,intermsofmarginalcosts.Renewableenergygeneratorsdonotfitwellintothispricingstructure,especiallyastheirpenetrationofrenewablesincreases(seesection4.2).Thisisbecausetheyhavelimiteddispatchabilityandverylowoperationalcosts,andthecoststructureisdominatedbyinvestmentcosts.Despitesittingontheleftofthemeritordersupplycurve(Figure17),theirinvestmentcostsarecurrentlymainlyrecoveredthroughadditionalregulatedpayments.Investmentcostsofmarginalresourcesarerecoveredintheso-calledscarcityevents.SCARCITYEVENTScarcityeventsarehoursofhighdemandandlowavailablesupply.Duringtheseevents,pricesaresetbythosepowerplantsthatareusedonlyafewhoursayear,suchasdieseloil,whichbidmuchabovetheiroperationalcosts(intheorderofthousandsofUSDpermegawatthour(MWh)).Duringscarcityevents,marginalresources(usuallynaturalgasplants)alsotypicallycanrecovertheirinvestmentcosts.Duringscarcityevents,thepriceshouldspikeuptothemaximumpriceforelectricitythatconsumersmaybewillingtopaytoavoidablack-outorareductioninenergyconsumption.However,consumershavelimitedandindirectparticipationinsuchmarkets,andscarcitypricingisoftencappedadministrativelyinwholesalemarketsforsocio-politicalacceptanceandtopreventtheexerciseofmarketpower.Themisalignmentcreatedbythiscapisdiscussedinchapter4.DispatchedcapacityCapacity(MW)Energyprice(USD/MWh)WholesalepriceVREHydropowerCoalDemandGasOil/PeakingplantFIGURE17.Scarcityevent71contextualisingpowersystemstructuresClosetorealtimeOncetheshort-termprocurementmechanismsareclosedandthebulkofpowergenerationiscommitted,additionalmechanisms(e.g.intradaymarkets)allowallstakeholderstofixanydeviationsthatmightoccurfromtheprogramme.Deviationsfromthescheduledprogrammecanhappenforavarietyofreasons:last-minuteplantshutdownsorchangestotheirforecastedproduction,congestiononinterconnectorsbetweencountries,unexpectedvariationsinthedemandscheduledordemand-sideresourcesunabletoadjusttheirconsumptionascommitted,andcoldorhotwavesthatchangeconsumptionprofiles.Recently,withtheincreasingpresenceofVREinpowersystems,theimpactofweatheruncertaintyontheschedulingofthepowersystemhasincreased.Deviationsfromtheplanneddispatcharedirectlymanagedbysystemoperatorsbyre-dispatchingthemusingdifferentmechanisms.Asalastresourcewhenthedeliverytimeapproaches,systemoperatorsre-dispatchdeviationsusingresourcesthatmakethemselvesavailabletosupplyancillaryservices(seebelow).Regulatedsystems:Real-timere-dispatchInaregulatedsystem,wherethemajorityorallthegenerationassetsareownedandcontrolledbythesameutility,thesystemoperatorkeepsoverseeingthesystemconditions,beinginformedbyassetoperatorsaboutchangesandbytheupdatedweatherforecast.Usingadedicatedalgorithm,real-timedispatchactivitybythesystemoperatoradjuststheschedulefromthepreviousunitcommitmentbasedontherevisedinputdataandthereal-timenetworkmodel,takingintoaccounttransmission,distribution,generationanddemand-sideconstraints.Eachgeneratorordemand-sideresourceistheninformedoftheoutput(orresponseinthecaseofthedemand-sideresource)thatitshouldprovide.ISOsystems:Real-timemarketInISOsystems,theISOmanagesthereal-timemarkettocontinuouslybalancethedispatchofresourcestomeetthereal-timedemandforelectricity.Ifaparticipantintheday-aheadmarketdeviatesfromtheschedule,itischargedtoreflecttheamountofdeviatedsupplyordemand.Thepricefromthereal-timemarketiscalculatedusuallyeveryfewminutesthroughaunitcommitment-likemodeltakingintoaccounttheactualconditionsofthesystem.Themodelre-commitspowerplantstocoverthedeviationsandoptimisethefleettohavesystemservicesreadyincaseofnecessity(seenextsection)IntheUnitedStates,theday-aheadandthereal-timemarketsmakeuptheso-calledtwo-settlementsystem.AccordingtotheFederalEnergyRegulatoryCommission,95%oftransactionsareagreeduponintheday-aheadmarket,leavingonly5%tobescheduledinthereal-timemarket(FERC,2016).TSOsystems:IntradaymarketsTheintradaymarketsaremechanismsinplaceinliberalisedTSOsystems,organisedbythemarketoperators.Theirdesigndiffersamongcountries.15Theneedforintradaymarketsislinkedtothefactthatdeviationsfromthescheduledcommitmentsfromshort-termmarketsarepenalisedbythesystemoperators.Theintradaymarket,therefore,helpsreducetheriskofbeingpenalisedfortheimbalancesbyallowinggenerationanddemandtoadjustitsofferswithreducinguncertaintyasdeliverytimeapproaches.15Formoredetailedexamplesofintradaymarkets,seeIRENA(2017)72RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONParticipantscantradeelectricityamongthemselvesinintradaymarketstoaddressexcessordeficitfromthecommitments,andhenceavoidorminimisepenalisations.Intradaymarketsallowparticipantstomakeadjustmentstotheirschedules.Thismarketcreatesnewfinanciallybindingcontractsbetweenparticipants.AncillaryservicesprocurementAncillaryservicesareservicesprovidedbypowersystemresources(whichcouldbegenerators,storageplantsordemand-sideresources),ondifferenttimescales,tosupportthesystemoperatoringuaranteeingthecontinuousandreliableoperationofthepowersystem.16Ancillaryserviceshavedifferentnamesdependingonthepowersystems,butgenerallycanbegroupedintofourcategories:•systemmanagementservicestoensuresecure,efficientoperationandmonitoringoftheelectricitysystem(forexample,interruptibilityservices);•frequencycontrolservicesthatguaranteethematchbetweengenerationanddemandatanygiventime(addressingdeviationsclosetodeliverytime);•voltagecontrolservicesthatareusedtomaintainthevoltagelevelintherangeofpermissiblevalues;and•systemrestorationservicesthatsystemoperatorscanuseinemergenciestorestoretheelectricitysupplyasquicklyaspossibleafterafailureaffectingpartoralloftheelectricitysystem.Theprocurementofsystemserviceshappensfromoneyeartoafewhoursbeforedelivery,dependingonthecountryandservice.Resourcesabletoprovidesystemservicescommittointerveninginthesystem(injectingpower,sheddingaload,chargingabattery,etc.)withinaspecifictimeframeaftertherequestofthesystemoperator.InaVIUsystem,wheretheutilityownsandoperatesalltheassets,generators’operationsareoptimisedtomaintainsomeresourcesabletoprovidetheseservicesifneeded.Insomeliberalisedsystems,someancillaryservicesmaynotbedirectlyrewardedtoprivategenerators.Systemparticipantsarerequiredtobeabletoprovidesuchservicesinordertoenterthemarket.InISOmodels,thereal-timemarketisdesignedtoalsoprocuresystemservicesandoptimisetheirprocurementwithclose-to-real-timeadjustments.InTSOmodels,competitivetenderingandbilateralcontractsonanannual,monthlyorweeklybasisarethemorecommonschemesforprocuringsystemservices.CapacityprocurementBothregulatedandliberalisedsystemsimplementmechanismstoguaranteethattheneededgenerationcapacitytoproperlyandreliablyoperatethepowersystemwillbeavailable.Inregulatedsystemsthesemechanismsarelinkedtocentralenergyplanning,wherebyinvestmentisundertakentoguaranteethatthesystemhasthecapacitytosupplytheforecastedelectricitydemand.Inliberalisedsystemscapacityprocurementismorecomplexbecauseofitsrelianceonwholesaleelectricitymarketstotriggerinvestments,andthediscrepancybetweenthesignalsthatthesemarketsprovidetoinvestorsandthereliabilityneedsofthepowersystem.Theenergytransitionintensifiesthesediscrepanciesandhastriggeredanincreasedrelianceoncapacitymarkets.16Formoredetailsandsuggestionsformodernsystemservices,seeIRENA(2019c).73contextualisingpowersystemstructuresCapacitymechanismsprovideguaranteedpaymentstopowerplantsforhavingthe“firmcapacity”toproduceelectricity.Thesystemoperatorbuyscapacityavailabilityyearsaheadofdeliveryviamechanismssimilartoauctions,withtheaimofensuringthatthereissufficientinvestmentinthedevelopmentofnewgenerationtomeetreliabilitystandards.Capacitymarketagreementholdersreceiveastandard“capacitypayment”(apaymentpermegawattavailable)andhavetheobligationtoguaranteetheavailabilityofcontractedcapacityduringacertainperiod.Thesystemoperatorcanthenrequesttheactivationofthepowerplant.Capacitymechanismswereinitiallydesignedtoprocurecapacityavailabilityandkeepthesystemreliable,inparticularforsystemsstrugglingtoattractinvestorsthroughshort-termmarketsandwithsubstantialunder-capacity(McRaeandWolak,2019).Notably,notallsystemshavethesekindsofmechanisms.However,capacitymechanismsemergedasanopportunityforgeneratorswhoareunabletorecovertheirinvestedcostsfromsellingelectricityinasystembasedonmarginalpricing.Indeed,theincreasingpenetrationofVREreducestheaveragewholesalepricesandthevolumeofelectricitysoldbyothertechnologies,therebyreducingtheoptionsforneworupcominggeneratorstorecovertheirinvestedcosts(section4.2).CapacitymarketsprovidethepossibilityfordispatchablegeneratorstorecovertheirinvestedcostbysupplementingtherevenuestheygetinVRE-richshort-termenergymarketswithanadditionalrevenuestream.Policymakersmustmakesurethatcapacitymarketsareusedfortheiroriginalpurpose–tomaintainsystemreliability–andnottoproducebarrierstotransitionbykeepingonlinerent-seekingfossilfuelpowerplantsthathavetoeventuallybephasedoutduringtheenergytransition.RetailofenergyThecostsincurredbythesystemneedtoberecoveredinordertohaveaneconomicallysustainablepowersystem.Theseincludegenerationcosts(whichmayhavesubsidyoradditionallyregulatedpaymentcomponents;seenextsections),transmissionanddistributioncosts,supplycosts,aswellasthecostincurredtoprocuresystemcapacityandtorunthewholesystem(e.g.remunerationforsystemandmarketoperatorsperformingtheirduties).Inthecaseofliberalisedpowersystems,benefitmarginsforallagentsinvolvedinpowersystemoperationarealsoincludedinsystemcosts.Ingeneral,therearetwowaysthatpowersystemcostscanberecovered:electricitybillsandgeneraltaxation.Today,theprevailingaimistorecovermostpowersystemcoststhroughelectricitybills,althoughsomecanstillberecoveredthroughgeneraltaxation(i.e.subsidiestoaddressenergypoverty);however,inthepastthebalancehasbeendifferent.Likewise,electricityconsumptionistaxedandhencehelpstoproducerevenueforgovernmentspending.Generally,theretailofelectricityisadeeplyregulatedactivity,evenwherethispartofthepowersystemisliberalised.Thefinalgoaltendstobeconsumerprotection,giventhenatureofelectricityasabasicservice.InVIUmodels,usersonlyhavetheoptiontobuypowerfromthelocalutilityor,sometimes,tobecomeproducersthemselveswithadistributedenergysolution.Retailelectricitypricesaresetbasedonrecoveringtheoperatingandinvestmentcostsoftheutility,includingarateofreturn.Thefinalretailpricesmustbeapprovedbytheenergyregulators,whichpreventVIUsfromoverchargingusers.74RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONInliberalisedsystems,userscanbuyelectricityfromstate-ownedorprivateretailersoftheirchoice,signingacontractwiththem.Inanycasestrongelementsofregulationpersist.Transmissionanddistributionsegmentsremainunderthecontrolofpublicentities,andhavetheircostsrecoveredsimilarlytotheVIUsystem,afterinformingtheenergyauthorityabouttheiroperationandinvestedcosts,throughadedicatedsectionoftheelectricitybill.Figure18presentsthestructureofindustrialandhouseholdelectricitypricesindifferentEuropeancountriesintermsofenergy,transmissionanddistribution,andtaxcomponents.Thepricestructurevariesgreatlyfromcountrytocountry,includingpoliticaldecisionsontheleveloftaxationallocatedtoelectricity,voltagelevelconnectionandper-customertransactioncosts.Forexample,in2020,onaverage,industriesconsumingbetween20and70gigawatt-hours(GWh)peryearsawanelectricitypricethatwas45%ofthatappliedtohouseholds(consumingbetween1and2.5MWhayear)intheEU-27(Eurostat,2022).FIGURE18.Averagehousehold(top)andindustrial(bottom)electricitypricesinselectedEuropeancountries,202000.050.100.150.200.250.300.350.40GermanyDenmarkIrelandBelgiumSpainAustriaItalyFinlandLuxembourgCzechiaFranceNorwaySwedenCyprusSlovakiaSloveniaLatviaGreecePolandMaltaRomaniaEstoniaLithuaniaCroatiaBulgariaHungaryBosniaandHerzegovinaRepublicofMoldovaSerbiaNorthMacedoniaTürkiyeGeorgiaEnergyandsupplyCapacitytaxesNetworkcostsEnvironmentaltaxesValueaddedtax(VAT)NucleartaxesRenewabletaxesOther00.050.100.150.200.250.300.350.40EUR/kWhEUR/kWhNote:Householdvaluesrefertohouseholdswithconsumptionfrom1MWhto2.5MWhperyear.Industrialvaluesrefertonon-householdswithconsumptionfrom20000MWhto69999MWhperyear.Source:Eurostat,2022.75contextualisingpowersystemstructuresTheenergycomponentintheelectricitybillisusuallylowandoftenaccountsforlessthanhalfofthefinalelectricitypricepaidbyendusers(IRENA,2017a).Inliberalisedretailmarkets,thiscomponentissetbyenergyretailersandcanthereforechangeacrossdifferentretailers.Thisandretailmarginsaretheonlypartsoftheelectricitypricenotdirectlyregulatedinliberalisedsystems.However,energyauthoritiessupervisethesetariffstoensurecustomerprotection.Finally,retailtariffsalsoincludeotherregulatedcostsrelatedtorenewableenergysupportpoliciesorsocialpolicies.Thesecomponentscanbeveryrelevantinsomecountries.3.4.SUPPORTINGTHETRANSITIONEconomicreturnsfromcurrentpowersystemorganisationalstructureswerenotenoughtofostertheinitialdeploymentofrenewablepowerplants.Supportmechanismswereneededtointroducethesetechnologiesinthepowersystemandtoallowthemtoadvancealonglearningcurves.Thissituationwasnotnew:sincetheoriginofpowersystems,supportmechanismsanddedicatedpolicieshavebeenadoptedfordifferenttechnologiesdeemedtobestrategic.Fromtheearlyhydropowerplantstotoday’smainstreamfossilfuelplants(andnotablynuclearpower),allhavereceivedsomeformofdirectandindirectsupport.By2018,fossilfuelsstillreceivedmorethantwicethesubsidiesofrenewableenergyorenergyefficiency(IEA,2019;Taylor,2020).Forrenewableenergy,supportpoliciesrangefromregulatedpayments(describedlater);toresearch,developmentanddeployment(RD&D)andpoliciesforskilldevelopment;toindustrialpoliciesandsystemintegrationpolicies.17Intheinitialcommercialstages,supportcamemainlyintheformofsubsidiesforinvestment,andwithtimeitevolvedtowardsperformance-relatedsupportintheformoffeed-intariffsorPPAs.Taxincentiveshavebeenconducivetokickstartandassistthedeploymentofrenewableenergyinmanymarkets(e.g.theUnitedStates).Theoveralldrivertosupportrenewableenergyisbasedontherecognitionofitssocialvalue(seesection4.1)anditsimportanceintacklingclimatechange,inadditiontoenergysecurity,independenceandaccess.Thehigherinvestmentcosts,anduntilrecentlylife-cyclecosts,ofmostrenewabletechnologiescomparedwithincumbenttechnologies18requiredsomeformofsupporttoincentiviseinvestmentsandallowthemtoprogressalonglearningcurves.Renewableenergytechnologiesarecapitalintensive,which,togetherwithuncertaintiesregardingperformance,maintenanceandsupplychainsduringthefirststagesoftheirdeployment,ledtohighriskperceptionbyfinancialinstitutions,withtheresultingincreasedcostofcapitalexacerbatingthehighcostbarrier.Supportschemesforrenewabletechnologieswereinitiallyconceivedtopushtechnologiesalongtheirlearningcurves:deploythefirstmegawattsoastomakepossiblereducingfuturecostswithlearning-by-doing,creatingsupplychainsandtrainingexpertsforthesetechnologies.Thepolicyinstrumentsweremeanttoprovideanincentivecapableofovercomingthecostbarrier,whilecreatingasecureinvestmentenvironmentcapableofattractinginvestorsandreducingfinancingcosts.Assupportschemesweredesignedandimplemented,thecommonconsiderationwasthatwhenachievinggridparity19(i.e.distributedgenerationachievingcompetitivenesswithelectricityretailprices)ormarketparity(i.e.competitivenesswithelectricitywholesaleprices),supportmechanismswouldgraduallybephasedout(IEA,2011).Thisconceptstillprevailstoday.17IRENA,IEAandREN21(2018)providedanewclassificationforalargenumberofpoliciesforrenewableenergy.18Withthenotableexceptionoflargehydropowerplants,whichinanycasereceivedsupportinthepast.19Alsoreferredtoas“socketparity”or“plugparity”.76RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONGridandmarketparityhavealreadybeenachievedinmanycountriesaroundtheworld(IRENA,2021b),asattestedbytherecord-lowwinningbidpricesinrecentauctions.Still,thedeploymentofmerchantpowerplantsisfarfrombecomingacommonoccurrence,andundercurrentpowersystemorganisationalstructuresitcanneverhappenatthescalerequiredbytheenergytransition.Chapter4presentsthemisalignmentsunderexistingpowersystemorganisationalstructures,whichrequiremaintainingadditionalregulatedpaymentsforrenewablestobecomethemainstreaminthepowersystem.Chapter6discusseshoworganisationalstructurescouldevolvetobecomefitforrenewable-basedpowersystems,withtheessentialsofcurrentadditionalregulatedpaymentsasthebackbone.Regulatedpaymentsforlarge-scalerenewableenergyCapitalsubsidieswereamongthefirstinstrumentselectedtoencouragerenewableenergydeployment(Figure19).Thesepaymentslowertheoverallinvestmentcostsandthusmakethetechnologycompetitiveorevenattractivecomparedtootheroptions,whichallowsforovercomingtheincreasedriskperception.Itisarelativelystraightforwardmechanism;however,oncegranted,itdoesnotguaranteegoodoperationalperformance.Feed-intariffschemesentailanagreedrevenuepermegawatt-hourproduced.Feed-intariffschemesareusuallyaccompaniedbypriorityofdispatch.Effectively,thismeansthatelectricitycanbeproducedatanytimeofthedayoryearwhilereceivingastablepayment,irrespectiveoftheactualpriceofelectricityorthevalueitbringstothepowersystem.Underafeed-intariffscheme,operatorshavetoreachaminimumlevelofperformancetorepaytheinitialinvestment(theperformanceriskistransferredtotheowners).FIGURE19.RegulatedpaymentsforrenewablepowergenerationUpfrontpaymentEnergypriceFeed-inTariFeed-inpremiumEnergypriceGreencertiﬁcatesEnergypriceNoincentivetoproduceelectricity:LowperformanceriskExposuretoperformanceriskExposuretoperformanceriskExposuretoperformanceriskCapitalsubsidiesFeedintarisFeedinpremiumsGreenscertiﬁcatesExposuretoGCmarketpriceriskExposuretoelectricitymarketpriceriskExposuretoelectricitymarketpricerisk77contextualisingpowersystemstructuresAsrenewablepowertechnologiesevolvedfurther,supportpoliciestransferredthepricerisktodevelopers,whohadtoparticipateinelectricitymarketsandwouldreceiveafeed-inpremium–thatis,anadditionalregulatedpaymentontopofthemarketprice.Thepremiumdefinitiondiffersacrossschemes,fromafixedvaluetovariable(alsocalled“sliding”)premiumsforeachmegawatt-hoursoldintothemarket.Similartoafeed-inpremium,thegreencertificatesystemsallowgeneratorstohaveanotherincomestreamforeachmegawatt-hoursold.Throughtheestablishmentofgreencertificates,aseparatedandregulatedmarketfortherenewableattributeofthegeneratedelectricityissetupbytheregulator,whoalsosetsaquotaobligation(henceestablishingademand)andafloorpriceforthegreencertificates.Rapidlyreducingtechnologycostsandasymmetryincoststructureinformation20ledpolicymakerstoconsiderauctionsasawaytodisclosethepriceofrenewableelectricityintheircountries.AuctionsarecompetitiveschemeswherewinningbidderssignaPPAsubjecttotheconditionsimposedforeachauctionround.Thepaymenttakestheformofafeed-intarifforofafeed-inpremium.Between2014and2018,instrumentsforcompetitivelysettariffs(PPAs)havegainedpopularity,owingchieflytotheirabilitytoprocurerenewable-basedelectricityatthelowestprice,ortoachieveotherpoliticalobjectives,suchasthecreationoflocalsupplychainsorlocalemployment.By2018,morethan100countrieshadadoptedauctions.Priceresultsforsolarandonshorewindauctionshavedecreasedoverallinthepastdecade(Figure20).In2018,solarenergywascontractedataglobalaveragepriceofalmostUSD56/MWh,downfromUSD250/MWhin2010.Windpricesalsofellduringthatperiod,albeitataslowerpace:fromUSD75/MWhin2010toUSD48/MWhin2018(IRENA,2019b).20Meaningthatregulatorsdonothaveaccesstorealtechnologycostsandhencecanintroduceerrorswhenfixingtheadditionalregulatedpayments,forinstanceprovidinganincentivehigherthantheoneneededtodeploythetargetedcapacity.FIGURE20.Globalweightedaveragepricesresultingfromauctions,2010to2018,andcapacityawardedeachyearSource:IRENA,2019b.05101520253035201020112012201320142015201620172018SolarPVcapacityOnshorewindcapacity050100150200250300SolarPVweightedaveragepricesPrice(USD/MWh)OnshorewindweightedaveragepricesCapacityawarded(GW)78RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONSupportfordistributedenergyresourcesDistributedenergyresources–mostlyrooftopsolarPV–havebenefitedinsomecountriesfromsupportschemessimilartoutility-scaleplants(capitalsubsidies,feed-intariffsandfeed-inpremiums).Costdeclines,coupledwithenvironmentalandsocialbenefits,havepavedthewayforgrid-connecteduserstogenerateallorpartoftheirelectricityneedslocallyandtoinjectthesurpluselectricityintothegrid.Specificregulationsandpoliciescouldbeadoptedtosupportthesedistributedapplicationsbyfacilitatingtheirparticipationinthepowersystem.Netmeteringschemesallowuserstousethedistributiongridasavirtualstoragefortheirelectricitysurplus.Netmeteringschemesallowownersofdistributedenergyresourcestoexporttheexcesselectricity(whenthePVsystemisproducingmorethanthebuilding’sconsumption)tothegrid,receivingacreditinkilowatthours.Thecreditcanbeappliedtooffsetconsumptionofelectricitywithinanettingcycle(whichcanspanfromanhourtoayear,dependingonthejurisdiction).ThePVsystemownerisbilledonlyfornetenergyconsumption.Ashortnettingcycle(e.g.dailyorhourly)implicitlypushesformoreself-consumptionbyreducingtheeffectivegrid’svirtualstorageaccessibletodistributedenergyresourceoperators.Inanetelectricitybillingscheme,aPVsystemownercanconsumeelectricityproducedbyhisorherplantorfromthegrid,asinthenetmeteringscheme.However,creditsforexcessgeneratedelectricityarenotgrantedinKWhterms,butallelectricityinjectedismeteredandcreditedatapredeterminedsellratethatcanbetime-dependentorfixed.Self-consumptionofelectricitygeneratedfromdistributedenergyresourcescandeliverbenefitstobothusersandthesystem.However,carefulplanningandpricingneedtobeinplacetoavoidmisalignmentsduetoorganisationalstructuresnotproperlycapturingthevalueofdistributedenergyresourcesforthepowersystemandintroducingconflictsbetweendistributedandcentralisedassetsorbetweenpro-usersandotherusers(IRENA,2020c).Chapter4delvesfurtherintheseissues.79ENABLINGTHETRANSITIONOFPOWERSYSTEMORGANISATIONALSTRUCTURESPART280Powersystemorganisationalstructuresweredesignedwiththeblueprintofthefossilfueleraandhadtobesuitedtotheprevalenttechnologiesofacentralisedenergysystemandtothegoalsofthetime.Governmentsnowfaceanewchallengeforthepowersector:tosuccessfullyintegraterenewableenergypowerplantsatarapidpacewhilemaintainingadequateoverallsystemcostsandfosteringthemaximisationofbothsystemandsocialvalue–andinacontextofwidespreadelectrificationoftheeconomy.Mostenergytransitionpoliciesputinplacehavenotdeeplyconsideredtheirinteractionwithprevalentpowersystemorganisationalstructures.Inmostcases,theyweredesignedtobypasstheexistingpowersystemstructuresinordertofacilitatethedeploymentofrenewableenergy.Asthetransitionprogresses,misalignmentsbetweenthecurrentpowersystemorganisationalstructures,supportmechanismsandthetechno-economiccharacteristicsofrenewablesbecomemoreapparent(IRENA,2020b).Thischapterdiscussesmisalignmentsthathavedifferentorigins.Somearegeneratedduringthetransitionduetotheinteractionsbetweenrenewableenergytechnologiesandtheprevalentpowersystemstructures(seesections1.1to1.8).Othersoriginatebeyondthepowersystem.Energysystemsweresetuptoprovideenergyservicestothesocio-economicsystem.Indeliveringthoseservicesthroughfossilfuels,however,theyproducedunwantednegativeimpactsonsocieties.MISALIGNMENTS481Misalignmentssuchasclimatechangeandairpollutioncanbepartlyaddressedthroughthetechnologicalshifttowardsanintegratedrenewable-basedenergysystemaspursuedbytheenergytransition.Butnotallmisalignmentswillbesolvedbythistechnologyshift.Misalignmentsspecifictothepowersectorshouldbeaddressedbyredesigningtheorganisationalstructuresofpowersystems,sincethesemisalignmentsoriginateintheinteractionbetweencurrentorganisationalstructuresandthecharacteristicsofrenewabletechnologies.Somemisalignmentscanremainunchangedorevenbereinforcedifpatternsofbehaviourfromthepastaremaintained(orstrengthened).Addressingthesemisalignmentsrequiresincorporatingotherpoliciesbeyondthosepursuingthetechnologicalshifttorenewables.Thisisthecase,forinstance,forthepursuitofsocialvalue,toaddressdistributionalissues,andtotacklethegrowthdependenceofeconomicactivity.Powersystemorganisationalstructurescancontributetheirshareinaddressingthesemisalignments,butthechallengegoesbeyondtheirboundaries.Addressingmisalignmentsisamusttopreventbarrierstotransition.Thenextfewsectionsdiscussdifferentmisalignments,startingwiththosethatexistmainlywithinthepowersystem.Thesearefollowedbymisalignmentsthat,despitehavingclearimpactsonthepowersystem,residemainlyinoutersystemiclayersandthat,tobeaddressed,requireplanningandpoliciesreachingwellbeyondthepowersystem.4.1.MISALIGNMENTSWITHINTHEPOWERSYSTEMAdvancingtheenergytransitionundercurrentpowersystemorganisationalstructureshasrequiredtheimplementationofsupportmechanismsforrenewableenergygeneration.Thesesupportmechanismsweredesignedtobridgethegapbetweentheactualcostsofrenewablegenerationandthecostrecoveredunderthecurrentorganisationalstructures,atatimewhenrenewablepowerwasnotcost-competitiveagainstfossilfuels(duetotechnologicalimmaturityandlackofincorporationofexternalities)andrepresentedasmallshareofthepowersystem.Supportmechanismshavealsobeenputinplacetostimulateinvestmentsinnon-fossil-fuelflexibilitytechnologiesandotherdistributedenergyresources.Whilethesesupportmechanismshaveevolvedtobecomemore“system-friendly”overtime,thefundamentaldisconnectbetweenorganisationalstructuresandthespecifictechno-economiccharacteristicsofrenewableshasnotbeenaddressed.Theevidenceofmisalignmentshastriggeredregulatorymeasuresaimedatfixingthem.However,byfailingtoaddressthebottom-lineissues,thesetemporaryfixesdonotpreventmisalignmentsfromsurfacingagainasrenewablesdeploymentadvances.Marginalcostpricingstructuresarebasedontwoassumptions:thepresenceofpositivemarginalcosts(fuelandopportunitycosts)anddispatchability.Theseconditionsarenotmetbyrenewable-basedpowersystems.82RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONDepressedwholesaleelectricitypricesMarginalcostpricingstructuresarebasedontwoassumptions:thepresenceofpositivemarginalcosts(fuelandopportunitycosts)anddispatchability.Theseconditionsarenotmetbyrenewable-basedpowersystems.Oneofthemainaspectsofafossilfuel-basedsystemisthepresenceofdispatchablepowerplantswithsizeableoperatingcosts(OPEX),mainlyfuelcosts,significantlycontributingtothemarginalcosts.Mostrenewableenergytechnologies,incontrast,haveverylowOPEX(windandsunare“free”resources),andVREsourcesalsohavenoopportunitycostsastheyarenotdispatchable.LowOPEXandopportunitycostsmeanlowmarginalcosts.IntroducingverylargesharesofrenewableenergyandVREmakescurrentmarginalcost-basedorganisationalstructuresunabletosustainrenewable-basedpowersystems.Duringthetransition,duetomarginalpricing,renewableenergygeneratorsdisplaceconventionalthermalgeneratorsinthemerit-ordercurve.Thisleadstoareductionintheclearingprice,therebyreducingthevolumeandpriceofelectricitysoldbyconventionalthermalgenerators(Figure21)butalso,importantly,reducingthe“captured”priceperceivedbyrenewableenergygenerators.Suchasituation–wherethesuccessindeployingrenewablegenerationunderminesitsfutureviabilitybecauseofwholesalepricedepletion–isoftenreferredtoasthe“cannibalisationeffect”.Thiseffectismagnifiedwhenelectricitydemanddecreases,whichduringthetransitionmayhappenasaconsequenceofefficiencydeployment.Additionalregulatedpaymentsexacerbatethisissuebyfosteringfurtherrenewablegenerationdeploymentirrespectiveoftheresultingwholesaleprice,sinceallormostrevenueforthesenewgeneratorsflowsthroughparallelmechanisms.21Asaresult,averageenergypricesaredecreasedandevennegativewholesalepriceswouldthenappear.22Thewholesalepricereductionintroducedbyincreasingsharesofrenewabletechnologies,whetherinliberalisedorregulated23organisationalstructures,isoftenwelcomedbypolicymakers(sinceitis,intheend,areductioninenergyprices).However,theselowpricesandthemechanismunderpinningthemintroduceimportanttransitionalbarriersasVREsharesincrease.21Inthelimit,renewableenergygeneratorsgettingpartoftheirrevenuefromthewholesalemarket(feed-inpremiums,greencertificates)couldevenbidnegativepricestoaccesstheextrarevenueassociatedwiththeiradditionalregulatedpayments.Negativewholesalepricescouldthenresult.22Negativepricescanalsooccurwheninflexiblepowergeneratorsbidnegativepricesduetonegativeopportunitycosts(i.e.itwouldcostmoretoshutdownandrestartaplantthanpayingforproducing).23Inregulatedprocurementmechanismsbasedonmarginalcosts,thevaluationofelectricityisgivenbythelastunit’smarginalcosts,ashappensinwholesalemarkets.Hence,the“«missingmoney”»problemisconceptuallypresentalsoinregulatedsystems.FIGURE21.RenewablespenetrationreduceswholesalepricesundercurrentmarginalpricingallocationmechanismsWholesalepriceDispatchedcapacityCapacity(MW)Energyprice(USD/MWh)Capacity(MW)Energyprice(USD/MWh)WholesalepriceHIGHVREPENETRATIONNORMALSITUATIONVREHydropowerCoalDemandGasOil/PeakingplantDispatchedcapacity83MisalignmentsWholesaleelectricitymarketsaretraditionallythemainsourceofrevenuefordispatchablegeneration.Priceandvolumedepressioncantriggerrequestsandpressurestoprovideadditionalpaymentssuchascapacitypaymentstoincumbenttechnologies(suchasfossilgas),thusfurtherentrenchingthemintothesystemandslowingdownthetransition.Thegeneratorsfirstandmostaffectedbythedeploymentofrenewablesinmarginalpriceallocationorganisationalstructuresaretypicallygas-firedpowerplants,whichprovidethebulkofcurrentsystemflexibility.Fossilfuel-basedgeneratorshavetobephasedoutduringthetransition.However,theretirementofthemostflexiblefossilfuelgeneratorsmustnotoutpacethedeploymentofothersourcesofflexibilityfitforarenewable-basedenergysystem.Theresultinglowpricesandlowvolumes(andinsomecasesfewerscarcityevents24)asrenewablesaredeployedinapowersystemrelyingonmarginalpricingmechanismsareoftenreferredtoasthe“missingmoney”problem,whichreferstoconditionswheregeneratorsareunabletorecovertheirinvestment.Ontopofthesebarriers,themostfundamentalissueisthattoday’sorganisationalstructuresrelyingonmarginalcostsareunabletosupportarenewable-basedpowersystemoncetheadditionalregulatedpaymentsarephasedout.Themainstreampolicynarrativearguesthatasrenewablesbecomecost-competitive,supportthroughadditionalregulatedpaymentsshouldberetired.However,oncetherevenueforVREpowerplantsislimitedonlytothatfrommarginalpricingstructures,theextremelylowwholesaleelectricitypricesthatresultfromhighpenetrationofrenewablescompromisetheverybusinesscasefortheseplants.This,inturn,leadstoanincreasedriskperceptionthatdirectlytranslatesintohighercapitalcosts,hencepreventingrenewablegenerationfromdeliveringitspotentialforlow-costelectricity.24Insomecases,theregulatedpaymentschemesworsenedovercapacitysituations.Thisovercapacityreducedoreliminatedtheoccurrenceofscarcityevents.Forexample,scarcityeventsneveroccurredinGermanyin2014(Huetal.,2018).Offshorewindfarm,Freepik84RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONCapacityremunerationmechanismsforfossilfuelplants:Thelock-ineffectTheprospectedlowrevenuestreamsassociatedwiththe“missingmoney”problemdiscourageinvestmentsinnewdispatchablecapacityorevenkeepingexistingcapacityonline(Huetal.,2018).Reduceddispatchablecapacitywhileotherflexibilityelementshavenotbeenfullyincorporatedinthepowersystemwouldputatrisksystemadequacy.Tosolvethis,manycountrieshaveturnedtocapacityremunerationmechanisms25(chapter3).Theuseofcapacityprocurementsystemstomakeupthe“missingmoney”neededtosupporttherequiredcapacitycreatesdistortionsandpotentialbarrierstotransition(Bushnell,FlaggandMansur,2017;Harvey,HoganandPope,2013;Muñoz,2019).Capacitymechanisms,infact,createaperversefeedback(Figure22):•IncreasingVREgenerationleadstoareducedaveragepriceofelectricityinmarginal-basedorganisationalstructures.•Remunerationisnotenoughtorecovertheinvestmentcostsofgenerationassetsortoencouragenewinvestments.•Tofilltherevenuegap,additionalregulatedcapacitypaymentsareprovidedtoexisting,dispatchable,centralisedandmostlyfossilfuelpowerplants.26Thefossilfuelplantsreceivingtoday’scapacitypaymentsbecomeentrenchedinthepowersystem,slowingtheirphase-outandthedeploymentofnewflexibilitysourcessuitedforarenewable-basedpowersystem.Theeconomicresourcesusedfortoday’scapacitypaymentscrowdoutthoseneededtodeploynewflexibilityorrenewableresourcesinthesystem.25Capacitypaymentsareexplicitinliberalisedsystemsbutoftenimplicitinregulatedsystems,wheretheeconomicresourcestorecoverthecosts(orfacethefinanceobligations)linkedtounderutilisedplantsarecollectedfromthebalancesheetsofverticallyintegratedutilitiesorfromadditionaltaxation.26AnotableexceptionwasMexico(IRENA,2019b),whereauctionsforcapacitywereopentoalltechnologies.FIGURE22.ThecapacitypaymentsfeedbackloopSource:AdaptedfromMuñoz,2019.DepressedpricesExcesscapacityVREcapacitybeingintroducedCapacitypaymentsMarketparticipantsaskingforcapacitymarketsPricesarenotenoughtorecoverﬁxedcost85MisalignmentsTheresultofthisdynamicislockinginfossilfuelplants,hencedelayingtheintroductionofflexibilityelementscapableofsupportingarenewable-basedpowersystem.Capacityremunerationmechanisms,ifdeemednecessaryforsupportingflexibilityinvestmentstomaintainsystemreliability,shouldbedesignedrecognisingthesystemandsocialvaluefromallflexibilityresources(onboththesupplyanddemandsides),withinatransitioncontextandwithintheframeworkofanorganisationalstructurefitforarenewable-basedpowersystem.Bothsupply-sideanddemand-sideresources(batteries,aggregators,electricvehicles,etc.)givealargearrayofoptionsforsystemoperatorstomaintainsystemreliabilitywithoutcentralisedpowerplants(IRENA,2019c)(seechapter6).InappropriateancillarysystemservicesSystemoperatorsprocuredifferenttypesofancillaryservices.Insomecases,ancillaryservicesprovisionisamandatoryrequirementtoparticipateinthepowersystem,whileinsomeliberalisedsystems,theseservicesareprocuredthroughdedicatedancillaryservicesmarkets.Inanycasetheregulationsforprovidingancillaryservicesandthedefinitionoftheservicestobeprocuredweredesignedintheeraoffossilfuelsandcentralisedgeneration.Asaresult,theseservicesarestillprocuredinmanycasesfromspecificgenerationunits–fromfossilfuelgeneratorsandhydropowerplants.Thisdoesnotallowthespaceforprocuringtheseservicesfromallthestakeholdersthatcouldprovidethem,which,beyondhydropowerandpumpedstorage,includedispatchablerenewablegenerators,batterystorage,demand-sideresponseandVRE(Figure23).Thecharacteristicsofancillaryservicesneedtoevolvetomeettherequirementsofrenewable-basedpowersystems.AsVREbecomesalargerportionofelectricitysupply,itsimpactsonthefunctioningofthepowersystemwillalsoincrease.Alreadytoday,withthecurrentshareofVRE,itispossibletoobservesignificantimpactsonthesystemoperationcreatedbywindandsolarPV.Tohavehighlevelsofsecurity,adequacyandservicequality,whileavoidingexcessivecostsforsociety,thetechnicalchallengescreatedbyincreasedVREsharesneedtobeproperlyaddressed,whichmayrequiredifferenttypesofancillaryservices.Note:DSM=demand-sidemanagement;dispatchablerenewableenergy=hydro,geothermal,biomassandCSPpowerplants.FIGURE23.GridservicesandtechnologiesFossilfuelpowerplantDispatchablerenewableenergyFrequencycontrolVoltagecontrolSystemmanagementSystemrestorationVREDSMBatteryCapableNotcapableCapablewithlimitationSource:RGI,2020.86RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONVREpowerplantsusuallyinterfacewiththenetworkthroughpowerelectronics,andhencedonotproviderotatinginertiaandreactivepowerbydefault,unliketraditionalthermalandhydrogeneration.Therefore,VREpowerplantsdonothavetheinherentcapability27tosupportfrequencyandvoltagethattraditionalpowergenerationplantshad.Thereare,however,optionstoaddressthechallengesposedbyanincreasingshareofVRE,whichcanbeprocuredfromthetechnologiesinvolvedinrenewable-basedpowersystems.VREsourcesarecapableofparticipatingintheexistingancillaryservicemarketswhenenabledtodoso.Forexample,windpowergeneratorsareallowedtoprovidebalancingservicesinmostofEurope(IRENA,2019c),whileinChile,solarPVpowerplantshavebeentestedtoprovideancillaryservicestotheutilitygridandtoensuregridstability:in2020thefirstPVplantwaslicencedtosupplyancillaryservices(FirstSolar,2020).Additionally,VREpowerplantsarebecomingresponsiblefortheirownimbalanceinthegrid.IndifferentEUMemberStates,windturbineoperatorsfacechargesforincorrectforecasts,thesamewayasconventionalgenerators(IRENA,2019c).Batterystorageisalreadyallowedtoprovideancillaryservicesinmanydifferentpowersystems,forexampleinthePJMsystemintheUnitedStatesandinAustralia,IrelandandmanyEUmarkets(EirGrid,2020;EnergyVictoria,2021;IRENA,2019c;PJM,2020).Atthesametime,newancillaryserviceproductshavebeendesignedforVREintegrationsuchasenhancedfrequencyresponseintheUnitedKingdomandrampingproductsinCalifornia(CAISO,2018;NationalGrid,2019).ElectricitybillsandtheirconceptualdisconnectwithrenewableenergycostsandremunerationUltimately,economicresourcesforallpowersystempaymentsarecollectedthroughthebillspassedtoendusers,sometimescomplementedbytargeted/generaltaxation.Therefore,electricitybillsincorporatedifferentcomponents,themainonesbeingtheenergyandnetworkcostcomponents.Inaddition,specificcomponentsareaddedtocoverthecostsofotherservices.Additionalregulatedpaymentsforrenewablesareusuallycoveredbyarenewableenergycomponent,asinEuropeanliberalisedsystems(Figure24).Theframingofpaymentsforrenewableelectricitygenerationasacomponentseparatedfromthebill’senergycomponenthidesmanynuancesandcanleadtowrongperceptions.Indeed,asthepenetrationofrenewablesincreases,andasauctionsbegintoprocurerenewableprojectswithlevelisedcostsofelectricity(LCOEs)belowtheaverageenergycomponent,thecurrentstructureoftheelectricitybillresultsinaloweredenergycomponent(renewablesdepressingthemarginalprice)andanincreaseintherenewablecomponent(morevolumeofrenewablesreceivingadditionalregulatedpayments,althoughatdecreasingunitarycosts).Theresultcanbeanincreasedperception(forbothpolicymakersandendusers)of“expensive”renewableenergy,potentiallytriggeringbarrierstofurtherrenewablesdeployment,whereastherealityistheopposite(Agora,2018).Thisbillingstructurecanproducethewrongimpressiontoendusersthattheyarepayingforthecostofelectricityintheenergycomponent,whiletheadditionalregulatedpaymentsforrenewablessubsidisethedeploymentofrenewablepowerplants.Inturn,thiscantriggerthethinkingandexpectationthatrenewablecomponentsareboundtodisappearassoonasrenewablesbecomecompetitive,andsincerenewablesareinmanycasesreachingthiscompetitiveness,politicalmomentumisalreadybuildinguptophaseoutthesepayments.27However,throughadditionallayersofpowerelectronics,VREcancontributetobothfrequencyandvoltagecontrol.87MisalignmentsThismisunderstandingwouldproduceunsurmountablebarrierstotransitionbecause,asdiscussedearlier,thewholesalemarginalpricingmechanismisnotappropriatetosupportapowersystembasedonrenewables.Electricitybillingalsoplaysanimportantcommunicationrole.Henceitsstructureneedstobeupdatedtoclearlycommunicatethemeaningandimplicationsofeachcomponenttoendusers,aswellasaligningitwiththecharacteristicsofarenewable-basedpowersystem(IRENA,2019c)(seechapter6).The“griddeathspiral”Schemesforsmall-scaledistributedrenewableenergysources(currentlymainlysolarPV28)differfromthoseforutility-scalepowerplantsinmanyfactors,frompermittingprocedurestoremuneration,withthegoalofsupportingthedeploymentoftheseinstallationswithverydifferentcharacteristics.Distributedgenerationmayprovideadditionalsystemandsocialvaluesuchasminimisinglosses,reducinggridexpansionrequirementsandincreasingcitizens’involvementinthetransition.Oneoptiontosupportdistributedgenerationwhilereducingtheburdenondistributiongridsisencouragingself-consumption(suchasnetbillingschemes).Self-consumption,inturn,reducesthetotalvolumeofbillableelectricity.Toguaranteesystemcostsrecovery,electricitybillscaptureallsystemcostsinmostjurisdictions.Someofthesecostsarerelatedtorenewableenergydeployment.Gridandothersystemcostsarealso28Eitherinhouseholds,businessesorindustry.FIGURE24.AveragehouseholdelectricitybillsbycomponentinselectedEuropeancountries,2020Source:Eurostat,2022.00.050.100.150.200.250.300.35GermanyBelgiumItalyDenmarkSpainIrelandAustriaLuxembourgCyprusCzechiaSlovakiaGreeceLatviaPolandSloveniaSwedenRomaniaLithuaniaCroatiaEstoniaEnergyandsupplyNetworkcostsRenewablecomponentValue-addedtaxCapacitycomponentEnvironmentaltaxesNuclearcomponentOther22%14%19%11%11%11%11%10%8%9%7%14%12%10%19%5%4%3%4%2%EUR/kwhWeightofRenewablecomponentintheﬁnalelectricitybill88RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONincludedintheelectricitybill,andtheincreaseindistributedresourcesmayimpactthemthrough,forinstance,distributiongridupgrades,remotemonitoringandcontrolcapabilities,andotherinvestmentsneededtomanageshort-termvariationsofVREandreverseflows(IRENA,2019c;Joskow,2019).Thecostofelectricityperceivedbyendusersistheoverallpriceintheelectricitybill,whichissignificantlyhigherthanwholesaleelectricitypricesbecauseitincludesallotherpowersystemcosts.Enduserscomparethecostsofdistributedrenewablegeneration(whicharehigherthanutility-scalerenewablegeneration)withtheresultingoverallbilledelectricityprice,andoftenarenotawareofthefullrangeofservicesprovidedbythegrid(beyondthesoldelectricity).Somesupportmechanismsfordistributedrenewablessuchasnetbillingreinforcethisperception.Asself-consumptionincreases,foragivenoveralldemand,lesselectricityhastobegenerated,distributedandbilledbythecentralsystem,which,underprevailingtariffstructuresandgridremunerationmechanisms29,resultsinasmallerbasisfortherecoveryofthefixedcostsofthegrid.Henceelectricitytariffsneedtobeincreased,30startingaviciouscycle:risingelectricitybillsencouragemoreinvestmentinself-consumptionsolutionssuchassolarPV(loaddefection),whichcausefurtherreductionsinthevolumeofelectricitybilled,whichfurtherincreaseelectricitytariffs,pushingformoredistributedPV,andsoon.Thiseventuallyleadstogriddefection,31wherethepotentialvaluefromthegridwouldbelost.Thissituationiscalledthe“griddeathspiral”(Figure25).29Wheretheoperatorsofdistributionandtransmissionsystemsrecoverabigpartoftheirfixedcostsmostlyonthebasisofthevolumeofelectricitydelivered.30Oftenboththeenergyandsystemcostcomponents,ifthereisnoneatmappingbetweencostcomponentsandbillingconcepts.31Onceauserfullydefectsfromthegrid,itstopsreceivinganyservicefromthegrid,andhenceneedstocopeonitsownwithalltherequirementsforareliableandsecuresupply,whichamongotherthingsrequiresincorporatingsignificantamountsofelectricitystorage.FIGURE25.ThegriddeathspiralDistributedRESincreasedcompetitivywithgridelectricityRetailpriceincreaseReducedenergysalesLoad/GriddefectionMoredistributedRESDistributedRESincreasedcompetitivywithgridelectricityRetailpriceincreaseReducedenergysalesLoad/GriddefectionMoredistributedRES89MisalignmentsThegriddeathspiralissuegoesbeyondthefactoflosingornotlosingthepotentialsystemvalueofthegridforthoseusersthatdefect.Thereisasocialjusticedimensionattachedtoit.Giventheircapital-intensivenature,distributedrenewableenergysources,suchassolarPVsystems,32haveusuallybeenadoptedfirstbyhigher-incomehouseholds.Vulnerable,low-incomeuserscannotaffordtheinitialinvestment,evenifataxincentiveoraregulatedpaymentschemeisinplace(Barboseetal.,2018;Coffman,AllenandWee,2018;Gaigalisetal.,2016,LukanovandKrieger,2019;MacintoshandWilkinson,2011).Hence,thegriddeathspiraldynamiccanexacerbateenergypoverty,astheincreasedelectricitybillsburdenusersthatarefullydependentonthegridbuthavenotbeenabletoinvestindistributedenergyresourcesolutions,suchaslow-incomeusers.Thisreducesevenfurthertheiropportunitytodeployrenewableenergyandincreasessocialinequalities.Thesesocialinequalitiescantriggerbarrierstotransitionasaconsequenceofnotbringingallonboardbyfailingtoaddresstheequitydimensionoftheenergytransition.Hencepolicymakingshouldpayspecialattentiontothesocialdimensionofself-consumptionschemes,andtailormeasuressothattheirbenefitscanbeequitablyshared.Favouringself-consumptioninareaswhereenergypovertyismorepersistentmaybeasolution(Bouzarovski,2018),aswellasdirectlyaddressingtheregressiveimpactsofsupportschemesfordistributedrenewables(seealsochapter5forcollaborativesolutionsbeyondregulationandcompetition).Asuitableredesignoforganisationalstructuresthatrecognisesboththevalueandthecostsofdistributedenergyresourcesforthepowersystemandforsocietywouldmakeitpossibletobenefitfromthewidespreadadoptionofdistributedenergyresourcesandincreasingparticipationofallusers(Bronskietal.,2015;IRENA,2019c;Loetal.,2019).Acaseinpointabouthowtoadvanceincapturingthesystemvalueandsomecomponentsofsocialvalueindistributedgenerationsupportschemesisthefeed-intariffdesignoftheStateofVictoriainAustralia(Box13).32Whichforfulldefectionorevenhigherself-consumptionsharesneedtobecomplementedwithbatteries,andhenceareevenmoreexpensive.Box13.AligningpriceandvaluefordistributedgenerationIntheStateofVictoria,Australia,theenergyauthorityEssentialServicesCommission(ESC)conductedanextensivestudyin2020tounderstandthe“truevalue”ofdistributedsolarPVgenerationintermsofgridinvestment,transmissionlossavoidance,avoidedenergygeneration,costsofancillaryservicesandtheavoidedsocialcostofcarbonemissions.TheESCalsorecognisedthatfeed-intariffarrangementshistoricallydidnotprovidecompensationtodistributedgenerationcustomersfortheenvironmentalandsocialvaluethatdistributedgenerationprovides.Thisresultedindistributedgenerationcustomersbeingunder-compensatedfortheexternalbenefitsthattheirsystemscreated.TheESCrecommendedandlaterintroducedmultiplefeed-intarifflevelsbasedonthetimeandlocationofexport.Itrecommendedthatthefeed-intariffshouldalignwithtimeblocksofretailprices(i.e.peak,shoulderandoff-peak).Ratelevelschangeeveryyear.Source:EnergyVictoria,2020.90RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONCost,priceandvalueAlthoughthissectionaddressesthecost,priceandvaluemisalignmentsmainlyfromapowersectorperspective,thesemisalignmentshavestronglinkswithoutersystemiclayers(economy,society),andhencearemidwaybetweenthissectionandthefollowingone,whichaddressesmisalignmentsbeyondthepowersystem.Discussionsabouthowtoallocatevalueandhenceabouthowvaluerelatestopricesandcostsarealmostasoldaseconomicthought,andunderthecurrenttransitioncontexttheybecomeextremelyrelevanttodiagnosestructuralmisalignmentsandtosteeroursocio-economicsystemtowardsprosperity(Mazzucato,2019).Thecost,priceandvaluedimensionsofelectricityareoftenmisaligned.Insightsintotheoriginsofthesemisalignmentscancontributetothepowersystemstructurebettercapturingthevalueofelectricityandadvancingthetransition.Thepowersystemstructureshouldaimataligningthevalueandpriceoftheproducedelectricitywithinthepowersystem,33whileprovidingmechanismsforappropriatecostrecovery.Box14providesadescriptionofwhatisincludedinthecost,priceandvaluedimensionsofelectricity.Oneofthemaingoalsofpolicymakerschargedwithdesigningdirectincentivesforrenewablepowertechnologiesistoproducethemostpowerattheleastpublicexpense(pricecompression).Usually,however,thisfocusesonlyonthetotalamountpaidtoproducerspermegawatt-hour,irrespectiveofsystemcostsandexternalities.Thepricecompressiongoalisnotnewfromtheenergytransition,asithasbeenextensivelyappliedinthepast.Attheonsetoftheenergytransition,pricecompressionhasbeenthemaindriverbehindtheexpandeduseofauctions.However,asthetransitionadvancesitbecomesincreasinglyevidentthatasystemicapproachisneededtoaddressthemultiplechallengesoverlookedbypricecompressionapproaches,whichoftenfailtocapturethevalueforthepowersystemofthenewlyprocuredgeneration.34Andbeyondthat,thewidersocialvalueofrenewable-basedgenerationalsoescapespricecompressionconsiderations.35Thelackofappropriatetimeandlocationpricingsignalsandtheassociatedmisalignmentbetweenpriceandsystemvaluecanleadtohigheroverallcostsforsocietyandthefinaluser,aswellastotheriskofgridcongestionandcurtailmentofVREgeneration(Liebreich,2017).Astheenergytransitionprogresses,timeandlocationalsignalsforflexibilitywillalsogainimportancetoassuretheinvestmentinresourcesabletoprovideflexibilitywhereandwhenthisismostneeded.33Foradequateallocation,thesocialvaluebeyondthepowersystemshouldinprincipleberewardedthroughsocialisedpricecomplements,andnotthroughthepowersystemprice.However,whencostsarehigherthanpowersystemprices,andintheabsenceofappropriatesocialisedpricecomplements,rewardingthevaluebeyondthepowersystemthroughpowersystemregulatedpaymentsorsubsidiescouldbeinstrumentalinachievingthesociallybeneficialdiffusionofthistechnologyintothepowersystem.34Notably,pricecompressioncanalso,mainlyinliberalisedcontexts,playinanoppositedirectiontoefficiencydeploymentduetoreboundeffects.35ExamplesofhowthelackofrecognitionofsocialvaluebringsadditionalcostsorlowerbenefitstothesocietyarepresentedinIRENA(2020c).91MisalignmentsBox14.Thecost,priceandvaluedimensionsofelectricityOneoftheaspectsoftenentanglingdiscussionsaboutcost,priceandvalueisfailingtounderstandwhateachoftheseconceptsincludes,becausetheyaremorenuancedthanmayfirstappear.Thisboxpresentsabriefconceptualdescriptionofwhateachofthesetermsincludesinthepowersectorcontext:CostTwocomponentsareincludedwithinthecostdimension:levelisedcostofelectricity(LCOE)and(negative)externalities.Thecostdimensionalsoincludesbothinternalisedcostsandexternalisedcosts:•Internalisedcostsarethemonetarycostsfacedbytheownerofthegenerationplant;inannualisedtermsthesearerepresentedbytheLCOEandincludedebtandequityservicingcosts.•Externalisedcostsarethosecostsnotcoveredbytheowneroftheplant–inotherwords,societypaysthem.Anexternalisedcostcanbeinternalised–forexample,byintroducingaPigouvian(orcorrective)taxequaltotheexternalcost,inwhichcaseitbecomesincorporatedintotheLCOE.Thisisthecasewithcarbontaxationaimedatinternalisingclimatedamages.Theabsenceofaproperinternalisationofallcostsconstitutesadistortionofpowerstructureallocationmechanisms(betheymarketorregulated),thushinderingtheoptimalallocationofresources.Theinternalisationofexternalitieswouldsignificantlyincreasethecompetitivenessofrenewablepowergeneration.PriceOverallpricesarethefinancialrewardforprovidingaproductorservice.Pricescanbesetbyamarketmechanism,bygovernmentfiatorbyregulation.Fromaconceptualperspective,twomainelementscanbedistinguishedwithintheprice:the“marketprice”,whichisshorthandforthepricegenerateddirectlybythepowersystem’sstructure,and“pricecomplements”,suchassubsidiesandadditionalregulatedpayments.Hencethepricedimensionincludesthreedistinctcomponents–marketprices,additionalregulatedpaymentsandsubsidies:•Theterm“marketprice”isusedheretodifferentiatethepartofthepricedirectlyallocatedbythepowersystemstructure,whichinthecaseofaliberalisedsystemwouldbethemarketclearingprice,butforaregulatedsystemwouldbetheregulatedorstipulatedprice.Thisallowsdifferentiatingthis“marketprice”fromtheoverallpricecategorythatincludesotherregulatedpaymentsandsubsidies.Hence,the“marketprice”shouldbeunderstoodasashortcutforthe“directpowersystemstructureprice”.•Additionalregulatedpaymentsarepricecomplementsintroducedtocorrectidentifiedflawsintheimplementedpricingstructure.Formaturetransition-relatedtechnologies,feed-intariffsandauctionedPPAsareadditionalregulatedpaymentstoovercometheunsuitabilityofthecurrentpowersystemstructurestoaccommodaterenewable-basedpowersystems.•Subsidiesarepricecomplementsmadetosupportagivenpowergenerationtechnology.Themotivationforgrantingasubsidycanvaryandisbasedonspecificpolicygoals,frominducingtechnologylearninganddrivingdownthecostsofnewtechnologies,tocreatingneweconomicactivityandjobs(Taylor,2020).Severaldifferentiationscomeintoplay:—Directversusindirectsubsidies.Directsubsidiesincludeallthevariousproductionandconsumptionsubsidiestofossilfuels.Indirectsubsidiesconsistofthepricepaidbysocietyfortheexternalcostsofthetechnology,whichinthecaseoffossilfuelsdominatethetotalamountofsubsidies.Indirectsubsidiesarethedifferencebetweenpost-taxandpre-taxsubsidiesasperthe92RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONInternationalMonetaryFund(IMF,2015a).—Subsidiesthatrewardsocialvalueversusthosethatdonot.Forinstance,subsidiestorenewablepowergenerationcanbelinkedtotheadditionalsocialvaluethatitprovides,whilesubsidiestofossilfuelscannot.—Subsidiesthatplayaroleinspreadingnewtechnologieswithinthepowersystemandthosethatnolongerplaythisrolebecausethetechnologiesarealreadyestablished.Inthecaseofarenewablepowertechnologythatstillneedstoadvancealongitslearningcurve,subsidiescanfacilitatethisprocess,therebycontributingtothediffusionofitssocialvalue.ValueValueishowmuchsomethingisworthhaving.Thevaluedimensionincludestwocomponents–powersystemvalueandadditionalsocialvalue:•Powersystemvalueisassociatedwithhow,whenandwhereelectricityisproduced.Eachpowerplant,beitrenewableornot,maybringadditionalsystemcosts(newgridlines,additionaloperatingreserves,storageorotherflexibilityrequirements,etc.).Theseinturncanbeminimisedbypropertechnologyanddesignchoice.Thehigherthesystemvalueofthegeneratedelectricity,thelowertheadditionalsystemcostsitinduces.•Additionalsocialvaluecapturesthevalueofthegeneratedelectricityforsocietybeyondthepowersystem.Itincludeselementssuchasclimatechangemitigation,theprovisionofadequatejobs,thecoverageofbasicneedsandtheenablingofeconomicactivity.Powersystemresiliencecontributestoboththepowersystemvalueandsocialvalue.Hence,socialvaluegoesbeyondthemitigationofgreenhousegasemissionsorpollutionandcandifferfromonerenewablepowertechnologytoanother,andevenforagiventechnologydeployedindifferentcontexts.Theremaybeseveralreasonswhyoneplantmayhaveahighersocialvaluethananother.Forexample,itproducesmoreorbetterjobs,activatestheeconomyinadepressedarea,allowspartofitsbenefitstoflowbacktothecommunity,makeslessormoresustainableuseofscarcematerials,orsourcesitsmaterialandhumaninputthroughfairtradeandrelationships.Thecontributionoftheenergytransitiontothedemocratisationoftheenergysystemcanhavesignificanteffectsonthesocialvalueoftheproducedelectricity(BurkeandStephens,2018).Attemptsarebeingmadetoincorporatepowersystemvalueintopolicymaking,energyplanningandenergyprocurementthrough,forexample,value-basedauctions(IRENA,2019b;Villareal,2018).Investigatorsareassessingaspectssuchasthetimeandspacevalueofgeneration,anditsintegration,flexibility,capacityandresiliencyvaluesforthepowersystem(Andersonetal.,2018;Denholmetal.,2015;IEA,2018;Jorgensonetal.,2013;Milliganetal.,2017).Thevalue-adjustedLCOEintroducedinIEA(2018)combinesintoasingleindicatortheLCOEandaproxyoftheenergy,capacityandflexibilityvalueoftheproducedelectricity,althoughtheindicatordoesnotsucceedincapturingallthecostsandbenefitsrelatedtoeachtechnology(forexample,networkintegrationcostsandnon-pricedenvironmentalexternalitiesarenotcaptured).TheconceptualapproachfollowedinthisreportdiffersfromthatusedinIEA(2018).Insteadoflumpingcostandvalueelementsintoasingleparameterthatrepresentsneithercostnorvalue,thisreportretainstheconceptualdifferentiationbetweenthecostandvaluedimensionswiththeaimofproperlyinformingthediscussion.Thisreportdoesnotattempttoproposeaspecificmethodologytoquantifythevalueofgeneratedelectricity,butrathertoprovideaconceptualframeworkwithinwhichtoconsiderthevaluedimension.Herewithwefocusonpowersystemorganisationalstructures,butexternalitiesarenotatallthepreserveofpowersystems,andtheymayariseinvirtuallyalleconomicactivities.Thesepricecomplementscanbecometheonlypayment(likeinfeed-intariffschemes)orremainacomplementtothewholesaleprice(likeinfeed-inpremiumschemes).Althoughinspecificlocalcontextsfossilfuelsubsidiesmayhaveaddedsocialvalue(ruralenergyaccess,energypovertyeradication,etc.),inatransitioncontexttheycannotbeconsideredtoaddthisvalueinthemediumtolongterm,andtheycrowdouttheresourcesneededtoprovidesocialvalueandaddressthetransitioninthesecontexts.93MisalignmentsAdditionalregulatedpaymentssuchasfeed-intariffsandPPAs,whenirrespectiveofthelocationandtimingofelectricitygeneration,implicitlypushdeveloperstofindlocationswhereresourcesareabundantandtoadoptplantdesignsthatminimisecostsandmaximisegeneration.Thisdrivesdownthemarketpriceofelectricity,increasingtheneedforadditionalregulatedpayments,whilesimultaneouslyleadingtohighergridinvestmentrequirements(e.g.reinforcementofgridstoconnectresource-richareaswithloadcentres),andtheneedtoprocureadditionalflexibilityresources.Assystemintegrationcostsbecomeapparent,policymakersacrosstheworldbegintoadoptstrategiesaimedatreducingthembyintroducingmechanismstoselecttheprojectswithhighersystemvalue,evenifthisdoesnotleadto“pure”costcompression(IRENA,2019b).AnexamplecomesfromBrazil,whereauctionsselectrenewableprojectsconsideringtheirimpactonthepowersystem(Box15).Policiesfavouringrapiddeploymentofrenewableenergyhaveattimesside-steppedthesocialdimension(Box16).Inparticular,competitivelysetmechanismslikeauctionsmayfacilitatethecostcompressionobjective,buttheiroutcomesmaybelessthanoptimalfromothersocio-economicperspectives(IRENA,2019b).Forexample,theymaynotproduceadiversifiedlandscapeofactorsorgeneratethesharedbenefitsenvisionedforajustandinclusivetransition(Fell,2017;Jacobsetal.,2020).However,recognitionofthesocio-economicbenefitsisbecomingmorecommoninrenewableenergypolicies.Auctions,forexample,arebeingimplementedinsomejurisdictionswithmechanismstofacilitatetheparticipationofsmallplayers(Japan)orcommunity-ownedprojects(Australia,Germany),ortovalueprojectsthatcreatejobsforpeoplefromdiversifiedsocio-economicorethnicbackgrounds(SouthAfrica)(IRENA,2019b).Box15.ARE-alignment:Incorporatingcost-benefitevaluationsintotheselectionprocess,BrazilForcertaintechnologiesinBrazilianenergyauctions,winnersareselectedonthebasisofacost-benefitindexandnotonthebasisofpricealone.Thereasoningbehindtheindexistoincorporate,forbidcomparisonpurposes,anexpectedvalueoftherenewableelectricitybasedonitsgeographicallocation,hourlyprofileandseasonalprofile.Theexpectedvalueofthegeneratedelectricityforthepowersystemisevaluatedthroughitsexpectedmarketprice,knownastheCEC(custoesperadodecompra).TheCECisthesecondmostimportantitem(aftertheauctionbidprice)indeterminingtheindexrankingofarenewablepowerplant.TheCECisdefinedastheexpectedvalueofspotmarketsettlementsovertheplant’susefullife.Itisdeterminedthroughasimulationinwhichthesystemplannerattemptstodifferentiaterenewablegeneratorsatdifferentlocationsandwithdifferentproductionprofiles.TheCECiscalculatedforeachplantbasedonitscertifiedproductionprofile.Here,complementarityplaysanimportantrole.Forinstance,windgeneratorslocatedinBrazil’snorth-eastregioncomplementthecountry’sabundanthydropower,astheiroutputtypicallyincreasesduringthedryseason.PlantswithmorepronouncedcomplementaritygethigherCEC.94RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONBox16.LackofrecognitionofthesocialandenvironmentalvalueofenergyPrivateandpublicentitiesandinvestorsallplayaroleinacceleratingthetransitiontoalow-carboneconomy.Capturingthevalueofajustandfairtransitionbeyondthereturnoninvestmentshouldbeacornerstoneoftheenergytransition.Renewableenergydeploymentisnotimmunetosomeofthenegativeimpactsoffossilfuelsandnuclearenergydeployment,particularlyifitfollowsthesameparadigmsthatguidedthedevelopmentofthepowersystemsofthefossilfuelera.Indeed,renewableenergydeploymentcanalsoresultinhumanandenvironmentalrightsviolationsandexternalisationofcoststocommunitiesandnature.Negativeimpactsaredrivenbyalackofrecognitionofthesocialandenvironmentalvalueofenergydevelopments.Theyincludetheexecutionofprojectswithoutthedueinformedconsentofaffectedcommunities,thelackofmeasurestomitigatethepowerimbalanceinthedialoguebetweencommunitiesandpromoters(eitherprivateorpublic),thepriorityaccesstoelectricityforindustryandurbanareasasopposedtoruralpopulation,landgrabbing,dangerousworkingconditionsandprecariouswagesacrossallthevaluechain,aswellasdamagetothelifeandlivelihoodsofindigenouspeoples(350Africa.organdWoMin,2020;Business&HumanRightsResourceCentre,2020;Finley-BrookandThomas,2011).Inthelastdecade(2010-2019),almost200casesofhumanrightsviolationshavebeenreportedlinkedtorenewableenergyutility-scaleprojects,61%ofthemintheLatinAmericanregion.Thedevelopmentofutility-scalerenewableenergyprojectswasthefourthsectorthatmost-violatedhumanrightsin2019,aftermining,intensiveagricultureandwastedisposal(Business&HumanRightsResourceCentre,2020;GlobalWitness,2019).Historically,allegationsofhumanrightsviolationsintherenewableenergysectortendedtoberelatedtohydropowerdevelopments.Butasthetransitionunfolds,allegationshavebeenmadeacrossallsub-sectorsofrenewableenergydeploymentsuchaswind,solar,bioenergy,geothermalandhydropower,whereweakstandardstoprotectworkersandcommunitiesareinplace.Hostcommunities’trueparticipationfromthedesignstageofprojectsisessentialtoaligntheprojectwithcommunityneedsandtoproducesocialvalue,allowingcommunitiestobenefitfromtheproject.However,prevalentorganisationalstructuresdonotfostermeaningfulsocialinvolvement.Thesocialfractureinducedbytheaforementionedviolationsandlimitationsrepresentsabarriertoengagehostcommunitiesinthepursuitoftheenergytransition.Evenworse,itoftentriggersaresistancetowhatislocallyperceivedasanunsustainabletransformation.Increasinglylinkedtotransition-relatedtechnologies.Thedistinctionbetweensubsidiesandadditionalregulatedpaymentswarrantsfurtherdiscussion,becauselackofclarityonthispointleadstoimportantpolicyandplanningmisalignmentspotentiallyhinderingthetransitionofpowersystemorganisationalstructures.Often,undertheterm“subsidies”,fundamentallydifferentelementsarelumpedtogether.Pricingcomplementsprovidedtotechnologiesharmfulforsociety(e.g.fossilfuelsubsidies)arenotthesameaspricingcomplementsprovidedtorenewablepowersoastoaddresstheunsuitabilityofthepowersystem’spricingmechanisms.Describingthemwiththesame,homogenouslabelisoftenmisleadingandmaybeconceptuallywrong.95MisalignmentsThisbecomesevidentwhenproposalsforpowersystemstructurereform,suchastheapproachdiscussedinchapter6,taketheconceptualframeworkofcurrentfeed-intariffsorPPAsandturnitintooneofthepillarsofanorganisationalstructurefitforrenewable-basedpowersystems.Ifatechnologyneedsadditionalsupportbecauseofthemarketpricenotcoveringitscosts,thiscanbeaddressedthroughanadditionalregulatedpaymentorasubsidythatcoversthedifferencebetweenthemarketpriceandthetechnology’scost.Butthisshouldalwaysbeconditionalonthesocialvaluefromthistechnology.Subsidiesfortechnologieswithhighexternalcostsshouldbephasedout(i.e.fossilfuelsubsidies,seeBox17),andinanycasehiddensubsidies(implicitlypaidbysocietybutnotexplicitlyrecognised)coveringexternalcostsshouldbeeliminated.Animportantdifferencebetweenanadditionalregulatedpaymentandasubsidyisoftenoverlooked.Asubsidyisanadditionalpayment(apricecomplement)madetoachievethepoliticalaimofsupportingagiventechnology.Thepossiblemotivesaremany.Theyincludethedesirabilityofspreadingthetechnologywithinthepowersystem(asisthecasewithrenewableenergy),supportingthelocalisationorcompetitivenessofgivenindustries,safeguardingjobs,andrespondingtolobbyingpressure,amongothers.Anadditionalregulatedpayment,ontheotherhand,attemptstocorrectanidentifiedflawintheimplementedpricingstructure.Feed-intariffsandPPAscanbeunderstoodasadditionalregulatedpaymentstoovercometheunsuitabilityofthecurrentpowersystemstructurestoaccommodaterenewable-basedpowersystems,althoughfeed-intariffsandPPAsmayalsoincludeelementsofsubsidywhilethetechnologytheysupportisstilladvancingalongitslearningcurve.Rewardingtheadditionalsocialvalueprovidedbyelectricitygenerationmaybeanothergoalofadditionalregulatedpayments.Thecost,priceandvaluemisalignmentscanplayoutinthepowersectorinvariousways.Thepricemisalignmentinwholesaleelectricitymarketswasdiscussedinsection4.1.However,fullyunderstandingthespaceofmisalignmentsrequiressimultaneouslyconsideringthethreedimensionsofcost,priceandvalue,sincetherealmofmisalignmentsgoesfarbeyondthepartofthepricedimensionallocatedbymarginalpricingmechanisms.Organisationalstructuresplayanimportantroleindetermininghowthecost,priceandvaluedynamicsunfold.Figure26presentsthreeexamplesoffossilfuelandrenewableplantsoperatingunderdifferentorganisationalstructurestoillustratethesepotentialmisalignmentsbetweenthethreedimensions.Inawell-designedpowersystemorganisationalstructure,priceswouldbealignedwithcostsandoverallpowersystemvalue,withadditionalsocialvalueprovidingapositivesocialbalance.Inthissituationadditionalregulatedpayments/subsidieswouldbeminimised.Forafossilfuelpowergenerationplantoperatingundercurrentorganisationalstructures(Case1),additionalregulatedpaymentsandsubsidiescanbeveryhigh,evenhigherthanthoseforrenewablegeneration.The“missingmoney”problemdiscussedearlierislikelytoleadtoadditionalregulatedpaymentssuchasthosefromcapacityremunerationmechanisms.Butaboveall,hugeindirectsubsidiesduetotheplant’sexternalitiesnotbeinginternalisedareinplace.Yettheplant’soverallvaluemaybesignificantlylowerthanelectricitypricesandcosts.Cases2and3correspondtorenewablepowergenerationplantsoperatingunderthecurrentpowersystemstructure(Case2)andunderapowersystemstructurefitforrenewableenergytechnologies(Case3),suchasthatdiscussedinchapter6.Becauseofthetechnologiesinvolved,Case2haslowercoststhanCase3,butthevalueforthepowersystemofthegeneratedelectricityisalsolowerin96RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONBox17.FossilfuelsubsidiesFossilfuelsubsidiesarestillabundantworldwidedespitethefactthattheyareabarriertothedecarbonisationofeconomies.However,thankstoclimateandwelfareconsiderations,debatesaboutfossilfuelsubsidyreformsaregainingground.Whenundertakingsubsidyreform,itshouldberememberedthatgovernmentshistoricallyestablishedfossilfuelsubsidiesforavarietyofreasons,includingtoreducepoverty.Therefore,addressingdistributionalissuesinsubsidyreformsisessentialtoavoidunintendedbarrierstotheenergytransition.Phasingoutfossilfuelsubsidiesprovidesroomforimprovementineconomic,environmentalandsocialprosperity,openingupgovernments’budgetaryspaceforinvestmentsintheenergytransitionandsocialwelfare,whilehelpingtoreducefossilfuellock-ineffects.Buttoreapthesebenefits,regressiveeffectsmustbeavoided.Althoughthereisnowidesocialawarenessofit,today’sfossilfuelsubsidiesareregressive,withthewealthiestbenefitingthemost.Globally,therichest20%ofhouseholdscapturemorethansixtimesthebenefitoffuelsubsidiesascomparedtothepoorest20%(IMF,2015b;UNEPandIISD,2019).Nonetheless,phasingoutfossilfuelscanproducenegativeshort-andlong-termdistributionaleffectssuchasadisproportionateburdenonlower-incomegroups,reducedenergyaccessormajorlabourloss,reducedcompetitiveness,substitutionwithunsafe,morepollutingfuels,andpooraccountabilityoverpricetransparency(Bridleetal.,2018;RentschlerandBazilian,2016).Preventingthesenegativeimpactsrequiresholisticallyaddressingtheseeffectsandfosteringsocialengagement.Forinstance,eliminatingfossilfuelsubsidiesonconsumptionfreesconsiderablegovernmenteconomicresources,butintheabsenceofaholisticapproachthatclearlyallocatestheseresourcestoimprovewelfareandthesituationofvulnerablehouseholds,explicitlyaddressingtheregressiveimpactsofexposingvulnerablegroupstoincreasedprices(affectingtheirabilitytocook,heatorcommute),socialoppositioncanbeexpectedtoblockeffectivereform.Intheabsenceofsuchaholisticapproachtofossilfuelreform,barrierscanbeexpectedinresponsetochangesininternationalfuelprices.In2019,somecountriesalreadystartedpushingbacktheirsubsidiesreformschedulesinresponsetohighinternationalfossilfuelprices.Forinstance,IndonesiaandMalaysiacommittedtosubsidiseenergyprices,whileIndiareducedtheexcisedutyonpetrolanddiesel,andBrazilincreaseditssubsidyondiesel(MatsumuraandAdam,2018).Therefore,aholisticapproachtofossilfuelreformisamust.Failingtoexplicitlyandsatisfactorilyaddressthesocialconsequencesoffossilfuelphase-out(withspecialemphasisondistributiveimpacts)resultsinincreasingsocialresistance,especiallyinacontextofforeseeablevolatilefossilfuelprices(Beatonetal.,2013).Similarbarrierscandevelopfollowingtheimplementationofcarbonorfossilfueltaxes,oftenwithsimilarimpactsforendusersasareductioninfossilfuelsubsidies:anincreaseinprices.Thegiletsjaunes(yellowjackets)movementisacaseinpoint,originatinginFrancein2018triggeredbyanincreaseinfossilfueltaxes(carbontaxes),ultimatelypreventingthosetaxesfrombeingimplemented(MartinandIslar,2021;Mehleb,KallisandZografos,2021).Ultimatelythesocialdimensionofclimatepolicy,includingadequatecommunicationandenhancedgovernance,holdsthekeyforsuccessfulresults(Bergquist,MildenbergerandStokes,2020;Lambetal.,2020).Fossilfuelsubsidescancomeintheformofbothdirect(supporttoconsumptionorproduction)andindirect(externalisationofsocialandenvironmentalimpacts)subsidies.97MisalignmentsCase2.36Moreover,sincethepowersystemstructureinCase2isnotfitforrenewablepower,itneedshigheradditionalregulatedpaymentsbecauseofthedepressedwholesaleelectricitypricesasrenewablespenetrationincreases.Ontheotherhand,theorganisationalstructureconsideredinCase3isappropriateforthecharacteristicsofarenewable-basedpowersystem(seechapter6)andhencepricesthegeneratedelectricityinawaythatiswellalignedwithbothitscostsandsystemvalue.Foramorenuanceddiscussionoftheseexamples,seeIRENA(2020c).Asillustratedinthissection,thecost,priceandvaluemisalignmentscanhaveprofoundimplicationsforthepowersectorandfortheoutersystemiclayers(economyandsociety).Butthereareothermisalignmentsbeyondthepowersystemthatcansignificantlyhindertheenergytransition,asdiscussedinthenextsection.4.2.MISALIGNMENTSBEYONDTHEPOWERSYSTEMAsuccessfultransitionrequiresasystemicapproach,payingattentiontotheinteractionsandfeedbacksbetweenthedifferentsystemiclayers(chapter1).Misalignmentsinsystemiclayersbeyondthepowersystem(energysystem,economy,society,Earth)dohaveimportanteffectsonthepowersystem,andhenceneedtobeaddressedbyaholistictransitionplanningandpolicyframework.Thisreportfocusesmainlyonthepowersystem,addressinghowtoovercomethemisalignmentswithinthissystem.However,misalignmentsbeyondthepowersystemthathaveimportantimplicationsforitandforthetransitionitselfarebrieflydiscussedinthissection,providingthenecessarybackground36Manycombinationsoftechnologiesandhowtheyareimplementedandoperatedmayleadtothesedifferences.Forinstance,Case3couldinvolvedispatchablerenewableenergytechnologies(suchasCSPorsolarPVwithbatterystorage)builtandoperatedwithhigheremphasisonmaximisingitssocialvalue.Alternatively,Case3couldrepresentanoff-gridapplicationofrenewableswithhighsocialvalueanddeployedwithinanorganisationalstructurethatproperlyalignsprice,costsandsystemvalue.FIGURE26.Cost,priceandvalueofelectricity(illustrativeannualaverages)Note:FF=fossilfuel;LCOE=levelisedcostofelectricity;RE=renewableenergy.CostPriceValueCostPriceValueCostPriceValuePowersystemvalueMarketpriceExternalitiesAdditionalsocialvalueIndirectsubsidiesAdditionalregulatedpaymentsanddirectsubsidiesLCOECASE1CASE2CASE3USD/MWhFFgenerationplantREgenerationplant98RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONtofosteraholisticapproachthatallowspowersystemorganisationalstructurestocontributetheirshareinaddressingthesemisalignments.Mostmisalignmentsbeyondthepowersystemarenottheuniquepreserveoftheenergytransition.Theyexistedbeforethistransitionandhaveco-existedwithfossilfuelpowerandenergysystemsforalongtime.Butthecurrentcriticalenvironmentalandsocialframeworkmakesaddressingthesemisalignmentsafundamentalcornerstoneforasuccessfulenergytransition(chapter1).Misalignmentsrelatedtolabour,unlimitedgrowthandinequalities,aswellastheimplicationsfortheenergytransition,arediscussedbelow.37Thesemisalignmentswillnotbesortedoutbymerelytransitioningtoarenewable-basedenergysystem(unlikethosediscussedinBox18).Henceaholisticpolicyframeworkspanningallsystemiclayerswillbeneededtoaddressthesemisalignmentsandpreventthebarrierstotransitionthattheycouldproduce.LabourdynamicsduringthetransitionTheenergytransitionwillbringaboutarestructuringofthelabourmarket,potentiallyincreasingtheavailabilityofemploymentinsomesectorswhilereducingitinothers,whichcanleadtolabourmisalignments.Becausethepowersectoriscalledtoplayacentralroleintheenergytransition,manyofthepotentialjobmisalignmentscanoriginatewithinitandthenripplethroughtherestoftheeconomy.Giventhelinksandfeedbacksbetweenthedifferentsystemiclayers(chapter1),employmentimpactspropagatebeyondtheenergysector,affectingtheoutersystemiclayers(economy,society).Aholisticpolicyapproachtotheenergytransitioncantakeadvantageofthesesystemicinteractions,38fosteringsynergiesacrossthedifferentsystemiclayersandsourcingsolutionstothelabourchallengesgeneratedwithintheenergysectorwhilesimultaneouslyaddressingchallengesinothersystemiclayers.39Withtheappropriateambitionandpoliciesinplace,theenergytransitioncanbringaboutanincreaseintransition-relatedjobs(renewables,efficiency,flexibility)thatexceedsthelossoffossilfuel-relatedjobsthatitentails.However,thetransition’slabourimpactpresentsastrongregionaldependence,drivenbyhowregional40andglobal41structuralsocio-economicelementsplayoutineachsituation.Butevenifthenewtransition-relatedjobsoutnumberthelostfossilfueljobsinaggregatedterms,severallabourmisalignmentscantakeplace.Sectoralmisalignmentsareassociatedwithsomeeconomicsectorslosingjobsinabsolutetermsduringthetransition.Temporalmisalignmentshappenwhennewjobsappearatadifferentpointintimethanlostjobs.Spatialmisalignmentsrefertonewjobopportunitiesbeingproducedindifferentgeographicallocationsthanthosewherejobsarebeinglost.Educationalmisalignmentshappenwhenthetrainingandskillsrequiredbythenewjobsdifferfromthoseofthelostjobs.Addressinglabourmisalignmentsrequiresaholisticjusttransitionpolicyframework(IRENA,Ferroukhi,GarcíaCasalsandParajuli,2020).Toinformthispolicyframework,IRENAhasbeenexploringthelikelytransitionlabourdynamicsthroughtheevaluationofthesocio-economicfootprintoftransitionroadmaps(IRENA,2021c,2019d,2018,2016b,Ferroukhi,GarcíaCasalsandParajuli,2020).Figure27presents37Besidesthesethree,thereareothermisalignmentsbeyondthepowersystemthatthroughsystemicinteractionscanjeopardisethetransition.Thisreportdoesnotaimtopresentanexhaustivecoverageofmisalignmentsbeyondthepowersector,butrathertopointoutthatthesemisalignmentsexistandhenceaholisticapproachisrequired.Thesethreemisalignmentshavebeenchosenbecauseoftheirdirectimplicationsforthepowersectoranditsassociatedtransitiondynamics.38Suchaholisticapproachisalsorequiredtoaddressotheremploymentchallengesthatwillarisebecauseofothermegatrends(suchasautomation,artificialintelligenceordemographicdynamics)thatwillbedeployinginparallelwiththeenergytransition.39Thiscouldbe,forinstance,donebyincreasingthepublicofferofcaringeconomyemploymenttosimultaneouslyaddresssocialchallengesandthelabourmisalignmentsintroducedbytheenergytransition.40Suchaspolicyambitionandaholisticpolicyapproach,fossilfueldependency,andthestrengthanddepthoflocalsupplychains.41Suchastradeagreements,commerciallinksandotherinternationaleconomicrelations.99MisalignmentsBox18.Pre-transitionmisalignmentsthatcanbemitigatedbytransitioningtowardsrenewables:ThecaseofclimatechangeandairpollutionTheconsumptionofever-increasingamountsofenergyduringthefossilfuelerahasleftthelegaciesofclimatechangeandairpollution,thelatterespeciallyimpactingurbanareasaroundtheworld.Powergenerationhascontributedgreatlytotheselegacies.Climatechangeandairpollutionhaveseverenegativeimpactsonthehealthandwelfareofpopulations,whichconstitutesanimportantmisalignmentofthecurrentenergysystem.Giventheincreasingtrendsofpopulationandpercapitaenergyservicesdemandedbythispopulation,intheabsenceofasignificantenergytransitionawayfromfossilfuelstowardsrenewables,theseimpactswouldincreasesignificantly.Becausethepowersystemisacornerstoneoftheenergytransition,potentiallyfacilitatingthefasterdeploymentofrenewablesinend-usesectors(energysystemintegrationthroughdirectandindirectelectrification),itcanplayaveryimportantroleinreducingbothairpollutioninurbanareasandclimatechange.Toanalysethesocio-economicfootprintofenergytransitionroadmaps,IRENAusesawelfareindexthatupto2021hadthreedimensions(social,environmentalandeconomic)andsixindicators(spendingoneducation,healthimpactsfromlocalairpollution,materialconsumption,greenhousegasemissions,consumptionandinvestment,andemployment).Figure27presentstheglobalwelfareresultsofIRENA’senergytransitionroadmap(REmap),expressedasthewelfareindeximprovementbetweenthetransitionscenario(TES)andareferencescenarioconsistentwiththecurrentlyplannedpolicies(PES),by2030and2050.Theimprovementinthewelfareindexincreasesasthetransitionprogressesandisstronglydominatedbytheimprovementinthehealthimpactsfromlocalairpollution,followedbythemitigationofgreenhousegasemissions.Hencethetransitiontoarenewable-basedenergysystemdirectlyaddressesthepollutionandclimatechangemisalignments,bringingaboutaveryimportantimprovementinwelfare.Note:C&I=ConsumptionandInvestment;GHG=greenhousegases.In2021theIRENATransitionWelfareIndexwasexpandedto5dimensions(addingdistributionandenergyaccess)and10indicators(IRENA,2021c).Source:IRENA,2020b.20302050ConsumptionandinvestmentEmploymentEducationHealthGHGemissionMaterialconsumptionEconomicSocialEnvironmental%dierenceinwelfarefromPES02468101214GreenhousegasemissionsSpendingoneducationHealthimpactfromlocalairpollutionandinvestmentConsumptionEmploymentMaterialconsumptionEnvironmentalwelfareSocialwelfareEconomicwelfareWELFAREFIGURE27.IRENA’swelfareindex:Structurewithitsthreedimensionsandsixindicatorsandresultsofitsglobalimprovementby2030and2050duringtheREmaptransitionroadmap100RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONresultsfromIRENA’s2019transitionroadmap42fortworegions:SouthernEurope43andtheGulfCooperationCouncil(GCC).44Jobresultsareprovidedforrenewableenergy,theenergysectorandeconomy-wide,sothatinsightsonpotentialsectoralmisalignmentscanbederived.Foreachregion,Figure27presentstwosetsofresults:thetimeevolutionofjobsunderthetransition(TES)scenario(2017-2050)andthedifferenceinjobsbetweenbothscenarios(TESandPES)in2050.ThetimeevolutionofjobsforbothregionsundertheTESscenarioissimilarintermsoftheincreaseofjobsbetween2017and2050,despitesignificantdifferencesintheabsolutenumberofjobsforeachregion.Jobsincreaseinrenewableenergy,intheenergysector,andinthewholeeconomy,withtheenergysectorexperiencingthehighestincreases.However,thesejobincreasesaretoalargeextentdrivenbythebaselineexpansionoftheeconomyassumedforthesescenarios.Indeed,undertheTEStheglobaleconomygrowsbetween2019and2050atacompoundannualgrowthrateof3.1%,withtheSouthernEuropeanandGCCeconomiesexpandingatcompoundannualgrowthratesof1.7%and3.3%respectively.45Hencetheeffectofthistransitionroadmapandthepotentialmisalignmentsitmayinducehavetobeanalysedbycomparingtheemploymentevolutionacrossthetwoscenarios:thePES(notransitionbeyondcurrentpolicies)andtheTES(transition).TherightpanelinFigure27providesthisinformation:by2050thetransition’simpactonjobsinthesetworegionsisverydifferent,asaconsequenceofhowregionalandglobalsocio-economicstructuralelementsplayoutineachoftheregions.InSouthernEurope,severalfactorscontributetoapositiveemploymentimpactinalltheconsidereddimensions(renewables,energysectorandeconomy-wide).Thesefactorsinclude:alimitedfossilfueldependencyofitsdomesticsupplychains;thepositivetradeimpactassociatedwithreducingfossilfuelimports;thelevelofenergytransitionambition;theexistenceofstronganddiversifieddomesticsupplychains;andtransitionfiscalpoliciesthattriggerpositiveeconomy-wideinteractionsthroughinducedeffects.EmploymentintheenergysectorinSouthernEuropeincreasesslightlymorethanemploymentinrenewableenergy,indicatingthatthedecreaseinfossilfuel-relatedjobsismorethancompensatedbyanincreaseinothertransition-relatedjobs(efficiencyandflexibility).Economy-widejobsexperienceanincreasesignificantlyhigherthanenergysectorjobs,indicatingthatpositiveeconomicfeedbacksleadtoemploymentincreasesinothereconomicsectorsbeyondtheenergysector.Hencethisregiondoesnotexperiencesectorallabourmisalignmentsduringthetransition,butratherpositivesystemicfeedbacks.IntheGCCregionthesituationisverydifferent,withemploymentsectoralmisalignmentshappeningbothwithintheenergysectorandintherestoftheeconomy.Thisisdrivenbyseveralfactorsincluding:astrongfossilfueldependencyofitseconomy,withnegativetradeimpactsresultingfromthetransition;strongfossilfueldependencyandlackofdiversificationofdomesticsupplychains.Figure28showsalowerincreaseinenergysectorjobsintheGCCregionthantheincreaseinrenewableenergyjobs,meaningthatthelossoffossilfueljobsissignificantlyhigherthantheincreaseinothertransition-relatedjobs(efficiencyandflexibility)andalmostneutralisestheoverallincreaseintransition-relatedjobs(renewables,efficiencyandflexibility).Economy-widejobsarelowerforthetransitionscenario,andsinceenergysectorjobsareslightlyhigherinthetransition,othersectorsoftheeconomyexperienceareductioninemploymentasaconsequenceofthesystemicfeedbacksbetweentheenergysectorandtheeconomy.42Thistransitionroadmapincludestwoscenarios:thePlannedEnergyScenario(PES),whichcapturesthecurrentpolicies;andtheTransformingEnergyScenario(TES),whichconsidersanincreasedtransitionambitionfromthatcapturedbycurrentpolicies.43ThecountriesincludedinSouthernEuropeare:Croatia,Cyprus,Greece,Italy,NorhMacedonia,Portugal,SloveniaandSpain.44ThecountriesincludedintheGCCregionare:Bahrain,Kuwait,Oman,Qatar,SaudiArabiaandtheUnitedArabEmirates.45Thesecompoundannualgrowthratesmeanthat,by2050,theSouthernEuropeaneconomywillbearound70%biggerthanin2019,andtheGCCeconomywillbearound170%bigger.101MisalignmentsIRENA’sanalysisalsoindicatesthatthelabourimplicationsofrenewableenergydeploymentarefavourableforwomen.Womenaccountforahighershareoftherenewablesworkforce(32%)thanisthecaseintheoilandgassector(22%)(IRENA,2019e).However,educationalmisalignments,especiallyindevelopingcountries,ifnotproperlyaddressed,canrepresentabarriertofulfiltheenergytransition’spotentialtoinvolvewomenintheenergysector.Theresultspresentedaboveshowcasehowtheregionalandglobalsocio-economiccontextunderwhichthetransitiondevelopscanproducesectoraljobmisalignments.Misalignmentsarelikelytohappeninthetemporal,spatialandeducationaldimensions,requiringacomprehensiveandholisticjustpolicyapproachtopreventnegativeimpactsandbarrierstotransition.Becausethepowersectorliesatthecoreoftheenergytransition,manyofthesejobmisalignmentscanoriginatewithinit,propagatingtotherestoftheenergysectorandtheeconomy,whileotherscantrickledownfromoutersystemiclayersandaffectthepowersector.Hence,dueattentionneedstobegiventothesocio-economicdimensionofpowersystemorganisationalstructures,sothattheycanhelptoaddresscross-cuttingjobmisalignments.TheimperativetoincreaseaggregatedeconomicactivityThepowersystemwillbesubjecttostrongopposingtrendsduringthetransition,withthepotentialtosignificantlychangeitssizeandstructure.Ontheonehand,energyefficiencydeploymentwillintroduceatrendtowardsreducingelectricitydemand.Ontheotherhand,energysystemintegrationthroughdirectandindirectelectrificationintroducesastrongtrendtowardsincreasingelectricitydemand.Underlyingthese,thereisanadditionaltrendfromtheeconomysystemiclayerthatwilllikelyFIGURE28.Differenceinjobsinrenewableenergy,energysectorandeconomywidefrom2017to2050forthetransitionscenario(TES)(leftpanel)andbetweentheplanned(PES)andtransition(TES)scenariosin2050(rightpanel).ResultsforSouthernEuropeandtheGulfCooperationCouncil.00.10.20.30.40.50.60.70.80.9RenewableenergyEnergysectorEconomy-wide00.10.20.30.40.50.60.70.80.9Economy-wideRenewableenergyEnergysector00.20.40.60.811.21.41.61.8Economy-wideRenewableenergyEnergysector-0.20-0.15-0.10-0.050.000.050.100.150.200.250.30Economy-wideRenewableenergyEnergysectorDierenceinjobs(million)Dierenceinjobs(million)TIMEEVOLUTIONTES:2017>2050SCENARIOEVOLUTION2050:PES>TESSOUTHERNEUROPEGULFCOOPERATIONCONCILPositiveeconomy-widePositiveenergy-wideEnergysectormisalignmentRestofeconomymisalignment!!102RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONpushenergy(andhenceelectricity)demandupwardstounderpintheimperativeforincreasedglobalaggregatedeconomicactivity,despiteeffortstodecoupleenergyusefromGDPgrowth(seeBox19).Transitioningtoday’senergyandpowersystemstowardsrenewableswithinthetimewindowavailableforclimateconsistencyisalreadyahugechallenge.Addingtheglobaleconomy’sgrowthimperativeontopofitmakesthetaskstillmoredifficult,becauserenewableenergydeploymenthastodealsimultaneouslywiththesubstitutionoftheexistingfossilfuelinfrastructureandcopingwiththeadditionalenergydemandlinkedtoincreasingglobalaggregatedeconomicactivity.Hencethechancesofsuccessfullytransitioningwithintheavailableclimatetimewindowwouldincreasegreatlyiftheeconomicgrowthimperativewererelaxed.46Theimperativetocontinuouslyincreaseaggregatedeconomicactivityhasdominatedeconomicpolicyandmainstreameconomicssincetheclassicaleconomistsofthe19thcentury.Today,itissodeeplyembeddedinoursocio-economicstructurethatanyslowdownineconomicgrowthtriggersdeepcrisisepisodes(recessions,depressions).Thewaythatsocio-economicsystemsarecurrentlystructuredissuchthatifeconomicgrowthstops,jobsarelost,businessescloseandpeopleloseaccesstofundamentalbasicservices(food,housing,health,transport,etc.).However,thecurrentsocio-economicstructureisasocialconstruct:thereisnothingthatpreventssocietiesfromintroducingstructuralchangestoadaptorganisationalstructurestotheprevailingsystemicboundaryconditions,whilesimultaneouslyimprovingthem.Inthepast,whilethesocialsystemwasrelativelysmallcomparedtothesizeoftheoutersystemiclayer(Earthsystem),increasingglobaleconomicactivitydidnotproduceevidentnegativemacroimpacts.However,sincethemid-20thcentury,ithasbeenincreasinglyevidentthattheseimpactsexistandareunsustainablebecauseoftransgressingseveralplanetaryboundaries.Climatechangeisoneofthemainimpacts,butothersincludebiodiversitylossandairpollution(Rockströmetal.,2009;Steffenetal.,2015).Althougheconomicgrowthhasbroughtimportantprogressinsocialdimensions,thisdoesnotruleoutthepossibilityofthisprogressorevenimprovedprogresstobeachievedwithothersocio-economicstructures.Indeed,thereismountingevidencethatunequaleconomicgrowthcouldbeaninefficientwayofpursuingsharedglobalprosperity,andthatincreasingaggregatedeconomicactivityissubjecttoasaturationprocessinthesensethatbeyondacertainthresholditdoesnotproduceadditionalsocialimprovements(Jackson,2017).Movingfromastand-aloneconsiderationoftheeconomytoasystemicapproach,itbecomesevidentthattheeconomicactivityhasbothlowerandupperactivityboundaries.Theloweractivityboundaryistopreventshortfallsinsocialneeds;theupperactivityboundaryistoavoidovershootingtheEarthsystemcapacity.Itiswithinthesetwoboundarieswhereasafeandjustspaceforhumanitytothriveexists(Raworth,2017).Henceinrecentyearsincreasingeffortshavebeenmadetoaddressthesestructuralchanges,whichwouldallowhumanitytotransitionfrompastsocio-economicstructurestowardsmatureonessignallingtheendofthegrowthphase(O’Neilletal.,2018;TrebeckandWilliams,2019).TransitioningoursocietiestowardssustainabilitywhilemaintainingtheimperativeofcontinuouslyincreasingaggregatedeconomicactivitywouldrequireaverystrongdecouplingofGDPfromemissionsandmaterialconsumption.Recentanalysesofhistoricevidenceofdecouplingandtheprospectsprovidedbyseveralscenariosarenotencouragingintermsofthecapabilitytoachieveandsustainablymaintaintherequiredratesofdecoupling(seeBox19).46Thisappliesdifferentlydependingonthestatusofeachcountry.Whilegrowthisstillnecessaryinsomecountriestoenablethepopulationtoadvanceintheprosperityladder,inothercountriesfurthergrowthcantriggerbarriersforasharedprosperityandfortheenergytransitionitself.103MisalignmentsBox19.DecouplingenergyandCO2emissionsfromGDPgrowthForeconomicgrowthtobesustainable,itneedstobedecoupled(inabsoluteterms)frombothresourceuseandgreenhousegasemissions(UNEP,2011).UnitedNationsSustainableDevelopmentGoal8(Target8.4)directlypointstothenecessitytodecoupleeconomicgrowthfromenvironmentaldegradation(UNDESA,2015).However,thereisgrowingconsensusthatnotanykindofdecouplingwilldo;specifically,decouplingforsustainabledevelopmentneedstobeglobal,absolute,fastenoughandlongenough(Vadénetal.,2020).Akeydistinctionisbetweenrelativeandabsolutedecoupling.Relative(weak)decouplingoccurswhenresourceuseorsomeenvironmentalpressuregrowsataslowerratethantheeconomicactivitythatiscausingit,whereasabsolute(strong)decouplingoccurswhenresourceuseorenvironmentalpressuredeclineswhiletheeconomicactivitycontinuestogrow(IRP,2017).Reductionsofenergyintensity(EI)andemissionsintensityofenergy(EmIE)overtimeindicateadecouplingofenergyandeconomicactivity(EI)andgreenhousegasemissionsandenergyuse(EmIE).Forthisdecouplingtobeabsolute,thereductionrateofEIandEmIEneedtobehigherthanthegrowthrateofGDPandenergyuserespectively;otherwisethedecouplingisonlyrelative.Decouplingofresourceuse(includingenergy)ismuchhardertoachievethandecouplingfromgreenhousegasemissions.Energydecouplingdependsonthedeploymentofenergyefficiency,whereasemissionsdecouplingbenefitsfrombothenergyefficiencyandthedeploymentofrenewables.Historicallytherehasbeenapositivecorrelationbetweeneconomicgrowth(measuredasGDP)andresourceuseandgreenhousegasemissions,althoughwithclearrelativedecouplingevenintermsofenergyuse(Guo,LiandWei,2021).Empiricalevidenceofabsolutedecouplingisscarce(Wiedenhoferetal.,2020).Regardingresourceuseatagloballevel,thereisnoempiricalevidenceofabsolutedecoupling(HickelandKallis,2020).SeveralcountrieshavealreadyachievedabsolutedecouplingofCO2emissions(Hausfather,2021).Thisdecouplingisclearlyfeasible,sinceitisadirectoutcomeofthetransitiontowardsazero-carbonenergysystem.However,thereareseriousconcernsaboutwhetherthiscanbedonefastenoughgloballytoaddressclimatebreakdown(HickelandKallis,2020;Li,2020;Parriqueetal.,2019;SchröderandStorm,2020;Tilstedetal.,2021).Absoluteenergydecouplinghasalsobeenachievedinafewhigh-incomecountries(Ritchie,2021).However,thisseemsdifficulttoattainglobally,becauseofthestructuraldifferencesbetweendeveloped/high-incomecountriesanddeveloping/low-incomecountries(Guo,LiandWei,2021;SchröderandStorm,2020;Steinbergeretal.,2013;Wu,ZhuandZhu,2018).TheexistenceofanincometippingpointatwhichenergyuseisabsolutelydecoupledfromGDPgrowth(energy-environmentalKuznetscurve)hasbeenfoundinindustrialisedandhigh-incomecountries,butdoesnotseemtobeapplicabletolow-andmiddle-incomecountries.Moreover,thepermanenceofthedecouplingforessential,non-substitutableresources(suchasenergy)couldbeimpossiblebecausetheefficiencygainsareultimatelygovernedbyphysicallimits(Wardetal.,2016).Henceasthephysicallimitsofresourceefficiencyareeventuallyreached,continuedGDPgrowthwoulddriveresourceusebackup(HickelandKallis,2020).104RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONEnergytransitionpathwaysandthetransition’slinkwiththeeconomicsystemaremainlycharacterisedbytheevolutionoftheenergyintensityoftheeconomy(EI,orenergyusedperunitofGDP),whichrelatestothedeploymentofenergyefficiency,andbytheCO2emissionsintensityofenergy(EmIE,oremissionsperunitofenergyused),whichdescribesthedecarbonisationoftheenergysector.TheclimateconsistencyoftheenergytransitionislinkedtoitsCO2mitigationrate,whichinturnisassociatedwiththeremainingcarbonbudget.47Foranyenergytransitionroadmap(characterised48bytheevolutionofEIandEmIE),thereisadirectlinkbetweentheCO2mitigationrateitprovidesandthegrowthrateoftheeconomy.Figure29presents49thisrelationshipforhistoricdataandfour50transitionpathways51atthegloballevel.52PointsindicatingthedifferentscenariosfromIRENAandtheIEA(PES/STEPS,TES/SDSand1.5S/NZE)havealsobeenincluded.Inaddition,thefigurepresentstheemissionsmitigationratescorrespondingtocomplyingwiththeavailable2021carbonbudgetsfor2°Cofwarmingat67%likelihoodandfor1.5°Cat50%likelihoodaspertheIPCC’s1.5°CSpecialReport(1.5SR)andSixthAssessmentReport(AR6)(IPCC,2021,2018).SeveralimportantconclusionscanbeextractedfromtheanalysispresentedinFigure29:•Foranytechnologicalcharacterisationofatransitionroadmap(givenbyitsefficiencyanddecarbonisationdeployment),thehighertheannualCO2mitigationrate,thelowerthegrowthinGDP.Henceasmitigationrequirementsincrease(toadjusttoeverreducingcarbonbudgets)themarginformaintainingpositiveeconomicgrowthdeclines.•ForanevolutionofEIandEmIEimprovementssuchasthoseassociatedwithcurrentpolicieslikeIRENA’sPES(IRENA,2020b)andtheIEA’sSTEPS(IEA,2021b),reducingglobalaggregatedeconomicactivityisamustforavoidingglobalwarmingbeyond2°C.•Forthetechnologicalcharacterisationofefficiency(EI)anddecarbonisation(EmIE)deploymentimplementedinmainstreamtransitionscenariossuchasIRENA’sTES(IRENA,2020b)andtheIEA’sSDS(IEA,2021b),economicgrowthcanbemaintainedforclimategoalsconsistentwitha2°Cglobal47IfweconsiderthecarbonbudgetsprovidedinIPCC(2018),theemissionscompoundannualdegrowthrateassociatedwithlimitingglobalwarmingto2°Cwith67%likelihoodand1.5°Cwith50%likelihoodare4.5%and15.3%respectively.WhenconsideringthecarbonbudgetsprovidedinIPCC(2021)thecompoundannualdegrowthrateoftheseemissionsis3.5%and8.5%respectively.48NotethatspecifyingtheevolutionofEIandEmIEtocharacterisetheenergytransitionroadmapalreadyincludestheeffectofallaspectsthatcanbeconsideredduringtheenergytransition,suchasthedeploymentofenergyefficiencyandrenewables,aswellasstructuralaspectsliketheincorporationofcirculareconomyandbehaviouralchanges.49ThepresentedanalysisisbasedontheKayaidentity,consideringa0.65%compoundannualgrowthrateforglobalpopulation,asinIRENA(2020b).Undertheseconditions,theKayaidentityrelateseconomicgrowthwiththethreevariablesdescribedabove(CO2emissions,energyintensityandCO2emissionsintensityofenergy).Notethatthisisanidentity,andnotanequationderivedfromamodel,andhencetheKayaidentitymustalwaysbefulfilled.50ThehistoricpathwayistechnologicallycharacterisedbyimprovementratesofEIandEmIEalignedwithhistoricvalues(-1%peryearforbothEIandEmIE).Thefirsttransitionpathway(currentpolicies)istechnologicallycharacterisedbyimprovementratesofEIandEmIEasfoundinmainstreamreferencescenarios,suchasIRENA’sPES(IRENA,2020b)andtheIEA’sSTEPS(IEA,2021b).Thesecondtransitionpathway(mainstreamtransition)istechnologicallycharacterisedbyimprovementratesofEIandEmIEasfoundincurrentmainenergytransitionproposalssuchasIRENA’sTES(IRENA,2020b)andtheIEA’sSDS(IEA,2021b).Thethirdtransitionpathway(netzeroby2050)istechnologicallycharacterisedbyimprovementratesofEIandEmIE,asfoundintransitionscenariosaimingatnetzeroCO2emissionsby2050,suchasIRENA’s1.5S(IRENA,2021c)andtheIEA’sNZE(IEA,2021b).Finally,thefourthtransitionpathway(moreambitioustransition)istechnologicallycharacterisedbyadditionalimprovementsofefficiencydeployment(EI-5%peryear)anddecarbonisationrates(EmIE-12%peryear).51EachtechnologicallydefinedbytheimprovementratesofEIandEmIE,bothexpressedascompoundannualgrowthrates.ItshouldbenotedthatcarbonbudgetsandtheassociatedrequiredmitigationratesrefertototalCO2emissions,i.e.energy,processandLULUCF(landuse,landusechangeandforestry).EnergyscenariossuchasthosefromIRENAandIEAdonotincludeananalysisofLULUCFmitigation.Therefore,whenpresentingpointsrepresentativeofthesescenariosinFigure-29theassumptionisthatthemitigationeffortinLULUCFemissionsisequivalenttothatinenergyandprocessemissions,i.e.LULUCFemissionsareproportionaltoenergyandprocessemissions.IfmitigationeffortinLULUCFwouldbelowerthanthatappliedinenergyandprocessemissions,thenthepointsrepresentativeofIRENAandIEAscenarioswouldmovetotheleftinFigure-29(loweroverallmitigationrates).52Globaleconomicgrowthratescanincludeverydifferentcountry-leveleconomicgrowthratesthatrecognisethedifferentneedsofcountriestoprovideprosperity.105Misalignmentswarming.Butwhenaimingfora1.5°Cclimategoal,theselevelsofefficiencyanddecarbonisationdeploymentwouldrequiresignificantreductionsinglobalaggregatedeconomicactivity.•Whenimplementingefficiency(EI)anddecarbonisation(EmIE)deploymentrateslikethosefeaturinginscenariosaimingatnetzeroemissionsby2050,suchasIRENA’s1.5S(IRENA,2021c)andtheIEA’sNZE(IEA,2021b),the1.5°CclimategoalcouldbereachedwhilemaintainingpositivegrowthratesofaggregatedglobaleconomicactivityinmorethanhalftherangeoftherequiredmitigationrateasperthecarbonbudgetsprovidedinAR6(IPCC,2021)andSR1.5(IPCC,2018).•Byincreasingtheratesofefficiencyanddecarbonisationdeployment,themargintomaintaingrowthfordifferentclimategoalsincreases.However,evenforafairlyambitioustransition(5%peryearreductionofEIand12%peryearreductionofemissionintensityofenergyuse),the1.5°Cat50%likelihoodclimategoal–asperthelowerestimatesoftheremainingcarbonbudget,suchasthosederivedfromtheSR1.5(IPCC,2018)–wouldrequireanalmoststeady-stateeconomy.Degrowthisnotanimperativefortheenergytransitiontocomplywithclimategoals,asproposedbymanyreferencesthattendtounderestimatethepotentialforefficiencyanddecarbonisationdeployment(HickelandKallis,2020;Li,2020;SchröderandStorm,2020).But,critically,limitinggrowthorevenbeingabletoorganiseoursocio-economicsystemtothriveunderreducingaggregatedglobaleconomicactivityincreasesthechancesofcomplyingwithambitiousclimategoals.5353Hencethechallengeisachievinganevolutionoftheaggregatedeconomicactivitythatiseconomically,environmentallyandsociallysustainable.Amongotherthings,thiswouldmeanadifferentdistributionoftheevolutionofaggregatedeconomicactivity,withhigherratesinpoorercountriesandlowerratesinricherones,butalsowithhighergrowthforpoorerversusricherpeople.FIGURE29.GDPgrowthrateasafunctionoftheCO2emissionmitigationratefordifferenttransitionpathwayscharacterisedbythecompoundannualgrowthrateofenergyintensity(EI)andtheemissionsintensityofenergy(EmIE)-15%-10%-5%0%5%10%15%20%0%1%2%3%4%5%6%7%8%9%10%11%12%13%14%15%16%COannualmitigationrateGDPpercapitaannualgrowthMainstreamtransitionCAGR:EI=-3,2%;EmlE=-4%MoreambitioustransitionCAGR:EI=-5%;EmlE=-12%Netzeroby2050CAGR:EI=-3,4%;EmlE=-10,4%CurrentpoliciesCAGR:EI=-2,1%;EmlE=-0,9%HistoricCAGR:EI=-1%;EmlE=-1%EIandEmlEimprovementsPES/STEPSTES/SDS1.5S/NZEAR6AR6SR1.5SR1.5CARBONBUDGETFOR2C@67%CARBONBUDGETFOR1.5C@50%106RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONOurcurrentsocio-economicstructurecollapsesunderadegrowthcontext.Tocomplywithambitiousclimategoalsthatpreventcatastrophicimpactonoursocio-economicsystem,thereislikelyaneedtomoveintotheareaofFigure29withloweraggregatedglobaleconomicactivitygrowthratesthanthoseexperiencedinthepast(toahigherorlowerextentdependingonhowfastefficiencyanddecarbonisationaredeployed).Henceaddressingstructuralaspectsthatallowoursocio-economicsystemstoprogressandthriveunderloweraggregatedglobaleconomicactivitygrowthratesisbecomingapriority.Asteady-stateeconomycouldbeanappropriategoalforhumanactivityonaplanetwithfiniteresourcesandimpact-bearingcapacity.Theconceptofasteady-stateeconomywasalreadyinthemindofleadingclassicaleconomistssuchasAdamSmithandJohnStuartMillinthe18thand19thcenturies,aswellasinthethoughtsofsomeofthemostinfluential20thcenturyeconomists,suchasJohnMaynardKeynes.Toreachasteadystateoftheglobaleconomy,somecountrieswillhavetogrowfurtherinordertosatisfybasicsocialneeds,whileothercountrieswhereeconomicactivityhassurpassedthecarryingcapacityoftheecosystemsthatcontainitwillneedtoreducetheiraggregatedeconomicactivity.Hencethetransitionchallengetoovercomethismisalignmentistwo-fold:•Reduceasfastaspossibleandwithoutfurtherdelayboththeenergyintensity(EI)oftheeconomyandtheemissionintensityofenergy(EmIE).Themargintoacceleratethem,andespeciallythereductioninEmIE,isstillveryhigh.•Introducestructuralchangesthatreduceoreliminatethecurrentdependencyofoureconomiesoncontinuousandunlimitedincreasingeconomicactivity.54Onlyadvancesonboththesefrontsallowforincreasingtheambitionoftheenergytransition(i.e.increasingtheemissionmitigationrate),andthereforelimitingtheimpactsofclimatechangeonsocio-economicsystems.CurrentlythemainfocusoftheenergytransitionhasbeenonreducingEIandEmIE,butthecontributionofadvancesinimprovingthestructureofsocio-economicsystemswouldbeverymuchwelcometosuccessfullyaddresssustainabilitychallenges.Powersystemorganisationalstructuresandtheeconomicgrowthimperativemisalignmentarerelatedatmultiplelevels:organisationalstructuresareanimportantdeterminantoftheresultingenergytransitionroadmap(evolutionofEIandEmIE);organisationalstructuresaredirectlyimpactedbytheevolutionofeconomicgrowthandtheclimateimpactsresultingfromit;andorganisationalstructureshavethecapabilityofhelpingtofacilitatethekindofeconomicactivitythatenableshigherCO2mitigationrates.Henceaholisticvisionisneededintheredesignofpowersystemorganisationalstructures,sothatsynergiesmaybemaximisedandbarriersareavoided.InequalityunderminescollaborationInequalityinthedistributionofincome,wealthandoptions/opportunities,aswellasinequalityinaccesstobasicservices,55deeplyunderminessocio-economicsystemsthroughthedegradationofsocialwelfare,56democracy57andecosystems,58aswellascontributingtoeconomicinstabilityandevenunderminingeconomicgrowth(Hickel,2017a;Raworth,2017;UNDESA,2020).54Currentlythiswouldrequiredifferentiatingwithequitycriteriaacrosscountriesbetweenthosethatstillneedtoincreasetheiraggregatedeconomicactivityandthosethatdonotanymore.Thelattercountriesultimatelywouldmaketheknowledgeabouthowtostructureeconomiestoflourishwithinplanetaryboundariesavailableforallcountriestoevolveattheirownpacetowardsthissteady-statecondition.55Suchashealth,education,energy,waterandfood.56Withmanyimpacts,includingteenagepregnancy,mentalillness,drugs,obesity,prisoners,schooldropouts,communitybreakdown,lowerlifeexpectancy,lowerstatusforwomenandlowertrust(whichinhibitscollaborativeframeworks).57Powerconcentrationandexclusion.58Byfuellingstatuscompetitionfedbyeverincreasingconsumptionanderodingthesocialcapitalneededtoconservethecommons.107MisalignmentsAddressingtheclimateemergencywithchancesofsuccessinlimitingglobalwarmingtopreventdisastrousclimateimpactsonsocio-economicsystemsrequiresanunprecedentedglobalcollaborativeeffort.Triggeringandmaintainingsuchacollaborativeeffortneedsaverysolidsocialcontract,basedonjusticeandfairness,thatleavesnoonebehind.59Henceinequalityisamajormisalignmentofthecurrentsocio-economicsystemthatcanseriouslyhinderthesuccessofthetransition.InitsupdatedwelfareIndex,IRENAhasincorporatedadistributionaldimension(IRENA,2021c)togaininsightsaboutthetransition’simplicationsforinequalityandthepoliciesneededtoaddressit.Havingalooktothehistoricevolutionofinequalitycanbedifficultbecauseofthedifferentmetricsinuse.Indicatorscantargetinequalitywithincountries,amongcountriesorforglobalcitizens,60andtheycanbeformulatedinrelativeorabsoluteterms61(Hickel,2017b;WorldBank,2016).Relativeincomeinequalitywithincountriesisveryhighandsince1990hasincreasedincountriesthatarehometomorethantwo-thirdsoftheworld’spopulation.62Relativeincomeinequalityamongcountries63isstillhigherthaninequalitywithinmostcountries,butitrecentlydeclinedafteraprolongedperiodofcontinuousincreases.However,absolute64incomeinequalitybetweencountriescontinuestogrow,withtheabsolutegapbetweenthemeanpercapitaincomesofhigh-andlow-incomecountriesincreasingfromaroundUSD27600in1990tomorethanUSD42800in2018(UNDESA,2020).Additionally,incomeinequalitieshaveacleargenderdimensionaswomenallovertheworldareunderrepresentedinhigh-profilejobs,whichtendtobebetterpaid,andareoverrepresentedinlow-payingandnon-remuneratedjobs(Figure30).Economicinequalitiesrelatedtogenderareevidentnotonlyinwagesearned,butalsoinownershipofproductiveassets.Includinginmanydevelopedcountries,womenarelesslikelytogetaloanforproductivepurposes(Demirgüç-Kuntetal.,2018),reducingtheirabilitytostart,operateorexpandaneconomicactivity.59Beyondsolidarity,inthecurrentclimatecrisisthishasbecomeamust.Transitiondynamicsinanunequalandunfairworldwouldleadtothemajorityofthepopulationgettingaccesstoverycheap(becauseofthereduceddemandfromtheGlobalNorth)fossilfuelsandfossilfueltechnologies.ThiscouldeasilyreverseanydecarbonisationadvancementsintheGlobalNorthbythepursuitofareplicationoftheGlobalNorth’sfossilfuel-basedeconomicgrowthofthepastdecades.60Theglobalincomedistributionamongtheworld’spopulation.61Relativeinequalitymeasuresdistributionaldifferencesinrelativeterms,whereasabsoluteinequalityevaluatesthedistributionaldifferencesinabsoluteterms.62Includingmostdevelopedcountriesandsomemiddle-incomecountries.63Calculatedusingpopulation-weightednationalincomespercapita.64Peopleperceiveandexperienceabsoluteinequalitiesintheirdailylives,intermsoflivingconditionsandwell-being(UNDESA,2020).108RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONThecurrentlyhugeglobalinequalityanditsevolutionunderasocio-economicbusiness-asusualunderminesanyoptionstobuildtheneededsocialcontractforsuccessfullyaddressingtheclimateandbiodiversitycrises.Thisbecomesclearwhenconsideringtheexistingcarboninequality:therichest10%oftheworld’spopulationhasbeenresponsiblefor52%ofthecumulativecarbonemissionsfrom1990to2015;65thepoorest50%hasbeenresponsibleforjust7%ofthesecumulativeemissions,whileatthesametimebearingthebulkofclimateimpacts(Oxfam,2020).Themostdisadvantagedgroupsarealsothemostvulnerabletotheimpactsofclimatecrisisandtheleastresilientduetosocio-economicstructuresthatexcludethemfromaccesstoresources,decisionmakingoragency(Dunne,2020;Wattsetal.,2018).Moreover,asdiscussedabove,underatransitioncontextdrivenbytheneedtolimitglobalwarming,theroomforincreasingglobalaggregatedeconomicactivityshrinkswithrequirementsforincreasedCO2emissionmitigationrates.Underthiscontext,improvingthedistributionofoutputandwealth(reducinginequality)withinandbetweencountriesbecomesoneofthepillarsneededforastablesocio-economicsystem.Toadvanceameaningfultransitionthatavoidsdisproportionateburdensforanygroupofpeople,itiskeytomeaningfullyinvolveallinthedesign,implementationandenforcementoftheenergytransitionanditsorganisationalstructures.Thepowersystemsitsatthecoreofthetransitionprocess.Throughitslinksandfeedbackswiththeoutersystemiclayers(economy,society,planet)thepowersystemwillbeinfluencedbytheinequalitymisalignmentanditsevolution,withimpactsrangingfromachievabledecarbonisationratestogovernancecapabilities.Powersystemorganisationalstructuresalsocontributetotheevolutionoftheinequalitymisalignmentthroughothermisalignments(seesection4.1onthe“griddeathspiral”formoredetails)anditsimpactonenergypoverty.65Therichest1%alonewereresponsiblefor15%ofthe1990-2015cumulativeemissions.FIGURE30.Proportionofwomeninseniorandmiddlemanagementpositionsinselectedcountries,2017Source:ILO(2022).0102030405060DominicanRepublicSeychellesLatviaUnitedStatesRussianFederationBrazilRwandaSouthAfricaGermanyBolivia(PlurinationalStateof)PhillipinesLuxembourgUnitedArabEmiratesBangladesh11.512.216.123.226.828.235.536.338.439.340.444.144.550.5Percentage109HIGHERVOLATILITYINWHOLESALEMARKETPRICESASTHEENERGYTRANSITIONUNFOLDS.THESPANISHCASEAstheenergytransitionunfolds,highervolatilityinwholesalemarketelectricitypricesisbecomingapparent.Ontheonehand,wholesalepricesmayspikedrivenbyspikesinthepriceofnaturalgasandtherolethatthistechnologystillhasinsettingthemarginalelectricitypriceinsomepowersystems.Gaspricefluctuationsmaybelinkedtothetransitioneitherdirectly(viaCO2pricing)orindirectly(viamismatchesininternationalgasmarkets).Aslowtransitiondelayingthephase-outofnaturalgasanditsswiftsubstitutionwithrenewableenergyandnon-fossilflexibilitywillextendtheseeventsintothefuture.Ontheotherhand,extremelylow(lessthanEUR1/MWh)orevennegativewholesaleelectricitypriceshavebeenalreadyexperiencedwhenVREproductionreacheshighshares.TheinitialCOVID-19lockdownsintensifiedtheoccurrenceoftheseeventsinsystemswithalreadysignificantVREcontributionbecauseoftheresultingreducedelectricitydemand.Asthetransitionprogresses,undercurrentorganizationalstructures,theincreasingsharesofVREgenerationwouldmaketheseextremelylowpriceeventsmorecommon.ThesedynamicshavealreadybeenplayingoutintheIberianelectricitywholesalemarketduring2020and2021(Figure31).WholesaleelectricitypricesdeclinedduringperiodsofhighsharesofhourswhenVREclearedthemarketprice,whichinturncanbedrivenbylowelectricitydemand(suchasduringthefirstCOVID-19lockdown-April2020)andhighsharesofVREgeneration(suchasinFebruary2021).JanuaryandFebruary2021provideanothergoodexampleofthesedynamics.TheFilomenastorminJanuary2021drawdemandup,withareductionofthenumberofhourswhenVREclearedthemarketprice,resultinginhighprices.InFebruary2021demandwentdownandVREshareup,withanincreasednumberofhourswhenVREclearedthemarketprice,resultinginlowerelectricityprices(Figure-31).Whengaspricesincreaseandgassetsthemarginalprice(suchasduringtheenergycrunchtriggeredbysupplysideconstraintsfromMay2021onwards),wholesaleelectricitypricesskyrocket.INFOCUS110RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONFIGURE31.Monthlyaverageclearedpricesinday-aheadmarket,electricitydemand,renewableenergyshare,andshareofhourswhenVREsetthepriceinIberia’swholesalemarket,2020-2022Source:REE,2022;OMIE,2022.Jan-2020Feb-2020Mar-2020Apr-2020May-2020Jun-2020Jul-2020Aug-2020Sep-2020Oct-2020Nov-2020Dec-2020Jan-2021Feb-2021Mar-2021Apr-2021May-2021Jun-2021Jul-2021Aug-2021Sep-2021Oct-2021Nov-2021Dec-2021Jan-2022Feb-2022Mar-20220%5%10%15%20%25%30%35%40%45%50%TWh/month1516171819202122Electricitypurchasedintheday-aheadmarket(TWh/month)ShareofVRE(%)HourswithVREsettingprice(%)Covid-19lockdownFilomenaStormRussia-UkraineconﬂictGassupplysidecontraint050100150200250300Jan-2020Feb-2020Mar-2020Apr-2020May-2020Jun-2020Jul-2020Aug-2020Sep-2020Oct-2020Nov-2020Dec-2020Jan-2021Feb-2021Mar-2021Apr-2021May-2021Jun-2021Jul-2021Aug-2021Sep-2021Oct-2021Nov-2021Dec-2021Jan-2022Feb-2022Mar-2022EUR/MWh%111InFocusLowelectricitypricesduringCOVID-19lockdownTheCOVID-19crisisprovidedaglimpseofthefuturewithregardtotheimpactofincreasingVREparticipationoncurrentwholesalemarkets.WhereasduringtheenergytransitiontheincreasingsharesofVREwillbedrivenbyincreasingVREcapacity,duringthepandemictheywereaconsequenceofthedecreaseindemand;however,inrelativetermstheimplicationsforthepowersystemaresimilar:VREgenerationisincreasinglyinvolvedinsettingthehourlymarginalpriceinthewholesalemarket,drivingdownprices.InSpainthemajorityofnewrenewablepowerplantssince2014havebeenconnectedtothegridwithoutanyadditionalregulatedpayment,relyingonthewholesalemarkettofullyrecovertheircosts(merchantrenewableplants).Between9Marchand21June2020,anation-widelockdownwasdeclaredinresponsetotheCOVID-19pandemic,withthestrictermeasuresreducingeconomicactivityandmobilityenforcedbetween19Marchand11May.Electricitydemanddroppedquicklywiththeconfinementmeasures,down15.7%onaverageinApril2020comparedtothepreviousfiveyears.ThelowerelectricitydemandledtohigherVREsharesthaninformeryears,surpassinginseveraloccasionsthe2019recordduringMarchandApril2020(REE,2022)(Figure32).FIGURE32.Variablerenewableenergyaverageandhourlypeaksharesbymonth,2019versus2020Source:REE,2022.0%10%20%30%40%50%60%70%JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember2019monthlyaveragehourlypeak2020monthlyaveragehourlypeakVREshare112RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONTheCOVID-19induceddropindemandledtoasubstantialreductioningreenhousegasemissionsfromthepowersystem(-44.3%inApril2020)(REE,2022).DespitesimilarsharesofVREgenerationthatsamemonthin2019(Figure32),averagemonthlywholesaleelectricitypricesalsofellinApril2020becauseofthehighershareofhourswhenVREsetthemarginalpriceduringthemonth(Figure31).Themonthlyaverageday-aheadclearingpriceinMarch2020wasEUR27.7/MWh(-27%comparedto2015-2019average),inAprilwasEUR17.7/MWh(-57%)andinMaywasEUR21.3/MWh(-52%)(Figure33).Figure35showsthepriceformationcurvesforApril2020at12p.m.,whenlowdemandandrelativelylargeVREgenerationpushedthepricedowntobelowEUR20/MWh.FIGURE33.EvolutionofmonthlywholesalemarketpricesinSpain,2020versuspreviousfive-yearaverageSource:REE,2022.0102030405060JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember5yearaverage2020EUR/MWhFIGURE34.SupplyanddemandcurvesinthewholesalepowermarketinSpain,12p.m.on16April2020Source:OMIE,2022.05010015020025030005000100001500020000250003000035000SupplyDemandEUR/MWhMWh113InFocusHighelectricitypricesduringtheenergycrunchInthesummerof2021,EuropeandAsiaexperiencedanenergycrunchduetovariousfactorsthatcreateda“perfectstorm”.Atfirst,thepost-COVIDeconomicrecoveryincreasedthedemandforenergyinthepowersectorandrecoveringindustries,particularlyinthechemicalsector.Thishappenedduringahotsummer(highairconditioningdemand)withlowwindpowergeneration.SummerisalsotheseasonintheEUwhennaturalgasreservesarefilledtocopewithwinterdemand.However,duringsummer2021theEUreserveswerebelowtheusual,promptingaggressivebuying.Atthesametime,ashortageingassupplyduetopoliticaltensionsandunexpectedbottlenecksgreatlycontributedtoincreasedgasprices.Sinceelectricitywholesalepricesaresetbymarginalpowerplants,highcostsofgasimplyhighelectricitypriceswhereandwhengassetsthemarginalprice,evenifVREalsocontributestocoverthedemandwithverylowmarginalcosts.Hence,withhighgaspricesandgasoftensettingthemarginalprice,usersarebeingimpactedbyextra-highwholesaleelectricityprices(aboveEUR200/MWhinmanyhoursof2021,reachingpeaksofEUR700/MWhinMarch2022)duetothepricingmechanismofthepowersystem.Forexample,at12p.m.on18Novemberlowmarginalcostplantsprovidedaround24GWh(75%ofthedemand),buttocovertheremaining8GWh,otherplantshadtobeactivated,withnaturalgassettingthemarginalpriceatEUR200/MWhforthishour(Figure35).Itshouldbenotedthatunderthecurrentmarginalpricingstructure,highwholesaleclearingpricesoccurmoreoftenthantheinstanceswhennaturalgasfueledtechnologiesdirectlyproducethesehighpricesbyclearingthemarketthemselves.Indeed,thehighnaturalgaspricesindirectlyimpactwholesaleclearingpricesthroughthebiddingbehaviorofotherdispatchabletechnologies,suchashydropower.Hydropowerplantsareveryawareofthenaturalgaspoweredplantbids(oftenareoperatedbythesameutility),andhencehavetheincentivetobidwithanopportunitycostjustbelowthenaturalgasbid.Therefore,highwholesaleelectricitypricesmayalsoresultevenwhennaturalgasplantsarenottheclearingtechnology.FIGURE35.SupplyanddemandcurvesinthewholesalepowermarketinSpain,12p.m.on18November2021Source:OMIE,2022.05010015020025030005000100001500020000250003000035000SupplyDemandEUR/MWhMWh114RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONIfVREpowerplantswerenotreceivingthewholesaleprice(merchantplants),butalong-termpaymentagreedbeforehand,theoverallelectricitypriceundereventssuchasthatshowninFigure35wouldbesignificantlylower,sinceonlyasmallfractionofoverallgenerationwouldberewardedatthishighmarginalprice.However,therequiredlongtermpaymentforVREishigherthanthelowmarginalcostbidsthatVREprovidestothewholesalemarket(Figure34),sinceitneedstocoveritslife-cyclecostsandprofitgoals.Itisimportanttonotethatunderthecurrentwholesalemarketstructure,infra-marginalplants,countonthedifferencebetweenitsmarginalcostsandtheclearedpricetorecoveritsCAPEXandtogenerateprofits.Moreover,thisdifferenceisthemaineconomicsignaltoencourageinvestmentinaliberalizedcontext.Itistheoveralllife-timeretributiontorenewableenergygenerationanditscertaintyforinvestorsthatwilldetermineitsfeasibilityandmakeitpossibletoreapthebenefitfromitspotentiallowgeneratingcosts(keepingfinancecostslow).LessonsfromtheSpanishexperienceTheextraordinaryvolatilityinwholesalemarketelectricitypricesinSpainduringtheCOVID-19pandemicandthe2021energycrunchillustratestheimpactfromsomeofthewholesalemarketmisalignmentsdiscussedinchapter4.Toproperlysteerthetransitionitiscrucialtobecomeawareofthestrongsystemicinteractionsatplaybetweenthepower,energy,economyandsociallayers.Thehighvolatilityinelectricitypricesmaytriggerstrongsocialreactions.Policyactioninresponsetohighpricesandtheassociatedsocialconcernmayintroducequickfixeswhichbymissingtheoverallpicture(itsbalancewiththelowpriceevents)producetransitionbarriers,ultimatelyhinderingtherequireddeploymentofrenewablesandflexibility.Indeed,duringthesecondhalfof2021,manyEUMemberStatesfeltpressurefromtheirpopulationstoreactwithmeasuresthatdelivershort-termresultsinordertoalleviatetheburdenofhighelectricitypricesonhouseholdsandcompaniesduringtheCOVID-19recovery.Withoutalong-termvision,someofthosemeasuresriskproducingadditionalbarrierstotransition.Aholisticapproachisneededtomakepowersystemorganisationalstructuresappropriatefortheenergytransitionandforarenewable-basedpowersystem.Thetimeisripetoholisticallyaddressthere-designofpowersystemorganisationalstructures.115InFocusAerialviewofsolarpanels,Andalusia,Shutterstock116Theexistingpowersystemorganisationalstructureswereconceivedandputinplacelongbeforetheenergytransitionwasgloballyacceptedasanecessity.Theyaretheresultofaprocessofadaptationtothetechnologicalandculturalchangesthathappenedinthepastinthepowersector.VIUswerethenormbeforethe1990s,whichwasconsistentwithgridexpansionneedsand,inmanycountries,withpost-WorldWarIIreconstructionefforts,takingadvantageofeconomiesofscaleandfocuseddevelopmentthroughcentralplanning.Inthemorerecentpast,duringthelastthreedecades,asustainedglobalefforthasbeendeployedtoinduceliberalisationinpowersystemsacrosstheglobe,promotingmarket-based,profit-drivencompetitionprocurementandallocationmechanismsinformerlypublic,centrallyplannedandverticallyintegratedsystems(seechapter3).Inrecentdecades,liberalisationhasbeenconsideredthepreferredpathwaytointroduceeconomicefficiencyinmostsectors,includingpowersystems,withthefinalgoalofbenefitingusersbyreducingpricesandtheirshareofrisks.Nevertheless,inpractice,liberalisationreformsofpowersystemsproveddifficulttoapplyuniversally,leadingtoawiderangeofhybridsolutionsbetweenliberalisedandregulatedsystems(Box19).THEROLEOFMARKETS:ENABLERSORBARRIERS?5117Interestingly,thedriversthatinthepastledtothepredominanceofregulatedsystems(intensegridexpansionneedsandareconstructioncontext)aregainingtractiontodayasthetransitionprogressesandsocio-economicchallengesareaddressed.ManycountriesintheGlobalSouthstillfaceveryimportantgridexpansionneeds,whichwillincreaseastheirpopulationsprogressalongtheelectricityaccessladder.EveninGlobalNorthcountries,theenergytransitionimposesadditionalgridexpansionneeds,becauseofboththeincreasingelectrificationofenergyservicesandtheneedtointegraterenewablegenerationandflexibilityresources.Theunfoldingclimatecrisisandtherecoveryimperativesfromthepandemicprovideacontextofurgencyandreconstruction(IRENA,2020d),wherelarge-scaleandhighlyco-ordinatedmeansofproductionandallocationseemtohavearoletoplay.Ananalysisofthehistoryofpowersystemorganisationalstructuresseemstopointtothefactthat,inthecurrentcontext,bothregulatedandliberalisedcomponentsmayhavespacetocontributetothetransitionandtoaddresscurrentchallenges.Therefore,itseemsworthwhiletorevisitthethinking(inheritedfromtherecentpast)thatconsidersliberalisation(markets)astheonlywayforward,andtosearchalsoforsynergiccombinationsofliberalisationandregulationthatcandeliverforthechallengesaheadindifferentsocio-economiccontexts.Already,theenergytransitionisproducingahybridisationofstructures,suchasregulatedsupportforrenewablepowerinliberalisedsystemsandcompetitiveprocurementofrenewablepowerinregulatedsystems(RoquesandFinon,2017).Addressingtheclimateemergencyandthebiodiversityandinequalitychallengesrequiressocietiestakingactioncollectivelyandwiththiscommonpurpose(collaboratively).Therefore,beyondtheregulationandcompetitioncomponents,organisationalstructuresmustaddresshowtoincorporateathirdcomponent:collaborationtoacceleratetheenergytransitionwithoutleavinganyonebehind.Thissectionexplorestherolethatcompetitivemarketsmayplayinfuturepowersystemorganisationalstructures,discussingunderwhichcircumstancesthesecanbeenablersorbarriersfortheneededenergytransition,andexploringitsappropriatemixwiththeregulativeandcollaborativecomponents.Thedriversthatinthepastledtothepredominanceofregulatedsystemsaregainingtractiontodayasthetransitionprogressesandsocio-economicchallengesareaddressed.118RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITION5.1.PRE-TRANSITIONLEARNINGSABOUTMARKETSINPOWERSYSTEMSTheelectricitysectorreformsthatstartedinthe1990swereframedunderageneraltrendtowardsprivatisationoftheeconomyinthepursuitofbettereconomicperformance.Liberalisationinthepowersector,asinthewidereconomy,wasbasedontheideathatthecombinationofcompetition,profitmaximisationandstrongincentivesformanagerialalignmentwiththeprofitmaximisationgoalwouldimprovetheeconomicefficiencyofutilityoperations(WorldBank,1993).Atthattime,manyVIUsoftensufferedfromsocialdisaffection,astheywerestrugglingtogetridoftheburdenofexcessivelybureaucraticmanagementandhaddecision-makingprocesseswithscarcepublicaccountabilityandhighvulnerabilitytopoliticalinstability.Thiscreatedafavourableenvironmenttoweakensocio-politicalresistancetoliberalisationinthepowersectorand,similarly,inmanyotherpublicservicessuchaswatersupply,railtransportorhealthservices.Internationalinstitutionsoftenreinforcedthetrendtowardsliberalisation,especiallyindevelopingcountries,bydictatingitasapre-requisitetoaccessinternationalsupportorfinance(Chang,2010).Figure36illustratespossiblewaystointroducecompetitionineachofthepowersystemsegments.Liberalisationprescriptionsinthepowersectorincludedverticalandhorizontalunbundling(seechapter3),thecreationofindependentenergyregulators,andtheintroductionofcompetitionamongcorporateproviders.Competitionamongprivatefirmshasfirstbeenintroducedinthegenerationsegment,wherefirmsprovideservices(IPPs,singlebuyermodelandbilateralcontracting)toaVIUthatalsomanagesitsowngenerationassets.Subsequentprogressalongthecompetitionladderinvolveseliminatingtheutilityandestablishingbid-basedwholesalemarketswhereallgeneratorscompetetoprovidetheenergyservicetothesystem;aswellastheintroductionofretailmarketswhereretailerscompetetoprovidethebestcost/servicecombinationforeachuser.Inafewcases,theintroductionofcompetitionhasalsoreacheddistributionandtransportactivities,gettingdifferentfirmstocontendfortherighttosupplytheserviceforaspecificperiodoftime(FosterandRana,2020;Steiner,2000).However,sincemostpowersystemstodaydonothavecompetitivecomponentsinthetransmissionanddistributionsegments,thesearenotfurtheraddressedinthisreport.FIGURE36.CompetitivecomponentsinpowersystemorganisationalstructuresGENERATIONSingle-buyermodelIndependantpowerproducersBilateralcontractingWholesalemarketcompetitionTRANSMISSIONANDDISTRIBUTIONCost-basedrateofreturnpricinginformedbythecomparisonbetweenoperatorsworkingindierentregionsCompetitionfortherighttosupplytheserviceonamonopolybasisforaspeciﬁcperiodoftimeRETAILOpeningfreechoiceofsuppliertroughretailmarketcompetition119Theroleofmarkets:EnablersorbarriersToday,mostcountrieshavesomeorallofthesecompetitivecomponentsintheirpowersystemorganisationalstructures.However,theprogressofthesecomponents,althoughhighintheGlobalNorth,hasbeenlimitedintheGlobalSouth(Figure37).Between2000and2015,therateatwhichdevelopingcountriesintroducedcompetitivecomponentsintotheirorganisationalstructureswaslow:40%ofdevelopingcountriesstoppedtheirprogresstowardsliberalisationattheveryearlystageswiththeintroductionofIPPsinamonopolisticenvironmentorthesinglebuyermodel.Competitionintransportanddistributionsegmentshasbeenquiterare.However,countriesthathadalreadylaunchedsignificantmeasurestointroducecompetitionby2005havegenerallycompletedthisprocessandgoneallthewaytoretailcompetitionby2015(FosterandRana,2020).Onlythreecountries(Albania,BoliviaandBurkinaFaso)reversedtheintroductionofcompetitivecomponents(Fosteretal.,2017).Definitions:1.Monopoly:asinglecompanyresponsibleforgeneration,transmission,distributionandretailsales;2.Independentpowerproducer:asprevious,butinaddition,privateIPPscancompetefortherighttogenerateashareoftheproducedelectricity;3.Singlebuyermodel:onesinglewholesalepowertrader,withnodirectinterestingeneration,thatpurchasespowerfromallgenerators,andsellsittodistributorsandlargewholesalecustomers;4.Bilateralcontracting:asinglebuyerofpowertradespowerforthemajorityofretailcustomers,whileallowinglargeuserstopurchasepowerdirectlyfromvariousgenerators;5.Wholesalemarketcompetition:apowermarketofmultiplegenerationfirmstradingdirectlywithmultipledistributioncompaniesandotherlargeusers,assistedbyanindependentsystemoperatorandmarketoperator.Smalluserscanbuyonlyfromtheirlocaldistributionsystemoperator6.Retailmarketcompetition:asprevious,butallowingallusers(smallandbig)topurchasepowerdirectlyfromretailcompanies.Itrequirespreviousverticalunbundlingofdistributionandretailcompanies,withdistributionsystemoperatorsprovidingopenaccesstothegridandprovidingservicestomultiplepowerretailers.Thecountrydatabaseincludes88developingcountries.ThecompletesetcanbefoundinFosteretal.(2017).Source:FosterandRana,2020.Afterafewdecadesofintroducingcompetitioninpowersystems,themovetowardsliberalisationhasresultedinsignificantdiversityacrosscountriesinthetiming,approachandaccomplishmentofreforms(Box20).Today,awiderangeofhybridorganisationalstructuresexist,especiallyintheGlobalSouth,betweenthetwoextremesofalmostfullyliberalised,unbundled,corporate-ownedpowersystems,andcentrallyplanned,verticallyintegratedandpubliclyownedones.FIGURE37.Evolutionofcompetitionelementsindevelopingcountries’powersectors0%25%50%75%100%1995200020052010201532%36%46%50%67%20%17%13%14%7%20%25%23%24%23%6%5%3%1%15%10%10%9%2%7%7%5%2%1%RetailmarketcompetitionWholesalemarketcompetionBilateralcontractingSingle-buyermodelIndependentpowerproducersMonopolyOnlyoneinfivedevelopingcountrieshasestablishedawholesalemarketandlessthanoneintenhasaretailmarket.120RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONBox20.AdoptionofpowersystemliberalisationreformatthegloballevelExpectationsofpowersystemliberalisationwerehighinthe1990s,includingthecreationofanindependentregulator,verticalandhorizontalunbundling(restructuring),theintroductionoftheprivatesectorindistribution,generation,andretail,andtheintroductionofcompetitioninprocurementmechanisms,notablygenerationandretail.However,afteralmost30yearsitsadoptionisfarfromuniversal.AccordingtothePowerSectorReformIndexusedbytheWorldBank,whereasmembercountriesoftheOrganisationforEconomicCo-operationandDevelopment(OECD)haveembracedonaverage78%ofthereformpolicyindicationsofthe1990s,theextentofassimilationintheGlobalSouthisonly37%(FosterandRana,2020)(Figure38).Scarcelyadozendevelopingcountrieshavecompletedthefullliberalisationreform,whilemosthaveadoptedamodelthatcombinessomefeaturesofcompetitionwithcontinuedstatedominanceofthesector(GratwickandEberhard,2008).Manysmall,low-incomestates(representingaquarterofdevelopingcountries)havejustmarginallyinitiatedreformsoftheirpowersystems.DespitethegreateradvanceofpowersectorliberalisationreforminOECDcountries,evenhereitsadoptionisnotcomplete.VIUspersistinsomecountriessuchasJapanandtheRepublicofKorea,whereverticalintegrationpreferenceisnotlimitedtothepowersector.Inothercases,theextentofprivatisationislimited,suchasinFrancewheremostofgeneration,transmissionanddistributionisstate-owned(Fosteretal.,2017).Researchshowsthattheprogressofliberalisationreformsdependsoneachcountry’sstartingsocio-economicandpoliticalcontext.Liberalisationhasadvancedthemostinmiddle-orhigh-incomecountriesthathaveasupportivemarket-orientedpoliticalenvironment,andinrelativelylargepowersystemswithawell-functioningframeworkoftariffregulation(FosterandRana,2020).Thetoolboxofreformsprescribedbyinternationaldonorsinthe1990sforpowersectorsindevelopingcountriesincludedfourmainelements:restructuring(verticalandhorizontalunbundlingofpowerutilities),privatesectorparticipation,settingupofanindependentregulatorandintroducingcompetitioningeneration.AsimplePowerSectorReformIndexhasbeenconstructedbyFosterandRana(2020)toevaluatetheadoptionofthefourdimensionsofpowersectorreformconsidered.Theindexgiveseachcountryascorefrom0to100oneachdimensionofreform,andtheaverageofthefourscoresprovidesanoverallsummaryoftheuptakeofliberalisation.Ahigherscoremerelyindicatesthatmorereformmeasuresweretaken;itdoesnotnecessarilysuggestabetterpowersectorperformanceororganisationalstructure.FIGURE38.Adoptionofpowersectorliberalisationreformatthegloballevel:ComparisonbetweenOECDandGlobalSouthcountriesonaverage0%20%40%60%80%OECDcountriesGlobalSouthcountries37%78%Source:FosterandRana,2020.121Theroleofmarkets:EnablersorbarriersIntheory,wholesalemarketsshouldprovideappropriatepricesignalstoguideproductionandinvestmentdecisions.However,forcompetitivewholesalemarketstoworkproperlyaseriesofdemandingpre-requisitesareneededintermsofgovernanceandenablingparticipation.Fulfillingthesepre-requisiteshasprovedtobechallenging66(Besant-Jones,2006;Pollitt,2012).Toimprovegovernance,theappropriatelinksalsoneedtobeestablishedbetweenwholesalemarketsandusersoftheenergyservice,providingthemeansforwholesalepricesignalstocascadedownsothattheycanhelpguideusers’decisions,andallowusers’actionstoinfluenceproducers’decisions.Competition,togetherwithindependentregulatorsandgoodgovernancemechanismsinfavourablesocio-economicandpoliticalcontexts,hasimprovedtheoverallefficiencyandfinancialviabilityofutilities,whilefacilitatingabetterenvironmentforinvestmentduringthefossilfuelera(Goldeng,GrünfeldandBenito,2008).However,evenwithinthefossilfuelera,whenprofit-drivencompetitionhasbeenintroducedwithweakerstartingconditions,ithasseldomledtopositiveresults,evenincreasingtheriskforpolicyturnabout(FosterandRana,2020;PerceboisandWright,2001;Pollitt,2012;YuandPollitt,2009).Furthermore,severalcountrieshaveshownthatitispossibletoachievecomparablepowersystemperformancewithoutadvancingtheliberalisationagenda(FosterandRana,2020).CostaRicaandUruguayaretwocasesinpoint,withcompetentstate-ownedverticallyownedutilitiesguidedbyclearpolicygoals,combinedwithamoregradualandtargetedrolefortheprivatesector(ICE,2020;UTE,2020).Thesesystemshavearesult-orientedgovernancethatalignsdecisionmaking,institutions,agentsandinstruments(insidethepowersystemandbeyond)towardsclearpolicygoals,respondingtoparticipation,transparencyandaccountabilityrequirements.Thisapproachhasallowedregulatedstate-ownedpowersystemstoimprovetheoperationofutilitieswhilemaintainingtheabilitytodealwiththepowersystemasawholeandtoproperlyaddresswidersocio-economicsysteminteractions.Suchanintegratedapproachoffersadvantageswhenaddressingdeeptransformationrequirementswithinlimitedtimeframes,suchastheenergytransition.5.2.COULDCOMPETITIONCONSTRAINTRANSITIONGOALS?Currentorganisationalstructures,withtheirdifferentbalancesbetweencentralplanificationandprofit-drivencompetition,representthestartingpointfortheenergytransitionineachcountry.Theroleofcompetitionisrelevantnotonlyforalreadyliberalisedsystemsbutalsoforregulatedandhybridsystemsthatareexploringtheroleitshouldplayintheevolutionoftheirorganisationalstructures.Mostoftheworld’sfuturepopulationwillbeinAfricaandAsia(Vollsetetal.,2020),twocontinentscurrentlydominatedbyregulatedorhybridpowersystemorganisationalstructures.Transformingpowersystemstructurescanbealongandchallengingprocess,asprovedbyexperienceswiththeattemptedliberalisationreform.Tofacilitatetheenergytransitionandpreventbarriers,powersystemorganisationalstructuresshouldevolvewithanticipation.Unfortunately,theyoftenlagbehind,reactingwithfixestotheupcomingchallengesinsteadofanticipatingthem.Theprosandconsofprofit-drivencompetitioninthecontextoftheenergytransitionareaddressedinthefollowingsections,withspecificattentiontotherolesofgovernance,generationandretail.66Amongothers,thesepre-requisitesincludeasufficientpoolofmarketparticipants,lackofunequalpowerpositionbyindividualparticipants,andlackofrestraintstoaccessthemarketandenableparticipation.122RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONTheroleofgovernanceandownershipstructureEventhebeststructuredmarketshavebeenunabletodeliveronsocialandenvironmentalimperatives(energyaccess,long-termrenewableenergyinvestment,fossilfuelphase-out,etc.).Asinregulatedenvironments,additionalpolicymeasureshavebeenessentialtoredirectandpromotetheneededinvestmentsforenergyaccessandtheenergytransition(FosterandRana,2020).Shiftingthespiritofthepowersectorfromoneofpublicservicetooneofshort-termprofitmaximisationcanbeatoddswhenitcomestoaccomplishinglong-termgoalssuchasgrantingenergyaccessandachievingresiliencewhileundertakingarapid,justandfairenergytransition(Thomas,2004;Weghmann,2019).Thecomplexityinvolvedinachievingthedesiredsocio-economicoutcomeswiththeexistinglocalpre-conditionschallengestheideaofmarketsbeingtheonlypossibleorganisationalstructuresfortheenergytransition.Theprivatisationdilemmaisnotexclusivetothepowersector.Othersectorsdealingwithvitalserviceshavebeenconfrontedwithopposingargumentsregardingprofit-drivenorganisationalstructures,especiallywhensocio-economicchangesaretakingplace(Box21).Alreadymorethan1500casesof(re)municipalisationofessentialserviceshavebeenmappedglobally,followingattemptstorebuildpubliccapacitytoprovidelocalservicesasadirectresponsetoexistingchallengesfacedbyprivatisedstructures(Figure39)(TNI,2020).Motivationsobservedforde-privatisationmeasuresinmanysectorsarediverse,buttheyoftenincluderevertingtheinadequateperformanceofprivatisationortheneedtoaligntheserviceprovidedwithwiderpolicyobjectives(environmental,socialorother).FIGURE39.Casesofde-privatisedpublicservicesmappedatthegloballevelSource:TNI,2020.Housing2%Waste6%Healthcareandsocialservices11%(Local)Governmentservices12%Education3%Food2%Transport4%Criminaljustice1%Telecommunications13%Energy24%Water22%123Theroleofmarkets:EnablersorbarriersWithescalatingpressuretocurbCO2emissionsandincreasingdissatisfactionwiththeoperationsofprivateutilities,politicaldebatesaregainingmomentum67aroundtheideaofwhetherstateownershipofutilities(asaproxyforsocietalcontrol)couldbeanappropriatewaytoacceleratetherateofenergytransitionwhilealsodeliveringsocialresilience.Somecountrieshaverecentlycreatednewstate-ownedutilities,driveninpartbytheprospectthatstate-ownedentitieswouldmakemoreclimate-friendlyinvestmentdecisions(Wollmann,KopricandMarcou,2016)(Box22).67Thiswasthecase,forinstance,duringthelastUKelectioncampaignandtheUSprimaryelectioncampaign(Bade,2020;Hodges,2019).Box21.Paris:Revertingmorethan30yearsofwatermanagementprivatisationFrommid-1980to2010,thepublicwaterserviceoftheFrenchcapitalcity(Paris)wasprovidedbythreeentities:ajointventureinchargeofwatersupplyandtwoprivatecorporationsinchargeofwaterdistribution.Auditsdemonstratedthat,asaresultofthisfragmentedapproach,watercostsforuserswere25-30%higherthanunderamoreintegratedapproach.Thiswentstraighttothecommunity’sbills,withthepriceofdrinkingwaterincreasing7%annuallyonaverageduringthisperiod(DPIDG,2014).In2007,thecitybeganaprocessoftakingoveritspublicwaterservice,creatingapublicauthority,EaudeParis,totakechargeoftheproductionanddistributionofwater.In2010(re)municipalisationwascompleted.Asaresult,tariffsdroppedby8%,some1200drinkingwaterfountainswereplacedacrossthecity,andaidwasestablishedforhouseholdsthatfacedifficultiespayingtheirwater,energyandhousingbills.Theseactivitiesrespondedtothepublicauthority’scommitmenttotreatwaterasavitalcommongoodasopposedtoacommodity(TNI,2020).Tostrengthenparticipation,theboardofEaudeParisiscomposedofelectedmunicipalofficials,staffrepresentativesandmembersofwaterrightsandenvironmentalnon-governmentalorganisations.Thisopengovernance,togetherwithopenpublicaccesstoallkeyinformationaboutthewaterserviceandmanagement,enableswidesupervisionofEaudeParis’activitiesanddecisions.In2017,EaudeParisreceivedtheUnitedNationsPublicServiceAward,acknowledgingitssustainedeffortinimprovingitsaccountability,transparencyandintegrity.124RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONPrivateprojectdevelopershaveopenedthespacefornewrenewableenergytechnologiesinanumberofcountries(Steffen,B.etal.,2018).However,nowthatrenewabletechnologieshaveproventheirmaturity,largeincumbentutilities(betheyprivateorpublic)areimportantinscalinguptheadoptionofrenewablesacrosstheworld.Atthisstage,andwhenconducivepolicyandgovernanceenvironmentsareinplace,stateownershipbecomesasanoptionworthconsideringtoalignutilities’technologicalchoiceswithtransitionrequirements.Wherestateownershipexists,policymakerscanstrategicallytakeadvantageofthisownershipstructuretoadvanceinachievingclimatetargets(Steffen,KarplusandSchmidt,2020).However,thisrequiresstringentgovernancemeasuresbothonthepolicysideandinutilityoperations,withsocialparticipationandsupportbeingkeytoachieveefficiencyandeconomicsustainability.Box22.Stateownershipandrenewableenergytechnologyadoption:ThecaseoftheEUInbothprivatelyownedandstate-ownedutilities,someinvestmentsdonotrespondtosocialdemands(decarbonisation,energyaccess,etc.).Moreover,nosystematicworldwideevaluationisavailableonthelinkbetweenownershipmodelsandpro-activityintheadoptionofrenewableenergytechnologies.However,Steffenetal.(2020)studiedthegenerationinvestmentdecisionsofbothprivatelyownedandstate-ownedutilitiesintheEUduring2005-2016.Resultssuggestthat,underthesamepolicyenvironment,state-ownedutilitiesdevotedhighersharesofinvestmentsto(non-hydropower)renewablescomparedtoprivatelyownedutilities.However,stateownershipdoesnotexertitsinfluenceinavacuum:itinteractswiththeexistenceofpro-adoptionpoliciesandstateenforcementcapabilities.Forinstance,Belgianstate-ownedutilities,between2005and2016,devoted79%oftheirtotalinvestmentingenerationto(non-hydropower)renewableenergy,whereasprivatefirmsdedicated51%.IntheCzechRepublic,noprivatefirmsinvestedinrenewableenergycapacityadditionsabove1MWbetween2005and2016,whereasstate-ownedutilitiesdevoted92%oftheirinvestmenttorenewablegenerationduringthesameperiod.AnexceptionisItaly,whereprivatecorporationsdedicated20%ofgenerationinvestmentstorenewableenergy,butpublicutilitiesdedicatedonly2%,withtheresultingprivateabsoluteinvestmentbeinghigherthanthepublicone.Thehigherpropensityofstate-ownedutilitiestoinvestinrenewablesseemstobetheresultofamorefavourableinteractionbetweensupportpoliciesandthegovernments’influenceontheirutilitiestoproperlyusethesefavourablecircumstances,althoughotherfactorscouldalsoplayarole.AllEUMemberStatesretainoneormorestate-ownedutilities,exceptLuxembourgandSpain.ExamplesincludetheSwedishpublicutilityVattenfallandthePublicPowerCorporationofGreece.125Theroleofmarkets:EnablersorbarriersInpractice,neitherpublicverticallyownedutilitiesnorliberalisedcompetitivesystemsaresocio-economicallyefficientandsustainablebydefault.Bothcanbecapturedbybureaucracyandinefficiency,byvestedinterestsandevenbycorruption.Thus,whateverthechosenpathway(publicownershiporliberalised),asuccessfultransitiondependsonstrong,high-qualityregulationandgovernance.Governance,inturn,requiresadvancedformsofsocialparticipationwheresocietycandirectlyandindirectlyparticipateindecisionmaking.SomeofthebenefitsandpossiblelimitsrelatedtotheownershipregimeofpowersystemsaresummarisedinTable1.BENEFITSCHALLENGESPUBLICLYOWNEDREGULATEDPOWERSYSTEM•Easiertoaddresselectricitysupplyasapublicservice.•Easiertoimplementmandatesforuniversalaccess.•Easiertoimplementmandatesforachievingclimateandenergygoals.•Increasedcapabilitytoscaleuptransitionrates(bettercrisisresponsecapabilities).•Possibleeconomicinefficiencyburdeningtaxpayersand/orelectricityusers.•Inabsenceofgoodgovernance,higherinertiatointroducechangesinadvancetofullblown-upcrisisperiods(lackofanticipation).•Riskof“regulatorycapture”.•Potentialinstitutionalpowerabuse.•Highvulnerabilitytopoliticalinstability.PRIVATELYOWNEDLIBERALISEDPOWERSYSTEM•Privatestakeholdersstimulatedtodelivereconomicefficiency.•Risksof“wrongbusinessdecisions”are,intheory,bornbyshareholdersalone(reducedriskforusers).•Orientedtocostcompression.•Nicheprivateactorscanbeearlyadoptersofnewtechnologiesandhenceacceleratechangeinfirststagesoftransformation(anticipation).•Higherinclinationandroomtoexternalisesocialandenvironmentalimpacts.•Marketmisalignmentswithsocialgoalsandprotectiveenvironmentforcorporateactivitymayburdentaxpayerswitheconomicinefficiencies(bailout,regulationcosts,etc.).•Privatestakeholdersnotstimulatedtodeliversocialoptimum.•Slowerresponsetocrisissituations,witheconomicinertiaslinkedtoinvestmentrecoveryslowingdowntransformationrates.•Competitiveorganisationalstructuresdifficulttoimplementuniversally.•Potentialcorporatepowerabuse.TABLE1.Potentialbenefitsandchallengesofpubliclyownedregulatedpowersystemsandprivatelyownedliberalisedpowersystems126RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONGeneration:Thecaseoflong-termprocurementLong-termprocurementisalwaysneededforsystemadequacy.Butinatransitioncontext,whenthesysteminfrastructureisbeingrefurbished,itbecomesevenmorecrucial.Wholesalemarkets,whendesignedtobeenergy-onlymarkets,focusonshort-termprocurementanddependonindirectpricesignalstospurtherequiredlong-terminvestments,withpowersystemadequacyhingingonthese.Long-termcompetitiveprocurement(ofrenewableenergy)hasbeenintroducedinmanycountrieswiththeaimofminimisingpublicexpendituretosupportthetransitioninbothregulatedandliberalisedsystems(IRENA,2019b).Thedifferentcompetitiveprocurementmechanismstoguaranteegenerationinthelongtermcanbeclassifiedintwomaingroups:1)procuringelectricityviaanIPPthatbuilds,ownsandoperatesthepowerplants(inbothliberalisedandregulatedenvironments),mainlythroughauctionedPPAs;and2)procuringpowerplantsthroughcompetitiveEPC(engineering,procurementandconstruction)biddingprocesses,withthepowerplantsbeingoperatedeitherbytheVIUorbyindependentoperatorsthatcanbecompetitivelyselected.PPAauctionsandEPCtenderingpresentanalogiesanddifferences.Bothcasesopenthegenerationsegmenttonewentrants(betheygeneratorsorconstructors),andbothallownewtechnologiestoemergewithinsystemsdominatedbytraditionalactorsandthegenerationtechnologiesthattheymaster.Also,bothschemesprovidemeanstocontroltherateofrenewablecapacitydeploymentand,therefore,itscost.ThemaindifferencebetweentheIPPandEPCapproachesliesintheriskallocationtothedifferentstakeholders.PPAauctionsallocateahighershareoftherisksontheprivatecounterpart,whichfinancesandprocures68thepowerplant,operatingittorecovertheupfrontinvestmentplusthebenefitmarginalongtheplant’slifetime.EPCtendering,incontrast,allocatesahighershareoftheriskstoVIUs,whichhavetofinanceandprocurethepowerplant.Inexchange,ifproperlyarticulateditallowstheutilitytobettertailortheplant’sdesignandoperationtotheneedsofthepowersystem(especiallyrelevantinatransitioncontext).Long-termeconomicbenefitsandknow-howarisingfromtheprocurementandoperationoftheplantremainwiththeutility,whichcanre-investtheminmorerenewablepowerplantsthatarebettersuitedtosystemneeds,orcontributetothenationalfiscalbudgetincaseofneed.Thisallowsbetteradjustmentofprofitmarginsanditsbalancewithsocialbenefits.TheEPCapproachalsoprovidesmoreroomtoenhancetechnologicallocalisation,whichinturncanfacilitatethetransitionandallowforincreasinglocalsocio-economicbenefits.Anadditionalrisk,commontobothPPAauctionsanddirectpublicinvestment,isthatoftheuncertaintyinelectricitydemandandtechnologicalevolutionestimates.Underbothlong-termprocurementoptionstheseestimatesaredonebytheregulator/government,andhencerisksaredirectlypassedtofinalusers.Inafullyliberalisedcontext,merchantplantsintheorywouldassumeabiggershareofthisrisk,butonlyaslongasmisalignmentsareproperlyaddressedandappropriategovernanceisinplace.68IPPscontractanEPCfirmforconstructingthepowerplant,andhenceundertakealltheEPCmanagementrisk.127Theroleofmarkets:EnablersorbarriersHowever,whencompetitionispurelybasedonpriceminimisationitrisksreducingthesocialvalueofrenewablesdeployment.InPPAauctionsitoftendisplacessmalleractors(whicharenotabletoaccesseconomiesofscaleorcheapfinancing)(Fell,2017;Grashof,2019;IRENACoalitionforAction2020).Thisresultsinareduceddiversificationintermsofdirectbeneficiaries(HermannandFlecker,2009)andtriggerspowerdynamicsthat,inturn,mayinducehighersystemandsocialcostsbecauseofunder-building,delayedprojects,sub-optimaltechnologicalandgeographicaldiversification,lowerstimulustopayattentiontolocalenvironmentalissuesandlackofsocietalinvolvement.Onthecontrary,stableandaccessibleallocationmechanismswithstraightforwardrulesadaptedtoallusers,suchasregulatedfeed-intariffsandnetbillingschemes,tendtoleadtoincreasedparticipationandhighersocialacceptancebecausetheyinvolvehouseholds,smallandmedium-sizedbusinesses,communities,energyco-operativesandmunicipalities(Bayer,SchäubleandFerrari,2016;Fell,2017;Kahl,KahlesandMüller,2014).SimilarissuescanariseinthetenderingofEPCcontractsbyVIUs.Whentendersarebasedpurelyonpriceminimisation,theyincentiviseinvestmentinlarge-scaleplantsofthecheapesttechnologylocatedinregionswithoptimumrenewableresources,excludinglocalcompaniesanddisregardingsocietalinvolvement,andnotpayingdueattentiontolocalenvironmentalandsocio-economicissues.Hence,forboththeIPPandEPCcompetitiveapproachestodeliverinthesocialdimension,goodgovernanceneedstobeinplace.Attheglobalscale,competitionishelpingtodrivedownthecostofrenewablesandstoragetechnology,makingtheenergytransitionincreasinglycheaper(IRENA,2020a).However,anarrowfocusonpriceminimisationleadstoanunevendistributionofthepotentialtransitionbenefits,triggeringextractivedynamicswithnegativesocialandenvironmentalimpacts(e.g.degradedemploymentconditionsandecosystemimpacts).Additionally,underexistinginternationaltradeagreements,measuresintendedtomaximisethelocalsocio-economicbenefitsofthetransitionmayberejectedas“protectionistmeasures”(HajdukiewiczandBoźena,2020).Hence,althoughcompetitioncanpotentiallybringvaluetothelong-termprocurementofrenewablegenerationinbothliberalisedandcentrallyplannedsystems,goodgovernanceisamusttoreapthesebenefits.Whenbasedoncollaborative,open,transparentandsociety-wideparticipatoryprocesses,long-termprocurementmechanismscanbemoreaccessible,stableandbalanced,improvingsocialparticipationdynamicsandfosteringtransitionbenefitsforlocaleconomies(Box23).Solarfarm,Sevilla,Shutterstock128RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONBox23.KeysandchallengesforsocialvaluecreationwithrenewablepowerplantdeploymentThedeploymentofrenewablepowerplantsoffersthepotentialtocreatesocio-economicvalueinlocalcommunities.However,reapingthesepotentialbenefitsdependsonproperandholisticmanagementofthetechnology,socialandpolicydimensions.Meaningfulparticipationoflocalcommunitiesintheplanning,deploymentandoperationofrenewablepowerplantsisessentialtodrivesocialsupport,avoidingdistrustintheseprojectsandintheenergytransitioningeneral.Emvelo,aSouthAfricancompany,hassetthesocialgoalofunlocking“greeneconomy”opportunitiesinruralareas,therebyreversingcurrenturban-ruralmigrationtrends.Emvelo’sexperienceprovidesinsightsonhowtoreapthepotentialforsocialvaluebeyondformalcompliancewithlegalrequirements.Italsohighlightstheextremerelevanceofappropriateandstablepolicyframeworksandenergyplanninginmaximisingsocialvaluecreation.In2009,intheaftermathoftheeconomiccrisis,EmvelobeganactivitiestodeployaConcentratingSolarPower(CSP)plantinUpilangaKaroshoekSolarParkintheNorthernCape,aprovinceendowedwithverygooddirectnormalirradiation(DNI),thesolarresourceusedbyCSPplants.CSPhashighsocio-economicvaluefortheprovincebecauseof1)itshighpotentialforlocalisation(abigshareoftheplantcomponentswerelinkedtoskillsandsupplychainsalreadydevelopedforotherindustriessuchascivilworksandpiping)and2)familiarityoftheSouthAfricanpowersystemwiththermalpowerplants(whichhavemanycomponentscommonwithCSPtechnology).Moreover,CSPwiththermalstorageisadispatchablerenewablepowerplant,contributingtotheflexibilityneededtoenabletheintegrationofothernon-dispatchablerenewablepowerplants.Theresultingplant,Ilanga-1,isa100MWCSPplantwiththermalstorageandisthefirstoperationalCSPprojectdevelopedbyEmvelo.Projectdevelopmentstartedin2009,beforeSouthAfrica’sRenewableEnergyIndependentPowerProducerProcurementProgramme(REIPPPP)wasinplace,withastrongfocusonlocalcommunityinvolvement.TheREIPPPPprovidedalegalframeworktointroducerequirementsforIPPprojectstopromotelocalsocio-economicdevelopment.Bidswereweighted70%onthebasisofpriceand30%onsocialelementsofthepresentedproject(IRENA,2019b).In2011,thefirstwindowoftheREIPPPPtookplace.However,duetoadministrativehurdlestheIlanga-1projectdidnotparticipateintheREIPPPPuntilthethirdbiddingwindow(2013).Emvelofocusedongoingbeyondtheminimumlegalsocio-economicrequirementssetbytheREIPPPPandaimedtoreapthefullpotentialsocialvalueofCSPtechnologybyaddressingthefollowingdimensions:•Jobs:maximisingthelocalandnationalworkforceduringconstructionaswellasoperationsandmaintenance(O&M).•Supplychains:preparinglocaleconomicentitiestohavethecapabilitytoprovideservicesandproducts.•Management:maintaininglocalinvolvementinplanning,constructionandoperation,toguaranteethatdevelopmenttrulydeliveredontheplannedsocialgoals.•Ownership:Fosteringlocalandcommunityownershipofthepowerplantthroughequityparticipation,bothinconstructionandO&M.TheIlanga-1planthas80%localequityshareholders(theoriginalgoalwas100%,butlendersrequestedtheinternationalEPCfirmstotakea20%equitystake).Amongthelocalequityshareholders,thehostcommunityholds129Theroleofmarkets:Enablersorbarriers15%equitythroughacommunitytrustestablishedbyEmvelo(higherthantheminimummandatory5%undertheREIPPPP),withdividendflowsfromthefirstdayofoperation.Whiletheloanisbeingrepaid,90%ofcommunitydividendsgotolendersand10%tothecommunity;oncetheloanisrepaid(after16yearsofoperation),100%ofcommunitydividendswillflowtothecommunity.Thisdividendflowscheme,togetherwiththelegallymandatory1%overtheplant’selectricitysales,hasapositiveeconomicimpactonlocalcommunities,whichcanundertakemeaningfulprojectsfromthestartofplantoperation.Mostprojectssharedividendswithcommunitiesonlyoncetheinitialloanhasbeenrepaid(normallyafter12to16years).Thisdelayinreceivingdividendscancreateresentmentincommunities,reducingprojectacceptanceandcommunities’willingnesstosupportfutureprojects.Beyondthat,thehostcommunityhasbeeninvolvedinthedevelopment,constructionandoperationsofIlanga-1,withregularstakeholderengagementmeetingsfromtheearlystages:thesocialteammetonceamonthwithcommunitygroups,andeveryquartera“leadershipmeeting”tookplacebetweenhigh-levelhostcommunityrepresentatives,themayorofUpingtonandIlanga-1developerstoprovidefeedbackandsolveanychallenges.Theholisticfocusoncommunityinterests,asopposedtoestablishingpersonalrelationswithafewlocalleaders,resultedinimprovedtransparencyandgovernance.Ilanga-1wasalsothefirstCSPprojectinSouthAfricawhereaSouthAfricandeveloper(Emvelo)wasa20%shareholderintheconstructionphase,assumingmanagingresponsibilities.Thisprovidedtheintegrationandspacetobuildlocalcapacityandeffectiveskillsandknow-howtransferfrominternationalEPCcontractors,whileatthesametimeboostinglocalisationeffortsbeyondtheminimumbidrequirements.Localenterprisesweredevelopedtosupplybasicservicesrequiredbytheproject(transport,cateringandothernon-technicalservices).Oncetheconstructionphasewascompleted,93%ofthestaffdirectlyemployedduringthethree-yearwarrantyperiodtooperateandmaintaintheplantwereSouthAfricans,halfofwhomcamefromthelocalcommunitywithina50kilometreradiusofthesite,andwereselectedamongthetraineeswhoattendedthefirstCSPOperationsandMaintenancetrainingcourseinUpingtonprovidedbytheIlanga-1partners.Afterthecompletionofthewarrantyperiod,thepartnershavecommittedtograduallyreacha100%SouthAfricanoperationsteam.Renewableenergyprojectdevelopmentinvolvescomplexsocialdynamics.Addressingthese,andpreventingthemfrombecomingbarriersfortheprojectandtheenergytransitionitself,requiresimprovedgovernancewitheffectivecommunityparticipation.FortheIlanga-1plant,thelocalpartner(Emvelo)fosteredcommunityparticipationandgovernancewellbeforetheproject’sonset,undertakingpro-activestepstobuildtrustandrelationshipswithlocalcommunities.Asaresult,socialunreston-sitewasneverexperiencedduringprojectdevelopment,andunioninvolvementduringtheconstructionphasewasminimalincomparisontootherrenewableenergyprojects.Buildingtrustwithlocalcommunitiesrequiresafocusedeffortandagoodtrackrecordfromprojectinceptionthroughallprojectstages.Deployingthissignificantsocio-culturaleffortonaper-projectbasismaybeinefficient:astablepipelineofprojectssupportedbypoliticalcertaintywouldgreatlyimprovetheprocessbyunlockingsynergies.Asignificantgapalsomayexistbetweenauctiondesign/projectproposalandimplementation.Explicitsocio-economicgoalsinprocurementprocessesarenecessarybutnotsufficient.Administrativegoalstendtosetaframeworktojustifycompliancewithbareminimums.Potentialgapsbetweenpost-antejustificationandrealimplementationmayarise,aggravatedbylimitedmonitoringofrealresults.130RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONMaterialisingthetheoreticalsocialvaluestatedonpaperintheprojectproposalmaybefacilitatedbycontinuousanddirectactiveinvolvementoflocalpartnersinmanagementofconstructionandoperations,withastrongsocialfocustobridgethegapsbetweenthecontractor’sdevelopmentandconstructionteamsaswellasbetweenlocalsandexpatriates.Localisingatechnologyandprovidingsocio-economicvaluetolocalcommunitiesrequiresfarmorethandesigningauctionschemerequirements.Trueandlastinglocalisationrequiresgoodplanning,stableregulationandpolicy,andappropriateimplementationandfollow-up.Localisationbidrequirementscaneasilybefulfilledonpaperby,forinstance,resortingto(usuallyurban)populationswiththerequiredskillsthatareresidentsofthecountrybutlocatedfarfromthesite.Thisprovideseconomicstimulustothecountrybutnotnecessarilytolocalcommunitiesandcanintroducesocialdynamicsthatultimatelyconfrontthelocalpopulationwiththeproject.Althoughoutsourcingjobscanbeappropriateforsomeservicesandtasks,forothers,givenappropriateplanning,thelocalcommunitycanbeinvolvedtobringmorelocalisedsocio-economicbenefits.Involvingthelocalpopulationinthelocalisationprocessrequiresidentifyingupstreamanddownstreamopportunities.Planningandanticipationtotrainthelocalpopulationiskey,sothatthecommunityisreadywhentheprojectrequiresitsparticipation.Localisationalsorequiresprovidingstabilityofjobopportunitiesandtrainingprogression.“Kneejerk”trainingcanbemoreofadisruptionthanarealsupportforlocalsocio-economicprosperity,sinceitleadsindividualstoinvesttimeandeffortinsomethingthatmaynothavecontinuity,potentiallyrequiringthemtostartoveraftertheprojectcycleiscompleted,wastingskills,trainingeffortsandtime.Gettinglocalsupplychainsworkingalsorequirescontinuity.Stimulatingthelocaleconomyanddevelopinglocalskillsrequiresapredictablepipelineofprojectssupportedbyasustainableandstablepolicy,sothatworkersfromthecommunitycanfindcontinuityintheirtrainingandprofessionsandlocalcompaniescanprogressalongthelearningcurve.Emveloispursuingthiscontinuityandsustainabilitydespitesignificanthurdles.Thefollow-upproject,Ilanga-2(100MW),wasnotawardedpreferredbidderstatusinbidwindow3.5(2014)becauseofadministrativebarriersbidwindow4didnotincludeCSP.Forbidwindow4.5(2015),EmvelopresentedthreeCSPplants(450MW)forNorthernCape(Ilanga-3,Ilanga-4andIlangaTower1),butthisbiddingwindowwascancelled.Biddingwindows5and6(2021)didnotincludeCSP.EmveloisnowexploringalternativeapproachestotheREIPPPP,suchasbilateralcontractswithprivateoff-takers(miningcompanies)andthepossibilityofreplacingbaseloadcoalgeneration(1600MW)ascurrentlyenvisagedunderSouthAfrica’s2030IntegratedResourcePlan(IRP).ThecommunityengagementfromIlanga-1isongoingtoday,withafocusonimprovingsocialdynamics,providinglocalsocio-economicvalue,empoweringlocalcommunitiestosteerthetransitiontowardssustainableeconomicactivity,andservingasabasisforfutureprojectdevelopmentatUpilangaKaroshoekSolarPark.REIPPPPistheauction-basedsupportmechanismforrenewablepowerdeploymentinSouthAfrica.131Theroleofmarkets:EnablersorbarriersIntroducingcompetitionintheretailsectorTheenergytransitionisnotonlyasupply-sidestory.Itrequiresactivatingawiderspectrumofagentsonboththesupplyanddemandsidestoproviderenewablegenerationandflexibility.Tomaximisethesystemvalue,anappropriatebalancebetweencentralisedanddistributedassetswillbeneeded.Clearsignalstousersareneededtoinduceadequateinvestmentandtoactivatedemand-side(centralisedanddistributed)serviceswhenneeded.Historically,inbothliberalisedandregulatedsystems,users’involvementinpowersystemoperationhasbeenaddressedthrougheconomicsignalsprovidedbyretailratesorregulatedsupplytariffs.Thedesignofeconomicsignalsishenceinstrumentaltofosterfavourableuserbehaviourwithregardtoproducing,usingandstoringelectricity,savingenergy,adaptingdemandtoVREcapabilitiesandincreasingenergysystemelectrification.Retailrates(liberalisedsystems)andsupplytariffs(regulatedsystems)arealsotheprevalentrevenuestreamforcostrecoveryinthepowersystemandforthefinancialviabilityofutilitiesinmostjurisdictions.Whileanexcessiveburdenonusersthroughtheirbillshasnegativesocio-economicandwelfareimpacts,amisalignmentbetweenprices/tariffsandsystemcostscanputatriskthefinancialviabilityofutilitiesoraddfurtherburdenonnationalbudgetsinordertocompensatetheimbalance(hencedetractingfiscalresourcesfromotherpublicspending).Inregulatedsystems,theVIUortheregulatorisinchargeofsettingsupplytariffs,whereasinliberalisedunbundledsystems,eachretailersetstheretailpricesofferedtoitsusers(incorporatingtheimpactofthetariffssetbytheregulatortocoverregulatedactivities).Somelevelofregulatedtariffsmayco-existinliberalisedenvironments,especiallyincontextswhereprotectionto(vulnerable)consumersisconsideredtobeimportant(e.g.EUlegislation).Cost-reflectivetariffsandfiscalsustainabilityarenotauniquepreserveofliberalisedsystems,nordoestheliberalisationoftheretailsectorguaranteethenon-interventionofpublicauthoritiesinelectricityprices.IntheliberalisedpowersystemsofEUMemberStates,instancesofelectricitypriceinterventionincreasedin2019:80%ofMemberStatesindicatedthattheprotectionofuserswasthereasonforpublicinterventioninpricesetting(ACERandCEER2019).Liberalisationoftheretailsectorwasexpectedtoimprovetheadherenceofretailratestocostrecovery,whileallowinguserstochoosethepowerretailerofferingthepriceandservicequalitycombinationthatbestmatchestheirneeds.Thisgoalhas,tosomedegree,beenachievedinsomecountries,mainlyintheGlobalNorth(Jamasb,2002).However,asaresultofretailcompetition,somecountrieshaveexperiencedretailpricesabovethosethatwouldreflectthepowersystem’scosts.Inothercountries,inappropriateretailpricedesignhaspreventedsmallerusersfromenjoyingthecostcompressiondeliveredbywholesalemarketcompetition.Retailcompetitionhasoftenworkedbetterforindustrialandlargecommercialusersthanforresidentialandsmallcommercialusers,forwhombenefitsareoftennotsoclear(Green,2000;Joskow,2003a).Supplyingelectricitytosmallusersisrelativelyexpensiveforretailers,andtheseusersdonotseemparticularlypronetoswitchingtheirretailer.Thislowpropensitytoswitchtheretailerandtheirlimitedcapacitytonegotiateandcontroltheretailer’sperformance,canresultinsmallusersinliberalisedsystemshavingtopayhigher-than-neededpricesfortheirelectricityservices,duetopowerdynamics(ACERandCEER,2019).132RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONCompetingretailerswerealsoexpectedtosparkawideportfolioofenergy-relatedservicesbeyondonlysupplyingelectricity,suchasenergy-as-a-serviceproducts(IRENA,2020e),aggregationofdistributedenergyresourcesandotheroptionstobettermeetindividualuserpreferences(Joskow,2003b).Competitionopensthedoortonewentrantsthattendtobemoreagileinadoptinginnovativeapproaches(PoplavskayaanddeVries,2020).Forexample,theembeddednetworksintroducedinAustraliafacilitateretailratesthataremorefriendlytodistributedenergyresourceswithinthejurisdictionofspecificminigrids(seechapter6).Anothercaseisretailersofferingdynamicpricingforelectricitytouserswhochoosesointheliberalisedretailmarket.InFinland,forinstance,someretailersofferprice-optimisedheatinghours,onthebasisofweatherconditionsandtheheatingcapacityused,whichmayhelpsaveupto15%onheatingexpenses(Eurelectric,2017).However,theexpectationofincreasingtheportfolioofofferedenergyserviceswithvalueforusershasnotfullymaterialised,especiallyforsmallusers.Innovationrelatedtodemandresponseandthecapabilitytoprovideadditionalenergy-relatedserviceswithvalueforusers,however,arenotapreserveofcompetitiveenvironments.Forexample,NewZealand’ssystemoperatorhasbeencontrollingdemandsincethe1950s,wellbeforeitsliberalisation(MBIE,2015).Thesystemoperatorintroducedhotwaterripplecontrolthatallowedtheelectricitysupplyauthorities(distributionsystemoperators)toswitchoffcustomers’electricwaterheatersifrequired(Transpower,2019).Thisisconsideredoneofthefirstexperiencesindemandmanagement(IRENA,2019c).Thus,whilecompetitionintroducedintheretailsegmentofpowersystemscanfacilitateinnovationdiffusionleadingtotariffsandservicesalignedwiththetransition,regulatedverticallyintegratedsystemsalsohavetheabilitytodirectlyscaleupchangestosupportthetransitionwithgoodco-ordinationwithothersectors(mobility,telecommunications,etc.)ifappropriategovernanceisinplace.Balancingtherisksandadvantagesofexposingsmallelectricityuserstocompetitioninretailpricingisanongoingtaskthatneedsspecialattention.5.3.TRANSCENDINGCOMPETITIONTHROUGHCOLLABORATIVEAPPROACHESBeyondregulationandcompetition,organisationalstructuresneedtoconsiderhowtofostercollaborationtoacceleratetheenergytransitionwhilemaximisingitssocio-economicvalue.Materialisingtherequiredcollaborative69effortneededtoaddresstheclimatecrisisrequiresaligningeverybody’seffortstocurbemissions.Aligningefforts,inturn,requiresbuildingaframeworkoftrust,wherecitizensperceivethatgoodgovernanceisinplace,thatnoonewillbeleftbehind,andthattheburdenandbenefitsofthetransitionarefairlyshared.Fosteringsuchacollaborativeframeworkrequiresmultipleingredientsincludingwiderparticipation,improvedgovernance,equilibratingtherolesofproductionanddemand,evolvingmarketdriversfromprofitmaximisationtosocialservice,andconfidencethatresourceusewillbekeptwithinplanetaryandsociallimits(BotsmanandRogers,2011;Gansky,2012).69Collaborationandco-operationaretermsthatareoftenusedinterchangeablybutthathavedistinctmeanings.Collaborationreferstotheactivitiesofagroupofagentsthatpursueacommongoal.Inthiscontext,thegoalistocompletetheenergytransition.Co-operationmeansthatagroupofagentsagreestocontributetothegoalofadifferentgroupofagents.Thedifferencebetweencollaborativeandco-operativeprojects,inotherwords,isownership.Thedistributedcharacterofrenewableenergysources,energysavingsandflexibilitymakesitpossibleforeverybodytobeinvolvedandtoowntheenergytransitiongoal,hencetocollaborateforitsaccomplishment.133Theroleofmarkets:EnablersorbarriersCollaborationcancontributetoaligningthecost,priceandvaluedimensions(seechapter4)inbothregulatedandliberalisedprocurementofelectricityandflexibility,preventinganunequaldistributionofthebenefitsandburdensofthetransition.Collaborationcansparkwider,effectiveandtransparentparticipationinthepowersystem,helpingtoalignpowerstructuresandutilities’goalswithsocialvaluecreation.Facilitatingcollaborationacrosstraditionalknowledgeboundariesbybridgingmultipleperspectivescouldprovideinnovationandbettersolutionsthananyoftheinstitutionsandactorswouldhavereachedbyactingalone.Collaborativeworkonenergyplanningandpoliciesofmultipledisciplinesacrossdifferentgroupsofsocietycanhelpsecurethe“bestavailableknowledge”andallowsasociety-wideexchangeonwhetherthedifferentscenarios,plansorpoliciesarebothplausibleanddesirablefromtheperspectiveofdifferentactors.Collaborationcanalsoensurethatresourcesareusedwithinplanetarylimitsbytappingintothepotentialforthepowersystemtoaccesssharedresourcessuchasstorage,distributedenergyresources,energyservices,space,financing,timeandskills,knowledgeanddata.Organisationalstructuresarecriticalenablerstoensurethatsharedresourcesareallowedinelectricityandflexibilityprocurement.Thissectiondiscussessomeavenuesforcollaborationwithinpowersystemorganisationalstructures.CollaborationtoimproverenewableenergyandflexibilityprocurementUndesirabledistributiveimplicationsofprofit-drivencompetitioncanerodethesocialvalueandacceptabilityoftheenergytransition,potentiallybecomingstrongargumentsagainstfurtherambition(Agora,2020).Fossilfuelphase-outplansinducedeitherbymarket-basedinstruments(e.g.highCO2prices)orbyregulation(e.g.powerplantemissionstandards)canbedisruptiveforregions,countriesandcommunitieswhosesocio-economicstructureisbuiltaroundfossilfuels.IntheEU,coalisstillminedin31regionsacross11countries,withcoalactivitiesprovidingjobstoaround230000people.Inthiscontext,labourunionsandlocaladministrationsofregionsreliantonfossilfuelshaveactedmanytimesinthepastasbarrierstotransition,untilacollaborativeeffortofunions,communities,utilitiesandadministrationsaimingforajusttransitionhasbeenintroduced(PrinzandPegels,2018).Coalmininginanopenpit,Shutterstock134RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONToensurethatnoregionisleftbehind,theEuropeanCommissionin2017launchedtheinitiativeforcoal-andcarbon-intensiveregionsintransitionandrecentlyintroducedtheJustTransitionMechanism,whichprovidestechnical,advisoryandfinancialsupporttostakeholders(EuropeanCommission,2020).TheexperiencesintheMidlandsofIreland,AsturiasinSpainandKarlovyVaryintheCzechRepublicshowthatakeyelementofthecollaborativeefforttoredirectphase-outplanstowardsajusttransitioniseffectivelyengagingaffectedworkersandcommunitiesinthedesignandimplementationofatransitionplanfortheshortandlongterms.Co-ordinationamongdifferentlevelsofadministrationhasprovenkeyfortheprocess(EuropeanCommission,2020),andcollaborationamonglabourunions,administrationsandcorporationsisanotherkeyelement.Recently,localoppositiontorapiddeploymentoflarge-scalerenewableenergytechnologieshasgainedmomentuminseveralcountries(Faucon,2021).Thishasbeentriggeredwhenhostcommunitiesfeellockedintoanenergytransitionthatreproducestraditionalfossilfueldeploymentdynamics,nottakingintoaccountlocalneeds,participationandculturalheritage.Collaborationcanpreventthesesituations,contributingtosocio-economicvaluecreation.Organisationalstructurecomponentscanbedesignedtofostercollaboration.Thisoftenrequiresgoingbeyondthestrictsystemboundariesofthepowersystemwithaholisticvision.Forexample,renewableenergyauctionsinSpainalreadyincludethepossibilitytoprioritiseinstallationinjusttransitionregionsortosetupdedicatedauctionsforcommunityenergyprojects.Butcollaborationwithlocalactorsbeyondauctionsisemergingasakeyfactorforpreventinglocalopposition.Citizen-ledenergycommunitiesincreasinglypresentthemselvesasacollaborativealternativetolarge,corporate-ownedpowerplants,withcommunityownershipandhorizontalgovernanceallowinglocalstoenjoythebenefitsoftheenergytransitionandtodecidewhattodowiththosebenefits.Sincethe1970s,localcommunitiesinDenmarkhavecollectivelyinvestedinwindenergy.TheDanish1996EnergyPlanaimedatcreatinganenergysectorrootedina“democratic,consumer-orientedstructure”.By1996,thecountrywashometoaround2100windco-operatives,whichcreatedthebasisforcontinuingsocialsupportforwindpowerinDenmark(IRENA,2013).Since2009,theDanishRenewableEnergyActhasrequiredaminimumquotaoflocalownership(atleast20%)inallnewwindprojects.Theminimumquotawasintroducedasaroll-backfromapreviouspolicyframeworkthatledtoasignificantdecreaseincommunityenergyandthusalsotosocialopposition.Asaresult,by2013,70-80%ofexistingwindturbinesinDenmarkinvolvedcommunityparticipation(Roberts,BodmanandRybski,2014).Inmanycases,citizen-ledenergycommunitiesreinvestpartoralloftheprofitsfromtheirassetsinnewcommunity-ownedrenewableenergyplantsorinsupportinglocalsocialneeds.Inothercases,suchasinGreece(CaramizaruandUihlein,2020),energycommunitieshavereservedsomeparticipationquotastodistributeforfreeamongvulnerablefamilies,sothattheycancountonanextraincomederivedfromtheoperationofthecommunity-ownedrenewableplant.Distributedenergyresourcesfacilitatedirectuserinvolvement.Theenergytransitioncanaccelerateifuserscollaborateinfinancing,installingandoperatingdistributedenergyresourceswiththesharedgoalofmaximisingpowersystemandsocialvalue.Aggregatorscanhelpco-ordinatethiseffortbymergingusers’distributedenergyresourcesandoperatingthemasavirtualpowerplant,providingvaluableservicestobothdistributionsystemoperatorsandfinalusers.Aggregatorscanworkinbothcentrallyplannedandliberalisedsystems.Acompetition-drivenaggregatorwilltendtodeliveritsservicesguidedfundamentallybythecostsofdistributedenergyresourcesandthepricesofflexibilityservices.Inliberalisedsystemsresidentialusersarereluctanttogetinvolvedinvirtualpowerplantsforawiderangeofreasons(inflexibleretailrates,unclearpolicyframework,etc.),withprofit-driveninitiativesnothavingyetbeenabletoproperly135Theroleofmarkets:Enablersorbarriersalignwithusers’needsandconcerns.Community-basedvirtualpowerplants(cVPPs)facilitatethecollaborativecreationandoperationofvirtualpowerplants,reflectingthecorevaluesandneedsagreedbyallcommunitymembers.SuchcVPPcommunity-basedplantscanalreadybefoundinLoenen(TheNetherlands),Ghent(Belgium)andIreland(InterregNorth-WestEurope,2019).Theidentificationofcoreprinciplesisrunthroughparticipatoryprocessesandcanrangefrommaximisinglocalcleanenergysupplyandlocalbenefits,tosettingfairelectricityprices,tocreatinglocalresilience(VandenBerghe,BaetsandMeskens,2019).Collaborationcanalsodirectlyaimatavoidingtheexclusionofthemostvulnerablefromthebenefitsofdistributedenergyresources.AcaseinpointismunicipalitiesinGreeceusingtherecentlyintroducedVirtualNetMeteringregulationtotransferrenewableenergyproducedonmunicipalrooftopstovulnerablehouseholds(Box24).Collaborativeinitiativeshavealsoprogressedinregulatedsystems.AcaseinpointistherolethatCostaRicancommunity-ledco-operativedistributionsystemoperatorsplayedinadvancingthecountry’senergyaccessgoal(Box25).Box24.SurplusrenewableelectricityexchangeandcollaborativeapproachestoalleviateenergypovertyRetailratesconducivetocommunityengagementindistributedenergyresources,togetherwiththesupportofnot-for-profitinteractions,mayhelpaddressenergypovertyandfacilitatetheinclusionofvulnerablehouseholdsintheenergytransition.AcaseinpointisEuropeanlegislationthatallowsthesurplusesofself-consumptionfacilitiestobeeasilyexchangedandallocatedtotheenergybillofotheruserslocatedinnearbyareas(virtualnetmetering/netbilling).Thepriceoftheexchangedelectricitycanbearrangedbetweenthetwopartiesexceptfortherelatedgridcoststhatareregulated.SeveralmunicipalitiesinGreece,forinstance,areinstallingsolarPVsystemsinpublicbuildingsforself-consumptionandexchangingsurplusproductionforfreewithvulnerableneighbours,asanalternativetosubsidisingenergyconsumptionbydirectlypayingtheenergybillsofvulnerablehouseholds.Thesetypesofschemesallowprogressinlocalcollaborativeinitiativesaimedatsharingthepotentialbenefitsofrenewableenergywhiletacklingenergypovertyandtheclimatecrisisatonce.136RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONFrameworkstoenablecollaborationandamoredirectinvolvementofcitizensinthetransitionareprogressingindifferentcontexts.IntheEU,theCleanEnergyforAllEuropeanspackageadoptedin2019providestheframeworktofosterenergycommunitiestoinvolvecitizensandlocalpublicadministrationsinallaspectsoftheenergytransition.CollaborationtoimprovetheambitionofenergytransitionplanningAninstructivecaseofcollaborationaroundambitioninaliberalisedcontextrelatestotheEUconsultationprocessaroundtheTen-YearNetworkDevelopmentPlanforEnergyInfrastructures(TYNDP)scenarios,whichtheEuropeanNetworksofTransmissionSystemOperators(ENTSOs)prepareasanon-legallybindinginputforfutureelectricityandgasgridexpansionandgridmodificationprojectsintheregion.Formanyyears,Europeannon-governmentalorganisationsrequestedtheENTSOstoadapttheTYNDPscenariostotheParisAgreementtargetandtodisclosetheunderlyingdataandassumptionstoenabletransparencyandeffectivesocialparticipation.Inresponse,in2018aconsortiumlaunchedthePAC(ParisAgreementCompatibleScenariosforEnergyInfrastructure)project,whichin2019deliveredthefirst-everscenariodevelopedbycivilsocietyorganisationsthroughabottom-upcollaborativeresearchprocess,involvingmorethan150differentstakeholdersfrommemberorganisations,scienceandindustry(PAC,2020).Box25.Co-operationwithcommunity-ledinitiativesinregulatedframeworksCoopeguanacasteisaCostaRicanruralelectricityco-operativelocatedinthenorth-westernregionofGuanacaste.Itwascreatedin1965bylocalmemberswithfinancialsupportandassistancefromnationalgovernmentinstitutions(thenationalutility,InstitutoCostarricensedeElectricidad,andtheNationalBankofCostaRica)toadvancethenationalpriorityoffullenergyaccess.Theco-operativewasgrantedaconcessiontosupplyanddistributeelectricitywithinacertainareaandillustratesasuccessfulcaseofcollaborationbetweenacommunity-ledinitiativeinaregulatedenvironmentandthenationalutility.In2015,CoopeguanacastesetupasolarPVprogrammeforremoteoff-gridhouseholds(112families),wherebyitprovideslow-incomefamiliesaccesstothegenerationfromaPVsystemowned,managedandmaintainedbytheco-operativeasasubsidisedsocialservice.Aone-timefixedinstallationfeeandamonthlyfixedrentalfeearepaiduntilthegridexpansionreachesthehousehold(AriasandHernandez,2014).Overtheyears,CoopeguanacasteandotherCostaRicanco-operativeshavediversifiedtheiractivitiestogenerationwithrenewableenergy,butfurtherimprovementsofthecollaborativeframeworkareneededtobetteralignwiththenationalutility(Madriz-Vargas,2018).137Theroleofmarkets:EnablersorbarriersThankstotheexchangesbetweentheconsortiumandENTSOs,thecollaborativeresearchprocessappliedforthefirsttimeacarbonbudgetapproachtotheTYNDP2020scenarios(PAC,2020).TheapproachsetsafixedcapontheamountofgreenhousegasemissionsthattheEUstillcouldemitwithoutputtingatriskitscommitmentundertheParisAgreement.ThemodellingofTYNDPscenariosthenalignstheforeseenevolutionoftheenergysystemwiththechosencarbonbudget.However,thesizeofcarbonbudgetusedbyENTSOs,whichisthecriticalparameterdefiningthetransition’sambition,wasnotagreedwiththePACcounterparts.CollaborationtoshareresourceswithinpowersystemsSharingknowledgeandresourcesisanexamplewherecollaborativebehaviourcanpositivelyinfluencethesuccessoftheenergytransition.Thissectionexplorescollaborationthroughsharingresourceswithinthepowersystem.Sharingstrategiescanariseinbothregulatedandliberalisedpowersystemsandcaninvolvethreedifferentactors:users,serviceprovidersandintermediariesbetweenthese.Resourcesharinggenerallydoesnotinvolveachangeofownershipandcanbecarriedoutforprofitoronanot-for-profitbasis.Sharingresources,infrastructuresandservicesrepresentsanopenfieldwithmultiplepossibilities,withpotentialbenefitsforcommercialandresidentialusers,administrationsandutilities.Solarpanel,Freepik138RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONAdaptedfromPlewnia,2019.ENERGYSHAREDGOODORSERVICEEXCHANGEMODELMaterialandenergyProducts(re-distribution)ProductservicesystemSpaceFinancingTimeandskillsKnowledgeandeducationDataandinformationUTILITYTOUSERTurnkeydistributedenergyresourceorutility-scaleprojectsSecond-lifeelectricvehiclebatteriesforresidentialstorageAggregation;cloudanddistrictstorage;embeddednetworksorminigridsParkingplacesandchargingstationsforelectricvehiclesMicro-creditsfordistributedenergyresourcesConsultancyandinstallationOptimisationservices(Near)real-timedataonusers’productionanddemand;transparencyservices;neighbourhoodplatformsUSERTOUSERPeer-to-peerenergyorstoragetradingandsharing;toolandappliancesharing;turnkeydistributedenergyresourceorutility-scaleprojectsviaenergycommunityorco-operativeSecondlifesaleofbatteries;collectivepurchaseofappliancesSharedelectricvehicles,smartheatingandcoolingsystemsorbatteries;energyco-operatives/communities;collectivepurchaseofturnkeyprojectsorappliances;collectivecontractnegotiationsRooforgarage,basementspaceforcomputerusedforblockchaindatavalidationinpeer-to-peerschemes,PV,micro-windorbatteriesCrowd-lending,-investment,-funding,digitalcurrenciesMutualsupportinenergyco-operatives,energycommunitiesormunicipality-ledenergyinitiatives;consultancyandinstallationthroughenergycommunityorco-operativePro-usereducation;forums;energyeducationNeighbourhoodplatforms;sharingplatformsforexchangingsub-usedgoods,materials,toolsandappliancesUSERTOUTILITY(Collective)storage;utility-scaleorresidentialgeneration;virtualpowerplantsorvirtuallines(demand-sidemanagement,distributedenergyresources)Second-handbatteriesfordown-cyclingCollectivepurchasesofappliances,power/energyorservicesPV/storageleasingagreement;electricvehicleleasingagreementsCrowd-lending/-investmentCrowd-sourcingsoftwareSmarthome;feedbackmechanisms;civicscience;openinnovation,openproduction,leaduserinnovation,co-creationAdvancedforecasting;civicscience;swarmdatastorageUTILITYTOUTILITYIndustrialsymbiosisRecyclingofPV/batteries;re-poweringofpowerplantsVirtualpowerplants;assetpoolingSharedenergystorage;complementaryuseofgridsVenturecapitalandmicro-fundingSharedservices;competencecentres;whitelabelsLearningnetworks;jointresearchanddevelopmentMonitoringtools;energydataaccess(hub/decentraliseddatabases)TABLE2.Overviewofsharingactivitiesintheenergysector139Theroleofmarkets:EnablersorbarriersThescopeofcollaborationthroughsharingishuge.Todevelopitsfullpotential,awarenessaboutthiscomponent,favourableregulationandaholisticapproachtoorganisationalstructuredesignareneeded.Togiveasenseofthemagnitudeandpotentialrelevanceofcollaborationthroughsharing,Table2providesanoverviewofgoodsandservicesthatarealready(orplannedtobe)sharedintheenergysector.Powersystemorganisationalstructurescanbeenablersorbarriersfordevelopingthecollaboration-through-sharingdimension,enablingorconstrainingtheexchangeofenergy,space,financing,knowledgeandothers.Anexampleofthiscanbefoundinpeer-to-peerelectricityexchanges:users,generatorsandpro-userscanexchangeelectricitydirectly,allowinguserstoselectspecificgeneratorsthatrespondtousers’needsorvalues(renewable-sourced,local,not-for-profit,etc).Thisschemefacilitatesusers’empowerment,allowingthemtomakebetteruseofavailableenergyresources.Forthistohappen,powersystemorganisationalstructuresmustallowpeer-to-peerexchanges,asincountriessuchasNetherlands.Butorganisationalstructuresinmostjurisdictionsdonotallowdirectpeer-to-peertradeofelectricity,orlimitsittoretailersandgenerators,suchasintheUnitedKingdom.Anotherexampleistheuseofbehind-the-meterthermalstorage,back-upstorageandelectricvehiclebatteriestoprocureancillaryserviceswhentheyarenotusedfortheirmainpurpose(providingheat,refrigeration,andback-upforcriticalinfrastructureormobility).Organisationalstructuresarecriticalenablersfortakingadvantageoffacilitiestoprovidestoragewhennotinuse.AnexampleisPJM’sexperience(DistrictofColumbia,US),whereaggregatedelectricvehiclesandstationarybatteriesareallowedtoprovidefrequencyregulationandeventoparticipateincapacitymarkets(IRENA,2019c;PJM,2018).Organisationalstructures,inbothregulatedandliberalisedsystems,mustbedesignedandoperatedinsuchawaythatenablesthecollaboration-through-sharingdimension,unlockingitsfullpotential.Electricbicycles,Shutterstock140AVISIONFORRETHINKINGPOWERSYSTEMORGANISATIONALSTRUCTURES:THEDUALPROCUREMENTMECHANISM6.1.OVERALLVIEWPowersystemorganisationalstructuresaredesignedaroundsocialandpoliticalgoals(seechapter3)andcountoneconomicandphysicalallocationandprocurementmechanismstoreachthosegoals,withinthesystem’stechnicallimits.Thewayinwhichenergyandflexibilityservicesarerewardedbringscrucialinformationinboththeshortterm(“Shouldweprovidethisservicenow?”)andlongterm(“Shouldweinvestinthesystemandcommissionanewunit?”).Organisationalstructuresconveythesignalsthatdeterminethefutureofthepowersystem.Increasingindicationsthatcurrentpowersystemstructuresareunsuitedfortheenergytransition(seechapter4)havespurredtwo,contrasting,reactions.Ononeside,supportersofthetraditionalfossilfuel-basedsystemhaveusedthemisalignmentsasanargumentagainstrenewableenergydeployment,focusingonissuessuchasintegrationcostsorthegriddeathspiraltoreducesupportforrenewableenergytechnologies(Agora,2018;Joskow,2019;Liebreich,2017).Ontheotherside,stakeholdersseekingtoadvancetheenergytransitionareengaginginadialoguearoundhowtomakeboth“system-friendly”renewableenergyaswellas“renewableenergy-friendly”powersystems.6141Bothregulatedandliberalisedpowersystemssharethechallengeofreformulatingtheirprocurementandallocationmechanismstosupportthepost-transitionpowersystemandtofacilitatethetransitionprocessitself.Thediscussiononthe“renewableenergy-friendlypowersystem”canbesynthesisedintwoapproaches:gradualcorrection(orfixes)andsystemicchange(Table3).Thesystemicchangeapproachisbasedontherecognitionthatimmediatesolutionstotheso-calledenergytransitiontrilemma(howtoprovideenergythatissustainable,affordableandreliable)arenecessarybutnotsufficienttoguidethecreationofpowersystemstructuresfitfortherenewableenergyera.Indeed,underashort-termvisionblindtopost-transitionenergysystemrequirements,fixesintroducedtoprovideshort-termresponsescanultimatelyreinforcestructuralmisalignmentsandproducetransitionbarriers.Thesystemicchangeapproachaddressestherequirementsofthestructuresneededbyrenewable-basedenergysystems,identifyingtherootsourcesofmisalignmentswhiletakingintoaccounttheinteractionswiththewidersocio-economicandEarthsystems.Buildingonimprovedgovernance(participation,transparencyandaccountability),itaimsataligningdecisionmaking,institutions,agentsandinstruments(insidethepowersystemandbeyond)withthetransitiongoalsandwiththewidersocio-economicimperatives,settinguporganisationalstructurescapableofprovidingaffordable,reliable,renewableenergytoall,withtherequiredclimateambition,whilehelpingtoreduceinequalities,equitablysharebenefitsandburdens,andbuildtheneededsocio-economicresiliencetonavigatetheclimateimpactsthatcannolongerbeavoided(afairandjusttransition).Tweaksandadjustmentsintroducedtothepowersystemcanbeusefulelementstoidentifyandtestsolutionsintheshorttermthatcouldthenbeincludedinre-designedpowersystems.Forexample,theincreasedtimegranularityadoptedbysomeEuropeanpowersystemsislikelytoremainandbepartofthepowersystemofthefuture.However,limitingprogresstotheintroductionofgradualadjustmentswithoutaholisticvisionislikelytocreatetransitionalbarriersasthepenetrationsofvariableanddistributedenergyresourcesevolvetowardshighershareswithouttherightstructuresinplace.Theneededinterventionislikelytorequireasignificantre-designofpowersystemstructures,sothattheyproperlyrewardflexibilityprovidersandprovidelong-termsignalstolow-OPEXandlowopportunitycostrenewablegeneration(IEA,2011;Joskow,2019;Keay,RhysandRobinson,2014;Liebreich,2017;PierpontandNelson,2017),whilesimultaneouslyphasingoutfossilfuels.142RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONBothregulatedandliberalisedpowersystemssharethechallengeofreformulatingtheirprocurementandallocationmechanismstosupportthepost-transitionpowersystemandtofacilitatethetransitionprocessitself(Figure40).Thisrequiresaholisticvisionthatcapturesthewidersocialandsystemvalueofelectricity,whilesupportingthedeploymentofVRE,distributedenergyresources,flexibilityandsystemintegration,overcomingmisalignmentsandconstraints.Inpursuingthisgoal,bothregulatedandliberalisedsystemsneedtofindtheappropriatebalancebetweenregulation,competitionandcollaborationtoshapetheirprocurementandallocationmechanisms.Bothliberalisedandregulatedsystemshavetheirownchallengesandpotentials,andstructurallyaddressingtheseisacontext-dependentprocess.Improvinggovernanceisacornerstonefortheevolutionofbothregulatedandliberalisedsystems,buthowthismaterialisesissystemdependent.GRADUALCORRECTIONSYSTEMICCHANGEDriversShort-termtechnicalandeconomicchallengesarisinginthepowersystem.Long-termvisiononthemisalignmentsarisingasthetransitionprogresses,bothinthepowersystemandinthewidersocio-economicsphere.VisionProvideanimmediatesolutionforanimminentissueofthepowersector.Provideasolutionfitforthetransitionandforthepost-transitionpowersystem,takingintoconsiderationtheinteractionsbetweentheenergysystemandthewidersocio-economicandEarthsystems.ObjectiveCostcompression.Valueenhancement.SolutionsproposedShort-termfixesandadjustmentsofcurrentorganisationalstructures.Rethinkingpowersystemstructurestoaddressrootcausesofmisalignments.AlignmentoforganisationalstructuresandwiderpolicyandregulatoryactionLimited.Conducivegovernance:enablingstructuresandappropriatepolicyandregulatoryactiontomakethevisionareality.TABLE3.Twoapproachestopowersystemevolution143Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismThedualprocurementconceptpresentedbelowaddressestheunderlyingmisalignmentsinpowersystemorganisationalstructuresbyacknowledgingtheintrinsiccharacteristicsofrenewableenergygenerationandflexibilitysupply,aswellashowtheseinteractwiththesocio-economicsystem.Theaimofthischapterisforthedualprocurementconcepttoactasalighthouse,informingandguidingthestructuralevolutionofbothliberalisedandregulatedpowersystemstowardstheorganisationalstructuresoftherenewableenergyera.6.2.DUALPROCUREMENTTheenergytransitionrequiressimultaneouslyadvancingalongdifferentlayers.However,progresstodatehasbeenunequalacrosslayers(Figure41),whichmayintroducebarrierstotransition.Althoughstillfarfromwhatisneeded,progressintheenergytechnologylayerhasbeenthemostsignificanttodate,withrenewables,efficiencyandflexibilitygraduallyoccupyingthespaceoffossilfuels.Furtheradvancesintheenergytechnologylayerrequirebothsystemicchangesandtheevolutionoforganisationalstructures.Systemicchangeslagsignificantlybehindthedeploymentofenergytechnologies,butevenbehindthatistheevolutionoforganisationalstructures,whichhavereceivedlittleattentiontodate.Thissectionaddressesthegapintheorganisationalstructureslayerbyconceptuallydiscussingapowersystemorganisationalstructurethatisappropriateforrenewable-basedpowersystems:dualprocurement.FITpowersystemstructureUNCERTAINOUTCOMESUCCESSBarriersSynergiesRenewable-basedMoredecentralisedBidirectionalRenewable-basedMoredecentralisedBidirectionalFIXESofcurrentpowersystemstructureTRANSITIONCurrentpowersystemstructureFossilfuel-basedCentralisedUnidirectionalFIGURE40.Impactontheenergytransitionofhowtherequiredpowersystemstructureupdatesareaddressed(fixesversusre-designtobefit)144RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONIntherenewableenergyera,powersystemswillhavetwofundamentalanddifferentiatedattributes:renewable-basedgeneration(mostlyVRE)andflexibility.70Renewableelectricitygeneratorsandflexibleresourceshavedifferentcharacteristics.Short-termmarginalpricesmaybecomeunabletoguaranteecostrecoverytoVREplantsastheirincreasingpenetrationdepresseswholesaleprices.Stablelong-termpaymentsarefarmoreappropriateforprocuringrenewablegeneration,giventheirCAPEX-intensivenature.Flexibleresourceshavedifferentcharacteristicsandaremorelikelytobeefficientlyprocuredthroughashort-termmarginalpricingmechanismthat,unlikethecurrentone,isnolongeraffectedbytheprice-depressingtrendintroducedbyVREgenerationandthepricingcapstopreventwindfallprofitsfornon-flexiblebulkgeneration(becauseVREprocurementwouldbeaddressedinparallel).Thedualprocurementproposaladdressesthisdilemmabysplittingtheprocurementofrenewableelectricityandflexibilityintotwocomplementaryprocurementmechanismsthatacknowledgethedifferentcharacteristicsoftheseservices,hencedirectlyaddressingsome71ofthemisalignmentsdocumentedinchapter4.70Flexibleresources,suchasbatteries,demand-sideresources,pumpedhydropower,dispatchablerenewables,increasedsystemvisibilityandintegration,andincreasedcross-bordertradewillplaythecornerstoneroleto“fillthegap”betweenVREgenerationandsystemneeds.71Beyondhonouringthecharacteristicsofrenewableelectricityandflexibilityservices,aholisticvisionisneededfordualprocurementtoaddressmisalignmentsinvolvingthesocio-economicsystemiclayer.•Non-integrated•Fewstakeholders•Centralised•Unidirectional•FossilfueleraEarthandSocietyEconomyClimate•Integration•Participation•Bidirectional•Distributed•DemocratisedRenewableenergyEnergyeciencyEnergyﬂexibilityRenewableenergyeraTechnologicaltransitionSystemicchangesOrganisationalstructuresWidersystemiclinksandfeedbacksFossilfuelsEnergyTransitionFIGURE41.Unequaladvanceinthedifferenttransitionlayers145Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismThetwomainco-ordinatedprocurementmechanismsare:arealong-termrenewableenergy(LT-RE)oneandashort-termflexibility(ST-Flex)one.72Aholisticvisionandintegrateddeploymentwillbeneededforthesetwoprocurementmechanismstoproperlycomplementeachother.EssentialcharacteristicsofthetwopillarsofdualprocurementaredescribedinTable4.AconceptualandoperationalrepresentationofdualprocurementisprovidedinFigure42.72ThecharacteristicsofflexibilityservicesmayrequirecomplementingtheST-Flexwithlong-termprocurementofflexibility(LT-Flex),especiallyduringthetransitionandforsomeoftherequiredflexibilityservices,suchasthoseprovidedbyseasonalstorageorsystemintegration.Infact,thesharebetweenST-FlexandLT-Flexduringthedifferentstagesofthetransitionisunclearandislikelytobecontext-dependent.However,thefocushereisontheST-FlextohighlightdifferentialcharacteristicswithLT-RE.LT-REprocurementST-FlexprocurementBasedonperiodic,long-term,product-basedallocationmechanisms(auctions,directpublicinvestment,etc.).Basedontheshort-termdimensionofcurrentdispatchmechanisms(balancingmarkets,regulateddispatch,etc.).Procuresrenewableelectricity(VREanddispatchablerenewableenergy)andenablesrenewableenergysupplyadequacywithanticipation.Procuresflexibility(demand-sidemanagement,distributedenergyresources,storage,dispatchablerenewableenergy,power-to-X,vehicle-to-grid,etc.)andenablesflexibilitysupplyadequacy.Designedtomatchsupplyanddemandasmuchaspossibleinthelongterm(capturingtemporalandlocationalvaluetothepowersystem).Matchessupplyanddemandintheshortandveryshortterms(capturingtemporalandlocationalvaluetothepowersystem).Drivenbylong-termloadforecastwithinintegratedenergyplanning,withappropriategovernanceandrisksharingmechanisms.Drivenbyshort-andvery-short-termdeviationsbetweenthescheduledload/renewableenergyproductionandrealdemand/production.ProvidesasafeinvestmentenvironmentthatminimisesfinancecostsforCAPEX-intensivetechnologies.Liberalisedsystems:Allowspricestovaryfromveryhightolowandevennegative,andallowsforadditionalregulatedpaymentsifneeded(especiallyduringthetransitionperiod:LT-Flex).Regulatedsystems:Providesanenablingframeworkfordeployingandoperatingtherequiredflexibilitycapacity.Designedforthecharacteristicsofrenewableenergytechnologies.Designedforthecharacteristicsofflexibilityresources,includingdispatchablerenewablepower,storage,demandresponse,vehicle-to-gridandpower-to-X.Recognisesthespatialandtemporalvalueofelectricity.Recognisesthespatialandtemporalvalueofflexibility.Theeconomicsignalsofdualprocurementshouldreachtheretailrates(orprices)ofalluserstopromotetheirparticipationinsystemoperation,whilesimultaneouslyaddressingdistributionalissuessothatcollaborativeengagementisachievedinajusttransition.Society-widecollaborativegovernance(publicorprivate),promotingandacknowledgingsocialvaluecreation:Enableseffectivesocietalanduserparticipationinplanningandoperation,fosteringtherequiredcollaborativeframeworkforsocialvaluecreation.TABLE4.Thepillarsofdualprocurement:Long-termrenewableenergy(LT-RE)procurementandshort-termflexibility(ST-Flex)procurement146RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONOPERATIONALREPRESENTATIONCONCEPTUALREPRESENTATION123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657Renewableenergy(LT-RE)Netload-surplusesNetload-shortfallLoadLongtermprocurement-securingRenewableenergyThedualprocurementShorttermprocurement-securingﬂexibilityDUALPROCUREMENTEXPERIENCEToprovideastableframework:•Supportmechanisms(FIT,FIP,PPA)•DirectpublicinvestmentTomatchsupplyanddemand:•Wholesaleandretailmarkets•CentralisedsystemoperatorsdispatchProcuringRenewablePowerProcuringFlexibilityLONGTERMSHORTTERMNote:FiT=feed-intariff;FiP=feed-inpremium;PPA=powerpurchaseagreement.FIGURE42.Thedualprocurementproposal147Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismThegoodnewsisthatthedualprocurementorganisationalstructuredoesnotneedtobeinventedfromscratch,becausemostofthetoolsandexperiencegainedinthepastcancontributetodualprocurement(Figure42).Itcouldbearguedthatthisproposalwouldbethenaturalevolutionofcurrentpowersystemsifaholisticvisionandassociatedpolicieswereinplace.Already,inliberalisedsystems,auctionsarebecomingoneofthemorecommonprocedurestoprocureutility-scaleVREenergy,withdecreasingpricesandincreasingdesigncomplexity(IRENA,2019b).Meanwhile,theday-ahead,real-timeandancillaryservicesmarketsareevolvingtothenewnormalofhighVREpenetration,withincrementaladvancestoproperlyrewardandstimulateflexibility.Inregulatedsystems,thelong-termprocurementofrenewableenergygenerationisalsoadvancing,throughIPPauctionsortargetedpublicinvestmentprogrammes,whileflexibilityprocurementandoperationisevolvingthroughintegratedenergyplanningandpublicinvestment.IncountrieswithhighsharesofVREandliberalisedorganisationalstructures,itisalreadypossibletodaytoperceivethe“split”betweentheprocurementmechanisms,withasizableamountofelectricityproductioncomingfromlong-termenergycontracts,intheformoffeed-intariffs,feed-inpremiumsorbilateral/auctionedPPAs.Indeed,thediffusionofauctionsiscreatingaconvergingtrendbetweenliberalisedandregulatedorganisationalsystems,withcentralisedpowersystemsintroducingacompetitiveschemetoprocurerenewableenergy,andliberalisedpowersystemsre-introducingelementsofstate-drivenenergypolicy.Dualprocurementisnotevenanewproposal.Itspursfromongoingdiscussionsaroundthephase-outofrenewableenergysupportmechanismsandpracticalexperiencewithrenewableenergydeployment.Severalpreviousanalyseshavecontributedtothedualprocurementproposal(BarrosoandRudnick,2021;Forsström,KoreneffandSimilä,2016;Grubb,2022;GrubbandDrummond,2018;Joskow,2019;KeayandRobinson,2017;Keay,RhysandRobinson,2014;Liebreich,2017;PengandPoudineh,2017;PierpontandNelson,2017;RobinsonandKeay,2020;RoquesandFinon,2017).148RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONTheseanalysesandstudiesstilllackaunifiedandholisticvision,usingtermssuchas“twomarket”or“hybridregime”todescribetheproposedorganisationalstructure.However,themainconceptsdiscussedarethesame:tosplitthecurrentallocationmechanismsintwo,recognisingthedifferenttechnicalandeconomicalnatureofVREandflexibleresources.Evolvingtowardsorganisationalstructuressuitedfortherenewableenergyerarequiresframingtheseconceptsunderaholisticvisionandsystemsapproach(Box26).Inthefollowingsections,guidelineprinciplesarepresentedtoprovideaninitialblueprintforthedualprocurementstructureofthefuture.Box26.Requirementsforevolvingfromcurrentorganisationalstructurestowardsdualprocurement•Clearlyidentifytherootcausesofcurrentmisalignmentsandconstraints.•Haveaclearholisticvisionofthepost-transitionenergyandpowersystemsneededtomeettheambitionandresilienceimperatives,withanadequatepolicyframeworktosupportandenabletheenergytransitionwhileaddressingthewiderinteractionswiththesocial,economicandEarthsystems.•Adequategovernancetoenablepolicyandregulatoryactiontomakethevisionarealitywhilefosteringtherequiredparticipationandcollaboration.•Acknowledgethatwhattodayareadditionalregulatedpaymentscanbecomeoneofthepillarsoftherequiredorganisationalstructure.•Maximisesynergiesbetweenthetwopillarsofdualprocurementaswellassynergieswiththetransmissionanddistributiongrids,whilefosteringtechnologicalandgeographicaldiversificationofrenewableandflexibilityresources.•DevelopparticipatoryframeworksthatenabletherequiredcollaborationwithpowersystemusersfordemandtohaveagoodalignmentwiththeLT-REgenerationprofile.•Promotesociety-widecollaborationenablingeffectiveparticipationindesign,planningandoperationofthepowersystemaswellasitssystemicinteractionswiththewidereconomic,socialandenvironmentalsystems.•Maximisesocio-economicandenvironmentalbenefits:Inliberalisedsystemsbyaligningcompetitivedriverswithsocialgoals,andinregulatedsystemsbyfosteringeffectivepublicownershipandgovernance.•Acceleratethephase-outofpollutingtechnologieswhilesimultaneouslyprovidingnewgenerationandflexibilityresourcesatsufficientspeedtomaintainsystemreliability.•Encouragetechnologyandsocialinnovationdevelopment,reducingentrybarrierstoinnovativesolutions.149Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismLong-termrenewableenergyprocurementTheLT-REprocurementmechanismbuildsfromthoseexperiencesthathavehadthebestsuccesssofarindeployingrenewableenergy,suchasfeed-intariffs,powerpurchaseagreementsanddirectinvestmentofVIUs(Box27).Box27.Summaryofthelong-termrenewableenergyprocurementmechanismTheobjectiveofLT-REprocurementistocovermostofthedemandwithlong-termrenewableenergycontractswhileminimisingexpendituresandmaximisingsocio-economicbenefits.InLT-REprocurement,acentralplanner/auctioneerdevelopstime-andgeographicallycharacteriseddemandforecastsandevaluatestheneedsofgenerationcapacityforsystemadequacy.Long-termprocurementwillbedrivenbythisforecasteddemandprofileandcanbearticulated(inbothliberalisedandregulatedsystems)throughcompetitiveauctions,orbydirectpublicinvestmenttodeveloptherequiredgenerationinfrastructureunderapublicownershipscheme.CompetitioncanbeintroducedinLT-REprocurementthroughtwodifferentiatedways:competitiveprocurementofelectricity,andcompetitiveprocurementoftheplant(publicinvestment).Incompetitiveelectricityprocurement,thecentralauctioneeraimstoprocurelong-termelectricitytomatchaswellaspossibletheforeseenelectricitydemandprofile.Selectedrenewableenergyproducers(IPPs)arerewardedthroughlong-termPPAs,subjecttobothplantacceptanceandperformancerequirements.Thesepurchasecontractscanbebilateralorcentralised.Underthepublicinvestmentpathway,thecentralplannerprocuresthroughcompetitivetendersthepowerplantsneededtosupplytheforecastedlong-termelectricitydemand.Bothliberalisedandregulatedsystemscanusethesetwoapproaches,oramixtureofthem,forLT-REprocurement.Riskallocationdiffersbetweenthesetwoapproaches.WhiletheprocurementofelectricitythroughIPPsallocatestheplantperformancerisktotheIPP,inthepublicprocurementpathasignificantshareofthisriskisshiftedtowardsthegovernment(whichtriestomitigateitpartiallythroughplantacceptancetests).Anotherriskisfromerrorsinenergyplanning,dueforinstancetodeviationsindemandoritsforeseengeographicalandtimedistribution,orbadforecastsbythecentralplanner.Originally,thiserrorsitswiththeenergyplanner,andhenceisdirectlytransferredtotheshouldersoftaxpayers.Therearedifferentwaystoreducetheburdenofthisriskontaxpayers,alloftheminvolvingimprovedgovernance.Periodicrevisionofenergyplanningtocorrectdeviationsandnewinputsisonefirststep.Goodgovernanceinenergyplanning,withdirectandparticipatoryinvolvementfromallstakeholders,isanothercomponent.150RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONInLT-REprocurement,renewableelectricityisexchangedvialong-termcontracts,addressingtherequirementsofcapital-intensivetechnologiesfacilitatinginvestmentsatlowcapitalcosts,andtherebyminimisingthecostofrenewablepowergenerationwhileallowingfortheappropriatecapacityexpansion.ThedualprocurementproposalisnotprescriptiveofthespecificsolutiontobeimplementedforLT-REprocurement.Thespecificinstrumentsandtherolethatcompetition,regulationandcollaborationplayinthemcanvarywidelydependingonthesocio-politicalcontext.LT-REprocurementcanbearticulatedthroughdifferentpathways,whichcanbeclassifiedintwobroadcategories:regulatedpayments(suchasfeed-intariffsorPPAs),anddirectpublicinvestmentandownership(Box28).Ifproperlyimplementedandwithgoodgovernanceinplace,thesetwocategoriescanberoughlyequivalentandapplicabletobothliberalisedandregulatedsystems.Long-termcontractsforpowerproductionareusedinbothliberalisedandregulatedsystemswheregenerationhasbeenopenedtoprivateinvestmentsthroughIPPs.Appropriateandtransparentcompetitiveauctionschemescanhelptochooseprojectsthatmaximisethesocialandsystemvalue.WhenLT-REprocurementisarticulatedthroughdirectpublicinvestment,adequategovernanceneedstobeinplacetoguaranteeeffectivepublicparticipationandownership,withfullrecognitionofthevaluecontributedbydifferentstakeholdersandwithefficientandsustainableuseofpublicresources.DirectpublicinvestmentisinturnarticulatedthroughcompetitivebiddingforEPCcontractsofthewholeplantorpartsofit,whichcanevenincludeanoperationcomponent.Designspecificationsandperformanceguaranteesarticulatedmainlythroughacceptancetestsarekeyfortheefficacyofpublicinvestmentandtheproperallocationofrisks.Inthissense,bothIPPandEPCprocurementbystate-ownedutilitiesareequivalentprocessesfromaconceptualstandpoint,withtheriskallocationmarkingthemaindifferencebetweenthem.InanIPPprocesstheriskofplantperformancerestsmainlywiththeIPPcontractor,whichwillbepaidthroughthePPAinproportiontotheactualgenerationachievedbytheplant.InanEPCprocess,theriskofplantperformancerestsmainly73withthepublicutility.Bothapproachesincludefinancingrisksthatwillcontributetotheoverallelectricitycosts,althoughpubliclyownedutilitiescouldaccessbetterfinancingconditions74andlimitprofit-makingrequirementstothosepartsoftheprocessnotinternalised.75TheLT-REelementofthedualprocurementorganisationalstructureintroducesafundamentalconceptualshiftwithimportantpolicyimplications.Today,undertheestablishednarrative,competitiveauctionsystemsprovidinglong-termrewardsforrenewablegenerationareoftenconsideredasupportmechanism(evenasubsidy)thatshouldeventuallybephasedoutoncerenewablesbecomecompetitivewithconventionalgeneration.However,asdiscussedinchapter4,thiswouldproduceafundamentalmisalignmentintheorganisationalstructure,tothepointofitbecomingunabletosupportarenewable-basedpowersystem.Theconceptualshiftintroducedbythedualprocurementproposalismakinglong-termelectricityprocurementschemesoneofitstwomainpillars,henceacknowledgingthattheyareheretostay.73Appropriateacceptancetestingcanpartlymitigatethisrisk,butnoteliminateitcompletely.74Andevendrawfromcentralbankmonetaryresources.75However,forthosepartsoftheprocessthatareinternalisedtherecouldbeapotentialefficiencydifferencewiththealternativeofexternalisingit,especiallywhenthereislimitedin-houseexpertise,whichcouldrevertthepotentialbenefitfromattenuatingtheprofit-makingcomponent.151Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismBox28.LT-REprocurementoptionsgobeyondauctionsOptionsforLT-REprocurementarediverse,andthechoiceoftherighttoolisdependentonthesocio-politicalcontext.Auctionsandfeed-intariffshavereceivedmostofthefocusasadditionalregulatedpaymentstoenableLT-REprocurement.However,publicownershipofgenerationassetsisanotheroptionforLT-REprocurement.Inrecentdecadespublicownershiphasreceivedlessattentionasapolicyoptionforthegenerationdimensionofpowersystemstructures,althoughinthepastitwaswidelyusedbyvirtuallyallpowersystems.Eventoday,manypowersystemsstillenjoythebenefitsofpublicownershiplegacy.Theperceptionoftheroleofpublicparticipationinpowerstructureswilllikelychangeasthetransitionprogressesandasclimateimpactsintensify.TheCOVID-19pandemicandrelatedeconomicstimuluspackageshavealreadychangedthecurrentperceptionoftheroleofpublicinterventionandinvestmentinaddressingintertwinedchallenges.Boththeregulatedpayments(auctions)approachandthepublicinvestmentpaths(Figure43)canbeappliedtoeitherliberalisedorregulatedsystems.Theauctionsapproachhasgainedtractionasaconvergencecomponentbetweenliberalisedandregulatedsystems,seenasaddedregulationforaliberalisedsystemandasaddedliberalisationforastate-ownedregulatedsystem.Publicownershipcanalsobeappliedinbothregulatedandliberalisedsystems.Whentheirrespectivechallengesareproperlyaddressed,boththeregulatedpaymentandthepublicownershippathwaysleadtosimilaroutcomesandhavesimilarimplicationsforcitizens.TheLT-REprocurementpillarshouldhencebearticulatedthroughthemostappropriateoptionforeachsocio-politicalcontext.Intheauctionsapproach,theriskfortheconstructionandperformanceofrenewableenergyplantslieswiththeIPPcontractors.TheIPPcontractorwouldcontracttheEPCcontractortobuildtheplant,usingprivateequityanddebtasfinance(hencetakingallconstructionrisk).Users,throughtime-extendedenergypayments,wouldpaytheIPPcontractoraspertheelectricityfinallyproduced(plantperformancerisklieswiththeIPP).TheIPPcontractorislikelytoincludeprofitsinitsbusinessmodel(aswellastheEPCcontractorandequityanddebtproviders),whichwouldultimatelybetransferredtousersthroughtheirenergypayments.Withproperregulation,theseprofitsshouldnotbespeculativebutrathershouldacknowledgetheaddedvalue(expertiseandriskmanagement),andshouldnotnecessarilygotocorporationsbutcouldbesocialised(socialenterpriseandfinance).Thepublicownershippathwayisbroadlyequivalenttotheregulatedpaymentspathwayforusers/citizensintermsofhavingasimilarrequirementforlong-termpayments,nowarticulatedastaxesandenergypayments.However,thispathwayaddsmorefreedominhowtheeconomicburdenisshared,andhencefacilitatesaddressingdistributionalissues(althoughthesecanalsobeaddressedintheauctionsapproachbyadditionalpolicylayers).However,inthepublicownershippathwaymonetaryflowsdiffer,aswellasriskallocation.ConstructionandperformancerisksareontheState’sshoulders,andhencewillhavetobemanagedbyit.Inthepublicownershippathway,theEPCcontractorisdirectlymanagedbytheStatethroughdirectpublicspending.Operationalandmanagementexpenditureduringtheplantlifetimealsocomesfrompubliceconomicresources.Usersarechargedthroughtaxesandenergypaymentstobalancetheeconomicresourcesusedbythestate,butnowwithoutastrictaccountingbalancerequirementwithinthepowersector,sinceexpensesand152RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONresourcescanbebalancedataneconomy-wideleveltobettermanagetheretributionoftheprovidedsocialvalue.Besidesriskallocation,animportantaspectofthepublicownershipapproachishowthedirectpublicinvestmentissourced.Directpublicexpendituremaybefinancedthroughaloanbypublicorprivatebanks.Iffinancedthroughprivatebanks,thesituationissimilartothedebtandequityprovisiontotheIPPcontractorintheauctionsapproachpathway,andfinancecostswillalsobesimilar(dependingontherelativestateandcorporatecreditratings)sincetheyhavetoproduceprofitfortheprivatebankingsector.However,otheroptionsareavailableinthepublicownershipapproach,suchaspublicfinancebynationalbanks.Inthecaseofpublicfinance,theStatehastoservethisdebt,butittypicallycandosowithlowerinterestratesthanthosefromcommercialbanks.InthecaseofdirectmoneycreationbytheState,adequatemonetarypolicieswouldhavetobeenactedtocontrolinflation,buttherewouldbenodirectdebtservice(itwouldbemanagedholisticallywithintheeconomy,andhencebeabletoaccountforthewidersocio-economicbenefitsassociatedwiththisinvestment)(Kelton,2020).Moreover,inthecontextoftheclimatecrisisandtheassociatedneedforanurgentandcollaborativeresponsetoit,evencountrieswithoutmonetarysovereigntycouldaccessinternationalclimatefinancefreeofinterestandevenwithnullorreduceddebtrepaymentrequirements.Thiscouldbeanimportanttooltoaddressfairnessandjusticetransitionrequirements(IRENAandAfDB,2022).CITIZENSORUSERSPUBLICOWNERSHIPPUBLICFINANCEDEBTSERVICING?O&MEXPENDITURETAXES&ENERGYPAYMENTSENERGYPAYMENTSLT-REOPTION1LT-REOPTION2DIRECTPUBLICEXPENDITUREAUCTIONSforenergy$$$$PRIVATEINVESTMENT$$$$$$$$$IPPcontractorEPCcontractorRisks:PerformanceandconstructionProﬁtsProﬁtsRisks:PerformanceandconstructionFIGURE43.Energyauctionsandpublicownership:TwoLT-REprocurementpathwaysNote:O&M=operationsandmaintenance.153Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismFosteringeffectiveparticipationAttentionshouldbegiventoreducingentrybarriersfornewstakeholderssuchashouseholds,smallandmedium-sizedbusinesses,sectorcoupling,municipalities,co-operativesandenergycommunities,sincethisisapre-conditionfortriggeringtheneededcollaborativeeffort.Inliberalisedenvironments,effectivelyinvolvingsomeoftheseactorsmayrequirearticulatingout-of-marketelements.Inregulatedenvironments,thismayrequireimplementingadequateparticipationrulesandfacilitatinginfrastructurethatempowersdecentralisedandmulti-stakeholdereffectiveandequitableinteraction.Thebenefitsfromriskreductionprovidedbylong-termregulatedpaymentsgobeyondreducingthecostsofelectricity.Enhancedparticipationofhouseholds,smallandmedium-sizedbusinesses,communities,energyco-operativesandmunicipalities,whichareusuallymorereluctanttofacerisk,isanadditionalpotentialbenefit.However,unlessproperlydesignedtocapturesystemandsocialvalue,competitiveauctionsbasedfundamentallyonpriceminimisationdisplacesmallerstakeholdersthatarenotabletoplaywitheconomiesofscale,togetaccesstocheapfinancingortofulfiltechnical,economicoradministrativecriteriainthepre-qualificationphase(Fell,2017;Grashof,2019;IRENA,2017).Thistendstofavourlarge-scaledevelopersandtodisadvantagesociety-ledinitiatives,negativelyimpactinglocaleconomiesandemploymentandresultinginlackofsocialparticipationandacceptance.Inbothregulatedandliberalisedsystems,governanceshouldincludetherighttoparticipateinthedesign,planningandoperationofthesystemforallusers,directlyorviaaggregators.LT-REprocurementmechanismscanincludenon-competitive(out-of-marketinliberalisedsystems)mechanismstailoredtopromotehighsocialandsystemvalueprojectsandtoretainstakeholderdiversitythankstowiderpublicengagement.Thesecanbe,amongothers,feed-intariffsorfeed-inpremiums,fixedpricesindexedto(butnotequalto)thelarge-scalecompetitiveauctions,andnetbillingschemes.HelpingtocreatequalityemploymentQualityjobcreationisanessentialelementofajusttransition.LT-REprocurementshouldtakeintoaccountexistingdomesticresourcesandcapabilities,identifyingwaystomaximisedomesticvaluecreationbyleveragingandenhancinglocalindustries.Localcontentrequirementsareoftenadoptedtosupportnascentanddomesticrenewableenergyindustriesandtomaximiselocalvaluecreationbystimulatingdemandforlocallysourcedequipmentandservices.Increasingthedepth,lengthanddiversityofrenewableenergysupplychainsisacrucialfactorformaximisingthelocalbenefitsfromtheenergytransition.Thisrequiresaholisticapproachtotransitionpolicymaking,reachingfarbeyondtheenergysector(IRENA,2020c).Aconcentrationofprojectsinresource-richregionscanoverloadcertainregionsanddisadvantageothers.LocationalsignalsembeddedinLT-REprocurementcanalsobeusedtofostersocialvaluecreationbytargetingthedeploymentofnewcapacityinareaswhereitmaximisessocialvalue.Amoreevenregionaldistribution,togetherwithaproperbalanceoflarge-scaleanddistributedresources,canhelpspreadthesocio-economicbenefitsofrenewableenergyprojectsandimprovethesystem’sresilience.154RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONShort-termflexibilityprocurementTheLT-REprocurementmechanismcannotdealwiththedetailsoftheshort-termelectricitysupplytomatchdemand,butonlywithacoarseapproximationtobalancegenerationanddemand.Itisnotpossibletoperfectlyforecastbothdemandandsupplyevenonedayahead,muchlessyearsinadvance.Hence,differenceswillalwaysexist(althoughsmallerifproperLT-REprocurementisinplace)betweentheelectricityprocuredviaLT-REandthefinalload.Thisdifferencewouldbesettledthroughflexibilityprocurementmechanisms.Procuringflexibilityismainlydrivenbyshort-termrequirementsanddynamics,sincethisservicedealswithaligningdemandandgenerationintheveryshortterm.Moreover,thecharacteristicsofflexibilitysupplyareinmostcaseswellalignedwithexistingshort-termprocurementmechanisms,suchasmarginalpricingwholesaleelectricityprocurement.Therefore,ashort-termflexibility(ST-Flex)procurementmechanismmaybeexpectedtoplayamajorroleindualprocurementbycomplementingLT-REprocurement.ThisiswhythisreportfocusesontheST-Flexcomponentoftheflexibilitypillarfromdualprocurement.However,along-termflexibility(LT-Flex)componentcouldalsoplayanimportantroleintheflexibilitypillar,bothtosmooththedisruptiveelementsofthetransitionprocess(guaranteeingflexibilityadequacythroughout)andtoaddressspecificcharacteristicsofsomeflexibilityservices(suchasseasonalstorageandsystemintegration).WhetherLT-Flexprocurementwillremainasecondarycomponentfromtheflexibilitypillar,mainlyreinforcingtheST-Flexcomponent,orwhetheritwilltakeonhigherrelevance,islikelytobecontextandtimedependent.Batteryroom,Shutterstock155Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismInST-Flexprocurement,theshort-termsystemreliabilityisguaranteedbyaliquidandmulti-actorexchangesystem.Itisbasedonmarginalpricing,withagranularbiddingformatandwithoutscarcitypricecapsthatcouldlimittheeconomicfeasibilityofinvestmentsinflexibility.Itdealswiththeresulting“netload”,thedifferencebetweenthefinalloadandLT-REproduction,bymeansoftheactivationofsustainableflexibilityassets.AswithLT-REprocurement,ST-Flexprocurementcanhavebothmoreregulatedormoreliberalisedversions,withmanyofthechallengesbeingcommontoboth.Oncethepowersystemgetsclosertorealtime,itsoperationrequirementsarealikeunderbothregulatedandliberalisedorganisationalstructures.Underoptimalinformationconditions(thesystemoperatorhavingfullvisibility/knowledgeofrealmarginalcosts)andunderoptimalmarketconditions(nomarketpower,withoutspeculativeaction,accountingforexternalities)boththeliberalisedandregulatedversionofthisallocationprocesswouldleadtothesameresult.Box29.Summaryoftheshort-termflexibilityprocurementmechanismThegoalofST-FlexprocurementistomeetthedifferencebetweengenerationfromLT-REprocurementandreal-timeelectricitydemand.Insimpleterms,ST-FlexprocurementisresponsibleforthedispatchoftheportionofelectricitynotcoveredbyLT-REprocurement,whichcanbeunderstoodastheremaining“netload”,aswellasformanagingthesurplusofLT-REgenerationontopoffinaldemand.TheST-Flexprocurementoccursthroughtheactivationanddispatchofflexibilityresourcesincludingdemand-sideresponse,distributedenergyresources,storage,dispatchablerenewableenergyandsectorcoupling(e.g.vehicle-to-grid,power-to-X).TheST-Flexprocurementmechanismshouldalsoprovideappropriateinvestmentincentivestomeetthepowersystem’sflexibilityadequacycriteria.Forthispurpose,anddependingoncontextandtimealongthetransition,ST-FlexprocurementmayneedtobecomplementedwithaLT-Flexcomponent.TheST-Flexdispatchisbasedonmarginalcosts,althoughadditionalregulatedpaymentscouldbeinorder.Inmanyways,theST-Flexdispatchissimilartocurrentdispatchsystemssuchasthosefromwholesalemarkets(day-ahead,intra-dayandnear-real-timemarkets),cost-of-servicedispatchbyVIUsandshort-termbalancingperformedbysystemoperators.Themaindifferencefromcurrentdispatchmechanismsisthatinsteadofattemptingtodispatchallgenerationwiththissinglemechanism,ST-Flexprocurementdealsexclusivelywithflexibilityresources,withthebulkofelectricityhavingbeenallocatedbyLT-REprocurementandhencenotobtainingwindfallprofitsfromflexibilityservicesitdoesnotprovide.Otherdifferencesaretheparticipationofalargerarrayofactorsbeyondenergygenerators,highertimegranularity,andwiderspotpricerangestocapturethesystemvalueofflexibilityasafunctionoflocationandtime.DesignofST-Flexprocurementruleswillneedtoalignpriceswiththevalueofflexibilityforthesystemandsocietyasawhole,equilibratingtherolesofproductionanddemand,favouringshiftingbusinessmodelsfromproduct-basedtoservice-based,andguaranteeingtheincreasedeffectiveparticipationofallagents.156RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONThus,asoccurswithLT-REprocurement,bothliberalisedandregulatedversionsofST-Flexprocurementcanbeusedinaccordancewiththeexistingsocio-politicalcontext,withthecommonchallengebeingtohaveadequategovernancetoovercomefailuresthroughcollaborativemechanisms.Themostliberalisedversionsshouldtakemeasurestoavoidmarketfailuressuchasmarketpowerabuse,elementsofspeculativeactionorignoringexternalities.Moreregulatedversionsshouldaddressbetteraccesstoinformationonthecostsofpowerandflexibilityplants(especiallyifgenerationhasbeenopenedtoplantsoperatedbyprivatefirms).Inboth,itisessentialtoestablishpropergovernancethatallowsforeffectivesociety-widecollaborativeparticipation.AspacetosettledeviationsItisnotpossibletoperfectlyforecastbothdemandandsupplyadayinadvance,muchlessyearsinadvance.OnceenergyproductshavebeencontractedinLT-REprocurement,theelectricitysystemstillneedstoensureitsreliableoperationinrealtime:electricitymustexactlymatchdemandinanymomentandlocation.TheST-Flexprocurementconceptisanevolutionfromthedesignfeaturesoftheday-aheadandintradaymarketscurrentlyinoperation,withgateclosureclosertodispatchinordertocapturethefullvalueofflexibility.However,ST-Flexprocurementwoulddifferfromthecurrentelectricitydispatchstructuresinbothliberalisedandregulatedsystems.Akeydifferencewouldbetheparticipatingactors.Incurrentoperationalstructures,thesupplycurveiscomposedofenergygenerators,andthedemandcurveofpotentialconsumersandcentralprocurementbodies.InST-Flexprocurement,theseroleswouldbemorenuanced,withaplethoraofactorscapableofofferingbothupwardanddownwardregulation.DeviationsfromLT-REprocurementcanbeinbothdirections,withactualrenewablegenerationlowerthanactualdemandorviceversa.Ineithercase,bothgenerationanddemandcanhelptoestablishthebalancethroughitsparticipationinST-Flexprocurement.Ifactualrenewableenergygenerationislowerthanactualdemand,theST-Flexmechanismcanprocureeitherupwardgenerationordownwarddemand.Ifactualrenewableenergygenerationishigherthanactualdemand,theST-Flexmechanismcanprocureeitherdownwardgenerationorupwarddemand.InST-Flexprocurement,flexibilityresourcesaredispatchedbymeritorder(Figure44).157Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismOPERATIONALREPRESENTATIONCONCEPTUALREPRESENTATION-200-180-160-140-120-100-80-60-40-200AvailableenergyDemandsideresources(increasingdemand)Storage(withdrawingenergy)020406080100120140160180200Storage(injectingenergy)Demandsideresources(reductionofdemand)DispatchablegeneratorLoadMWMWShortfallofelectricitySurplusofelectricityLT-RELT-DemandShortfallSurplusLTmatchingofsupplyanddemandforecastingMismatchbetweenActualloadandLT-REprocuredelectricityST-FlexprocurementST-FlexprocurementUsersarewillingtopayforadditionalload-similartotodaysituation.Storage,demandsideresourcesanddispatchablegeneratorsrankedperoer.ExcessofenergyavailablefromLT-REactors.Storageanddemandsideresourcesremuneratedtowithdrawenergytokeepthesystemstable.STdeviationsFlexresourcesmeritorder•Flex.Generation•Demandresponse•Storage•SystemintegrationLT-RELT-Demand•Upwardsgeneration•DownwardsdemandLT-RELT-Demand•Downwardsgeneration•UpwardsdemandUSD/MWhUSD/MWhFIGURE44.ST-FlexprocurementtoaddressdeviationsbetweengenerationfromLT-REprocurementandactualdemand158RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONBasedonshort-termexchangeST-Flexprocurementisbasedonshort-termsignals.HourlyexchangeisunfitforhighsharesofVRE.Thesettlementofenergyexchangeinboththeday-aheadandreal-timemarketsshouldthushappenformuchshortertimeframes,ideallyaround15to5minutes,affectingboththefinancialsettlementsandthedispatchschedule.Five-minutefinancialsettlementislikelytobecomethenorm,ashasoccurredinAustralia(AEMC,2017;Filatoff,2020;IRENA,2019c).LocationalvalueST-Flexprocurementshouldalsoincorporateelementscapturinglocationalvalue,differentiatingthevalueofflexibilitybetweenlocationsonthegrid,hencecontributingtoreducedcurtailmentandgridcongestion.76Procurementstructureswithhighgeographicresolutionprovideanaccurateeconomicrepresentationofthephysicalrealityandoperationofpowersystems,andhencefacilitateoverallsystemcostminimisationandvaluemaximisation.ThesehavebecomecommoninpartsoftheUnitedStates,wheremarketssuchasERCOT(Texas)uselocationalnodalpricing.Thesystemoperatorusesasinputsthecharacteristicsofthetransmissionsystemandoftheresourcesbiddinginthemarkettosolvealarge-scalemarketmodelfortheleast-costsystemdispatch.Themodelalsogeneratespricesforeverynodeonthegrid.High-resolutiondesignconstitutesthebenchmarkforshort-termprocurementstructuresandcanreducetheoverallcostsofoperatingpowersystems(IRENA,2019c;IRENA,IEAandREN21,2018).76NotesynergieswiththeLT-RElocationalprocurementsignals:withbothLT-REandST-Flexaccountingforlocationalvalue,overallsystemcostscanbeminimisedthroughcollaboration.159Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismEnablingallactorsShort-termmarketsimproveliquidityandcompetitionbyenablingmoreresourcestofullyparticipate,especiallythoseresourcesthataremoreflexible.Regulatedsystemsalsobenefitfromincreasedparticipation.Allcleanflexibleresources–thosethatcangeneraterapidly,holdbackgeneration,consume,orstoreandshiftelectricity–shouldbeenabledtoparticipatedirectlyinST-Flexprocurement.TheparticipationofaggregatorsinST-Flexprocurementshouldbefacilitated.Bymanagingadiversifiedportfolioofflexibilityresources,eachofwhichcanprovidearangeofflexibilityservices,aggregatorswouldhavetheincentivetoeffectivelymanageflexibilityrisksandfindtherightbalancebetweencompetitionandcollaborationtomaximisevalue.NoadministrativecaptothescarcitypriceMostcurrentmarginalpricingsystemssetalimitonthemaximumpriceachievableinwholesalemarkets.Thisisdoneforpoliticalreasonsandtoavoidmarketpowerabuse.However,thiscanbedistortivefortheadequatepriceformationwhensourcingflexibility.MoreeffectivescarcitypricingcouldencourageST-Flexprocurementparticipantstoreacttopricesignalsandtobeavailablewhentheyaremostneeded,whileallowingthemtorecoverinvestmentcosts.Itisthereforecriticaltoensurethatadministrativeandimplicitpricecapsareremovedtoallowforscarcitypricingtoplayitsroleinflexibilityprocurement.ByseparatingtheLT-REandST-Flexprocurements,oneofthemainissueswithunlimitedscarcitypricingisdirectlyaddressed.Notallgenerationinascarcityeventwillberewardedatthescarcityprice,onlythegenerationanddemandcomponentssupplyingtherequiredflexibility,whichminimisesthechancetogeneratewindfallprofits,andpreventshighoverallelectricitypricevolatilityandimpactonusers.Hence,scarcitypricingfacilitatesflexibilitysystemadequacywithoutjeopardisingthepossibilityofofferingreliableandstablepricestofinalcustomers.Moreover,alargenumberofactorsinthesystemwillreducetheoccurrencesofscarcityeventsandtheleveloftheassociatedscarcityprices.However,assomedemandmayremaininflexibletoprices,ifneededenergyauthoritiescanstillfixthemaximumpricetheST-Flexprocurementcanbecleared.Anadequatelydeterminedvalueoflostload(VOLL)canbeusedforthispurpose.VOLLrepresentsthepricethattheoverallsystemisestimatedtobewillingtopaytoavoidoutage.TheVOLLcanbeestimatedbyenergyauthoritiesconsideringvarioussocio-economicfactors,aswellastime-relatedconsiderations(lossofloadat4a.m.maynothavethesameimpactasthelossofloadat4p.m.).ButtheuseofVOLLtosetacaponST-Flexpricesatasociallymeaningfulvaluerequiresimprovedgovernanceandparticipationtoallowallstakeholders,andespeciallyusers,toeffectivelycontributetoVOLLdetermination.EstimatedVOLLvaluessofarexploredinliberalisedcontextsaretypicallyquitehigh,severalthousandsofdollarspermegawatt-hourabovecurrentadministrativescarcitycaps,asillustratedinFigure45forEUmarkets.Hence,theroomtoimproveflexibilitysignalsissubstantial,andinthedualprocurementstructureitsimplementationwouldnothaveinefficientnegativeconsequencesbyrewardingallgenerationatthisprice:onlyresourcesandvolumesparticipatinginST-Flexprocurementwouldreceivethisprice.7777Reliabilityoptionscanalsobeusedtofurtherdiscriminatehowscarcitypricingisdistributedacrossflexibilitysuppliers.160RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONAcaponthelevelofanadequatelydeterminedVOLLwouldprovideincentivestoinvestinflexibilitycapacitytofulfiltheST-Flexprocurementneeds.78Itshouldbenotedthatscarcityeventsarerareincurrentdevelopedsystems,oftenaconsequenceofstructuralovercapacityrelatedtotheadditionoffossilfuelcapacityinthelastdecades.However,asthenecessaryphasing-outoffossilfuelplantsprogresses,clearerpricesignalswillbeneededtoattractdispatchablerenewableenergygeneration,storageassetsanddemand-sideresources.Retailrateseffectivelyinvolvingusersinsystemoperation(directlyorthroughaggregators)canhelptoreduceflexibilityrequirementsandhenceoverallsystemcosts.Inthecaseofdualprocurement,userswouldhavetheoptionofeitheraccommodatingtheirconsumptiontoLT-REprocurement(withitstimeandlocationdistribution),henceaccessinglowpricesbyhelpingtomatchrenewablepowergenerationanddemand,orconsumingmoreexpensiveelectricitycomingfromST-FlexprocurementwhentheyopttonotactivelyaligntheirdemandwithLT-REcharacteristics.Policyandregulationwouldhavetocomplementthisapproachtoguaranteetherightofbasicenergyaccesstoall,shieldingthemostvulnerableuserswhoareunabletoproperlyengagewithpricesignals,andpromotingcollaborativeapproachestoaddressenergypovertyandtheinclusionofvulnerablehouseholds.Long-termflexibilityprocurementcomponentEvenwhencapsareremovedfromscarcityevents,inspecificcontextsandespeciallyduringthetransition,theST-Flexprocurementmechanisminliberalisedsystemsmayneedtobecomplementedbyalong-termflexibility(LT-Flex)procurementcomponent.Thiswouldhelpguaranteesystemadequacyinaperiodwhenflexibilityrequirementsareincreasing.TheLT-Flexmechanismscouldtaketheformofcapacityauctionstargetedtocoverashareofflexibilitycosts,hencecomplementingthecostrecoverymechanismprovidedbyST-Flexprocurementandreducingtheriskperceptionofinvestors.79DirectpublicinvestmentisalsoanoptionforLT-Flexprocurementinliberalisedsystems.78Asindicatedabove,thiscanbecomplementedwithanLT-Flexcomponentintheflexibilitypillarofdualprocurement.79AlthoughST-Flexseemsboundtobecomethedominantcomponentoftheflexibilitypillar,thefinalmixofST-FlexandLT-Flexwillbetimeandcontextdependent.FIGURE45.DifferencebetweenadministrativepricecapsandestimatedVOLLinselectedEUcountriesSource:EuropeanCommission,2016.0500010000150002000025000300003500040000PolandPortugalSwedenIrelandFranceDenmarkDayaheadmarketcapIntradaymarketcapAncillaryservices(Balancingmarkets)capEstimateofVOLLEUR/MWh161Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismBox30.Theendofadditionalregulatedpaymentsandsubsidies?OnceVREhasanappropriateprocurementmechanism(LT-RE)thatisabletoproperlyorganisetechnologieswithhighcapitalexpendituresandlowopportunitycosts,thenVREwillnolongerneedadditionalregulatedpaymentstoovercometheunfitnessofthecurrentorganisationalstructures.Atthesametime,ST-Flexprocurement,ifproperlydesignedandwhenneededcomplementedwithLT-Flexprocurement,shouldberesponsiveenoughtoenableandprocurethewholearrayofflexibilityresources,includingstorage,demand-sideresponseandsectorcoupling(e.g.vehicle-to-grid,power-to-X).Hence,properLT-REandST-Flex/LT-Flexprocurementwilleliminatetherootcauseofmostadditionalregulatedpaymentsassociatedwithinappropriateorganisationalstructures,sincetheappropriateretributionstructurebecomesfullyinternalisedintheorganisationalstructure.Duringthetransition,theLT-Flexcomponentcouldberequiredtoplayasimilarroleastoday’sadditionalregulatedpayments,mitigatingriskstoenableflexibilityproviderstoundertake,attherequiredpace,theneededlong-termflexibilityinvestmentsinsituationswheretheutilisationrateandexpectedpricesarestilltooloworuncertaintoguaranteereturnoninvestmentandreasonablefinancingcosts.However,sincetheseadditionalregulatedpaymentswouldbeveryfocusedonspecificsystemneeds(incontrasttoaddressingmisalignments),theirvolumewouldbemuchsmallerthanadditionalregulatedpaymentsundercurrentorganisationalstructures.Subsidiescouldstillbeneededduringthetransitiontoacceleratetheprogressionofnewtechnologiesalongtheirlearningcurves,sothatthetargetedtransitionratescanbeachieved.ThiscouldbethecaseforsomeofthenewflexibilitytechnologiesparticipatinginST-Flexprocurement,whichareatthebeginningoftheirlearningcurves.Subsidiestargetedatnewtransition-relatedtechnologiesandusedforthispurposewouldhavesimilardynamicstothosethatallowedtheinceptionofVRE,fossilfuelsandnuclearpowerplantsinthepast.Loans,fiscalandfinancialmeasurestoassisttheinvestments,andspecificmeasurestoreducethenon-financialbarriers(e.g.gridcodes)maystillbeneededtotriggerthedeploymentofflexibleresourcesattherequiredrate.Anotherdimensionthatduringtheearlytransitioncouldrequiremeasuresthatareanalogoustocurrentadditionalregulatedpaymentsisfosteringtheeffectiveinvolvementofusers,especiallyinliberalisedsystems.Evenwhensupportedbysubsidiesfortheacquisitionofflexibleandcontrollabledevices(heatpumps,electricvehicles,etc.),residentialpro-usersmaystillbehesitanttoenterintoamarket(evenwhenpooledwithotherpro-usersthroughaggregators)whentheentryriskisperceivedastoohigh,thereturnsareuncertainandthemarketdoesnotreallyrecognisethevalueoftheenergyservice(SmartEN,2020).Fine-tuned(transitional)LT-Flexcomponentscouldbeenvisagedtoencouragetheactivationof(especiallydistributed)resourcestofacetheuncertaintythatST-Flexprocurementmaypose.Fosteringfullparticipation,avoidingdistributionalbarriers(onlymoreaffluentusersbeingenabled)andpromotinggoodgovernancecouldalsorequirededicatedmechanismstobefactoredintoLT-Flexprocurement.162RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONInregulatedsystems,thedispatchofflexibilitycanbetechno-economicallyanalogoustothatinliberalisedsystems,i.e.basedonmarginalcostingestimatesandwhennecessarybackedwithanLT-FlexcomponentwithsimilarstructuretotheLT-REprocurementinthesesystems.80Integratedplanningbackedwithpublicinvestmentislikelytoplayamajorroleinguaranteeingsystemadequacybydeployingandactivatingtheneededflexibility.AuctionsarealsoanoptionforLT-Flexprocurementinregulatedsystems.AncillaryservicesprocurementAncillaryservices(seechapter3)makeupasmallportionoftotalelectricitysystemcosts,butneverthelessareapillarofanypowersystem,providingthemeansandresourcestoadaptthelastportionofgenerationand/orloadtokeepthesystemreliable,secureandefficient.Systemoperatorscurrentlyusevariousformsofancillaryservicesprocurementmechanismstoensurethenecessaryresourcesforthemanagementandcontroloftheelectricitysystemuptorealtime,inordertomaintainaconstantbalancebetweenelectricityproductionandconsumptionandtokeepfundamentalnetworkparametersstable.Inbothregulatedandliberalisedcontexts,theseprocurementmechanismshavelimitedliquidityandcompetitionduetorestrictionofparticipation,regulatedprices,anddynamicsofprocurement.Insomepowersystemsancillaryservicesarenotdirectlyremunerated,butratherarepartoftheobligationofgeneratorstobeabletoparticipateinthesystem.Duringtheenergytransition,meetingtheneedsofthenewpowersystemwillrequirechangestothesesystemservicesandtheirprocurementmechanisms.Amongthemorenotablechangesexpectedinsystemservicesprocurement,twohavebeenconsistentlynotedinbothresearchandreal-lifeexamples:•Openingthesystemserviceprocurementmechanismtoalargernumberoftechnologies(demand-sidemanagement,batteries,VRE)andfromdiversifiedareas(cross-bordertrade,distributiongrids);and.•Thecreationofnewsystemserviceproducts,toaddressthenewneedscreatedbyVRE.Synergiesexistbetweenthesetwochanges,asthenewservicesrequiredmayalsobeprovidedbythenewactorsthemselves.NewactorsforsystemancillaryservicesToday’ssystemserviceprocurementmechanismsaredominatedbylargecentralisedpowerplantsbasedonfossilfuels.Currentorganisationalstructuresmayhaveembeddedlimitationstofosterparticipationinprovidingsystemservices,especiallyregardingtransition-relatedtechnologies.Eventhecurrentdefinitionsofsomeconventionalsystemservicesmaynotbesuitedforallthedifferentresources.Thislimitstheresourcesavailabletosystemoperatorsforprovidingsystemservices(IRENA,2019c).Thetransitionincreasesthediversityandnumberofactorsparticipatinginthepowersystem,whilesimultaneouslyrequiringnonfossilfuel-basedserviceproviders.Openingthedoortomoreactors(suchaselectricitystorage,VREpowerplants,demand-sidemanagementresourcesandsmallpowerplants)reducestherelianceonthecurrentfossilfuel-basedserviceproviders,facilitatingtheirphase-out.However,theparticipationofnewactorsmayrequirevariousmeasures,suchasspecificgridcodesandupgradestothesystemservicesprocurementmechanism(IRENA,IEAandREN21,2018).Inconventionalpowersystems,providersofancillaryservicesareusuallyconnectedatthetransmissionlevel,butnewproductprovidersarealsoemergingatthedistributionlevel,oftenco-ordinatedbyaggregators.80LT-Flexprocurementmechanismssuchasdirectpublicinvestmentorcapacityauctions(toinvolveIPPsforflexibility).163Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismForexample,inAustraliaspecificminigridoperatorsarealreadyallowedtoprovidesystemservices(IRENA,2020c;Villar,BessaandMatos,2018).RoleofVREWithinthedualprocurementproposal,actorsinboththeLT-REandtheST-Flex/LT-Flexprocurementsmayparticipateintheancillarysystemservicesprocurementmechanism,allowingthemtostackrevenuesamelioratingtheirbusinesscaseinliberalisedsystems,andoptimisingoverallcostsinregulatedsystems.Withmoreadvancedforecasttechnologiesandcontrolsystems,VREcanbearbalancingresponsibilities,andthisisthecaseinmanyEuropeanmarkets.VREproducerswillhavetoforecastascorrectlyaspossibletheirgenerationandhedgetheirvolatility,henceimprovingsystemsecurityandeconomicefficiency(JoosandStaffel,2018).State-of-the-artVREgeneratorsarecapableofprovidingarangeofrelevantsystemservicestostabilisethegrid(IRENA,2019c),asisalreadythecaseinDenmark.Inlate2020,forthefirsttime,windturbinesparticipatedintheDanishmarketforancillaryservicesprovidingregulation(i.e.rampingupordownuponrequestofthesystemoperator),helpingtosupplytheservicesthatEnerginet,theDanishsystemoperator,needstomaintainbalanceintheelectricitygrid.Inparticular,accurateweatherforecastsmadeitpossibleforwindturbinestocompetewithdispatchablepowerstations,whichuntilrecentlyhavebeentheonlyoptionsinDenmarktorampupordownifafaultoccurredintheelectricitygrid,iftheweatherwaswindierthanforecast,orifconsumptionwasdifferentthanexpected(Energinet,2020).RoleofbatteriesBatteriesarewellsuitedtoprovidebalancingservicesandfastfrequencyresponsebecauseoftheirshortresponsetimes(IEAandREN21,2018;IRENA,2019c).Indeed,themaximumvaluefromelectricitystorageisobtainedwhentheoperationisco-optimisedtoprovidemultipleservices,bothintheday-aheadandtheancillaryservicesmarket.Theoptiontoletstorageprovidesystemservicesisalreadyinplaceindifferentpowersystems,forexampleintheUnitedKingdom(Box32).164RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONRoleofdemand-sideresourcesPowersystemoperatorshavesincetheinceptionofpowersystemsusedindustrialloadstoprocuresomeancillaryservices,withinterruptibleloadsbeingshutdownwhenthegridcannotcopewithexcessivedemand.Ascontrolandvisibilityoverbothloadandsystemneedsareincreasing,theactiveparticipationofdemand-sideresourcescansignificantlyincrease,providingavarietyofsystemservices.Thiscanhappenforbothlargeindustrialloadsandaggregateddistributedloads.Aggregators,inparticular,canprovideflexibilityatthedistributionsystemlevel.Inliberalisedsystemsthisrequireshavinginplacearegional/localmarketforflexibility.Texas,inparticular,hasarelativelylonghistoryofdemand-sideparticipation(Box31).NewproductsforsystemancillaryservicesAninfluxofnewtechnologiesinapowersystemaltersitsstructure,andhencetheancillaryservicesrequiredtocopewiththesystem’sneedschange.Newancillaryservicesarerequiredthatrecognisethecharacteristicsofnewtechnologiesandthenewneedsofthepowersystem.Fastreserve,over-generationmanagementandrampingareamongthenewancillaryservicesrequirements(RGI,2020).Fastreserve:Thisancillaryservicecouldbeessentialformanagingtheconsequencesofadecreasingsysteminertia,whichuntilnowhasprovidedthecapabilityforthesystemtoresistaninstantaneousimbalancebetweengenerationandconsumptionthroughtherotatingmassesoflargepowerplants.Fastreservewouldbeaservicetodeliveraveryfastresponse(activationtimebelow1second)bydispatchablepowerplantsandstorage.OneexampleisEnhancedFrequencyResponse(EFR)procurementintheUnitedKingdom(Box32).Box31.Demand-sideparticipationintheancillarymarketTheTexasindependentsystemoperatorERCOThasallowedtheparticipationofdemandintheancillaryservicesmarketsince2002,whenthepowersystemopenedtocompetition,encouraginglargeindustrialcustomerstoparticipateinthismarket.Thedemand-sideresourcesparticipatingintheancillaryservicesmarketarecalled“responsivereserve”andprovideinterruptibleloads,byagreeingtocurtailtheirloadwithin10minutesofnotice.Inthebeginning,ERCOTallowedonlyupto25%ofloadresourcestoparticipateintheresponsivereservemarketbutthisshareincreasedto60%in2018.Bythatyear,ERCOThadatotalof300loadresourcesregistered,foratotalcapacityof4.2GW(morethanthelargestsinglepowerplantinTexas).Thegreatmajorityofloadresourcesthatprovideancillaryservicesarefromtheindustrialsectorandlargecommercialbuildingssuchasdatacentres.165Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismOver-generationmanagement:Thisisaservicecapableoffacingthechallengeofstructuralover-generationfromVRE(whengenerationpotentialexceedsdemand).Thisservicecouldbeprovidedbystorage,demandresponse(industrialprocessesoraggregateddomesticdemand)andsystemintegrationsystems,includingelectrolysersandvehicle-to-grid.Ramping:Deviationsfromexpectednetloadmayleavethedispatchableresourceswithsufficientcapacitybutwithoutenoughrampingcapability.Inotherwords,thecapacitycouldbepresent,butitisnotabletomeetthesetpointintime.Thischallengeisexacerbatediffastdispatchableconventionalgeneratorsarebeingphasedoutandhencetheablecapacityitselfismissing.RampingservicerequirementsaretypicallyfoundaroundsunriseandsunsettimesinsystemswithsignificantsolarPVcapacity.Rampingserviceswouldbeprovidedbysystemparticipantsthatarewillingandabletohavesharpschedulechangestomeetsystemneeds.Examplesarethe“rampingcapacityproducts”beingprocuredbyindependentsystemoperatorsystemsintheUnitedStatesandintegratedintheirco-optimiseddispatchprocedures(Box33).Box32.EFRauctionintheUnitedKingdomThepowersystemintheUnitedKingdomislosinginertiaasthermalgeneratorsshutdownwiththeincreasingpenetrationofVRE.Thus,enhancingtheabilityofthesystemtorespondtosuddenpowerlossesorsurgeshasbecomemoreimportant.TheUK’sNationalGridestablishedanewsystemancillaryservicesproduct,calledEnhancedFrequencyResponse(EFR).SuppliersofEFRhavetoprovidefullcontractedpoweroutputwithin1second.Bycomparison,thepreviousfastestfrequencyresponseserviceaskedthefulloutputtobereadyin10seconds.Atechnology-neutralcapacityauctioninsummer2016forfour-yearcontractsrewardedeightbatterystorageprojectstotalling201MWofcapacityatapricerangebetweenUSD9.4andUSD16perMWperavailablehour(NationalGrid,2019).Thesuccessfulbidsweremuchlowerthanaveragebidpricesforconventionalfrequencyresponseservices.Box33.RampingproductsinCAISOTheCaliforniaIndependentSystemOperator(CAISO)in2016implementedtheFlexibleRampUpandFlexibleRampDownUncertaintyAwards,whichareancillaryservicestoprocureramp-upandramp-downcapabilityfor15-and5-minutetimeintervals.Theproductisprocuredintermsofmegawattsoframpingrequiredina5-minuteduration,andanyresourcecapableoffulfillingtherampingrequirementcanparticipateintheprocurementprocess.Thepriceforprovidingramp-upandramp-downserviceswascappedatUSD247/MWhandUSD152/MWhrespectively(CAISO,2018).166RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONPromotingsociety-wideparticipationTheroleofenergyendusersissettochangeduringtheenergytransition(seechapter3).Thischangeisalreadyoccurringgraduallyinmanypartsoftheworld,becominganimportantcomponentoftheenergytransitionthatshouldpermeateitsorganisationalstructures.Theenergytransitionwillseealargerrangeofenergyservicesmovingtothepowersector,directlyorindirectly(becauseofsectorcoupling).Thiswillimplyalargerdependencyofendusersonthepowersystemanditsorganisationalstructures,butalsoviceversa.Thepowersystemanditsorganisationalstructureswillincreasinglydependondistributedresourcesbothforgenerationandflexibility.Thiscontextwilltriggergreaterawarenessamongusersoftheirpotentialroleinthepowersystem,evolvingfromthetraditionalroleofpassiveconsumerstowardsanactiveroleinthedesign,planningandoperationofboththepowersystemanditsorganisationalstructures.Bothusersandpro-usershaveanimportantroletoplayinthedesign,planningandoperationofbothLT-REandST-Flex/LT-Flexprocurement.Fosteringthisactiverolecanbeinstrumentalinfacilitatingandenablingthesociety-wideparticipationneededtoensurethattheorganisationalstructureisalignedwiththegoalsofclimateambitionandresiliencebuilding.Theparticipationofusersandpro-usersinorganisationalstructurescouldbedirectorindirect.Indirectparticipationmayhappenbyresortingtoaggregators,energycommunities,minigrids,orviaapublicbodyrepresentingusersthatcannotparticipatedirectly,becauseoftechnicalorcomplexitybarriers.Billingstrategiesmayhelptoactivateflexibility.Inparticular,time-of-useornear-to-realtimetariffsandratesareexpectedtohaveacriticalrole.Theycanconveytousersaneconomicsignaltoadapttheirenergyuseinasystem-friendlyway.However,improvedinformationflowsandgovernanceareneededfortheseeconomicsignalstobeeffective.Likewise,measuresneedtobeestablishedtoguaranteefullaccesstoenergyandtheprotectionofvulnerableusers.DirectparticipationAsincurrentpowersystems,largeusershavemultiplepossibilitiestoparticipatedirectlyinthedualprocurementmechanisms.Theywouldbepartofthedemand-settingexercise,providingtheirfutureloadestimate,andwouldbeabletodirectlyparticipateintheST-Flex/LT-FlexandLT-REprocurements.WhiledirectparticipationofsmallerstakeholdersintheoperationandplanningoftheST-Flex/LT-FlexandLT-REprocurementsmightencountertechnicalorcomplexitybarriers,theycouldstilldirectlyparticipateinthedesignofthepowersystemorganisationalstructuresandrelatedprocurementmechanismsthroughdirectconsultation,givenappropriategovernance.AggregatedparticipationAssmallusersmayencountertechnicalorcomplexitybarrierstotheirdirectparticipationinplanningandoperationoftheLT-REandST-Flex/LT-Flexprocurementmechanisms,theycouldfindstrengthandorganisationalefficiencyinnumbers,associatinginvariousformstoreachacertainsizeandcharacteristicsofloadthatismoreconvenienttoparticipateinbothprocurementmechanisms.Enduserscouldcontractwithaggregatorstomanagetheparticipationinprocurementmechanismontheirbehalf,muchliketoday’senergyretailers81dowiththeconsumptiondimension.Indirectparticipationthroughaggregatorshasimportantprivacyanddecision-makingimplications.Apartialtransferofcontroloverflexibleresourcestoaggregatorsisneededforaggregatorstobe81Inthissenseenergyretailerscouldevolvetowardstheroleofaggregatorbyintegratingtheemergingrolesofusersandpro-usersinpowersystems.167Avisionforrethinkingpowersystemorganisationalstructures:Thedualprocurementmechanismabletoeffectivelyoperate.Forthistransfertohappen,thespecificcontractualtermsofactivationofflexibilityresourcesarekeytokeepthebalancebetweentheagilityoftheaggregator,thecomfortoftheassetowner,thetransparencyandaccountabilityoftheaggregators’operation,andtherespectofusers’privacy.Participationofflexibilitystakeholders,especiallysmallerones,inthedesignofthecontractualtermsandrulesfortheaggregatortodecidewhenandhowtheuser’sassetwouldbeactivatedandunderwhicheconomicconditions,isessentialtocreatethetrustrelationshipneededforparticipation.Contractualtermscanbenegotiateddirectlybytheprivateaggregatorsinmoreliberalisedsystems(withanappropriateregulatoryframework)andthroughpublicparticipationtosettherulesofpublicaggregatorsinmoreregulatedpowersystems.Forbothliberalisedandregulatedsystems,abetterbalanceoftheprofitandsocialgoals82canbereachedthroughpropergovernancewheredecisionmakingreflectsthewidersocialinterest.MinigridsAminigridcanbedefinedasalimitedsetofelectricitygeneratorsinterconnectedtoadistributionnetworkthatsupplieselectricitytoalocalisedgroupofusers.Minigridsmaybeconnectedtoadistributionortransmissionsystemthroughaparentconnectionpointorbecompletelyisolated,whilebeingpreparedforeventualmaingridarrival.Minigridscanprovideownersandtenantsaconvenientwaytosharethebenefitsoflocallyproduceddistributedenergyresources.Ifconnectedtothemaingrid,theminigridoperatormaybeenabledtobuyenergyfromanenergyretailerandthenresellittoendusersatthesite.TheymayalsobeenabledtoaggregatedistributedgenerationandgridservicesfromusersandmakeitavailabletotheLT-REandST-Flex/LT-Flexprocurements,ortomanagetheminternallytoreduceenergyexpenditures.AprominentexampleoftheminigridsmodelcomesfromAustralia(Box34).82Aggregationmaybebasedcompletelyonnot-for-profitmotives.Inthesecases,theparticipationinthepoolwouldnotbebasedonamarketagreement,butonasocialagreementabouttheuseofenergy.Examplescouldbeenergycommunities,co-operativesormunicipalentities.Box34.Australia’sembeddednetworksInAustralia,theso-calledembeddednetworks(minigridsrecognisedandregulatedbythesystemoperator)providevaluenotonlytousers,whocanaccessclean,inexpensiveenergyandparticipateincommunity-owneddistributedenergyresourcesystems,butalsotothegrid.Today,embeddednetworkscanprovidefrequencycontrol,voltageregulationanddemandresponseservices.Withstorage,embeddednetworkscanenjoytariffarbitrageanddelayedsolarPVself-consumption.TheAustralianexampleshowsthepotentialofamarketredesignthatenablesdemand-sideanddistributedenergyresourcestoparticipateinthemarketandprovidevalue,engagingconsumerswithsimpleoffersandstreamliningthecreationoflocalaggregators.168RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONProtectedusersMorevulnerableusersmaynotfinditpossibletoactivelyengageintheorganisationalstructure,byforinstancechangingtheirbehaviourinenergyuse,orfacingupfrontinvestmentinsmartappliances,ordistributedgenerationorstorage.TheirprecariouseconomicsituationmightmakethemriskaversetowardsmorecomplexcontractualtermswithanaggregatorandmorevulnerabletovolatileelectricitypricesontheST-Flexprocurementmechanism.Collaborativeapproachestosupporttheparticipationofvulnerablehouseholdsindualprocurementwillbeneeded.Fortheseusers,theenergyauthorityshouldfindregulatorymeasurestoguaranteethemfairelectricitypriceswhileadoptingmeasurestofostersystem-friendlybehaviour.Inmanyliberalisedretailmarkets,publicretailerswiththetaskofprotectingconsumershavelongexisted(forexample,the“AcquirenteUnico”inItaly),andtheycouldstillplayaroleinthedualprocurementproposal.Publicretailerswouldbeentrustedwithassuringelectricitysupplyatjustpricestoprotectedusers.Tomeetthisobjective,thepublicbodymaysignlong-termbilateralPPAsorparticipateinthedualprocurementmechanisms,andimplementatariffstructurethatcapturesthesocialvalueofelectricityaccessandtheeliminationofenergypoverty,factoringintherequiredredistributiveelements.6.3.TRANSITIONINGTODUALPROCUREMENTWithoutattemptingtodevelopadetailedroadmap,thissectionprovidessomehighlightsonthetransitionfromcurrentpowersystemorganisationalstructurestowardsthedualprocurementconcept.Firstly,awarenessisneededabouttherequirementtotransitionthesystemiclayerofpowersystemorganisationalstructures,withfocusedpolicyaction,sothatthesestructurescanenableandsupportthetransitioninothersystemiclayers.Thisreportaimstohelpdothisbyinclusively(coveringliberalised,publicownershipandhybridsystems)andthoroughlylayingdowntheconceptualframeworkandoutlyingapotentialwayforward:dualprocurement.Whenconsideringhowtoimplementaroadmaptotransitionfromcurrentpowersystemorganisationalstructurestothedualprocurementconceptualframework,twooutstandingconceptscometotheforefront:thewealthofexperiencesandknowhowfromcurrentorganisationalstructuresthatifproperlyappliedcanproduceasmoothtransition;thepossibilitytotransitionalongbothliberalisedandpublicownershippathways,withsignificantconvergenceelementsbetweenthem.ThedualprocurementcansmoothlyevolvefromcurrentexperienceThetransitiontowardsthedualprocurementapproachcanbuildupontheexperiencegatheredwithexistingorganisationalstructures.Itsconstituentpillars(LT-REandST-Flex/LT-Flex)seamlesslyevolvefromcurrentlong-termprocurementandshort-termelementsandexperiences,takingadvantageofbestpractices.Feed-intariffs,auctionedPPAsandpublicdirectinvestmentschemeshaveprovedsuitableforsupportingthedeploymentofCAPEX-intensiverenewablepowerplants,properlyacknowledgingtheircharacteristicsandprogressivelyincorporatingvalueconsiderations.Temporalandspatialgranularprocurementmechanismsbasedonmarginalcostsprovideagoodbasisforflexibilityprocurementwhenthepeculiaritiesoftheflexibilityresourcesfortherenewableenergyeraareproperlyacknowledged.Aholisticvisionandpolicyframeworkistheadditionalcomponentneededtofosterandsmooththeevolutionfromcurrentorganisationalstructureelementstothedualprocurementpillars(Figure46).169Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismAlthoughthedualapproachhasnotyetappearedinthepoliticalandregulatorydebateinasystemicway,asproposedinthisreport,theneedfordealingwiththepeculiaritiesofshort-termandlong-termprocurementmechanismsisalreadypresentinthedailyrealityofmanypowersystems.Thisisillustrated,forinstance,byhydro-abundantsystemsinLatinAmerica.Thesepowersystemsexperienceahighvolatilityofmarket-clearingelectricityprices,alternatingbetweenlongperiodsofzeroandnear-zeropricesduringwetseasons,toperiodsofhighpricesduringdryseasons.Inresponse,thosepowersystemshavechosendecadesagotocombinebid-basedshort-termelectricitydispatchwithmandatoryandvoluntarylong-termmechanismstoguaranteesystemadequacy83(BarrosoandRudnick,2021).Fromsupportmeasuretobackboneoftheenergytransition:LT-REprocurementCurrentadditionalregulatedpayments(suchasfeed-intariffsandauctionedPPAs)andpublicprocurementschemesforrenewableenergyaretheseedsforthebackboneoftheLT-REprocurement.Thecontinuousevolutionofrenewableenergyauctionandpublictenderingspecificationdesigns,andtheemergingtrendofintroducingsocio-economicdevelopmentrequirementsinthem,candirectlyfeedintotheLT-REpillar.Animportantconceptisthatthesecomponents(feed-intariffs,PPAs,publicprocurementofrenewableenergy),originallyenvisionedtosupportthedeploymentofrenewablesincurrentpowersystems,areheretostayasoneofthepillarsofpowersystemorganisationalstructures,contrarytotheextendedbeliefthattheywouldgraduallyvanishasrenewablesadvancealongtheirlearningcurvesandbecomecost-competitiveinlife-cycleterms.Theclearunderstandingofthisrealityiskeyforarticulatingatransitionpolicyframework.83Themandatorylong-termmechanismsthatChileandPeruintroducedareforwardenergycontracts,whileBrazilintroducedenergybundledwithreliabilityproducts,andColombiachoosecontractsforastand-alonereliabilityproductwithenergycontractstradedinbilateralmarkets.FIGURE46.Thetwopillarsofdualprocurement(LT-REandST-Flex)asanevolutionfromcurrentexperienceswithinaholisticframeworkHOLISTICVISIONLT-RET-Flex««««««««««EvolutionfromexperiencesToprocureREs:Tomatchsupplyanddemand:•Supportmechanisms(FIT,FIP,auctionedPPA)•Directpublicinvestment•Wholesaleandretailmarkets•CentralisedSO’sdispatchDUALPROCUREMENT170RE-STRUCTURINGPOWERSYSTEMSFORTHETRANSITIONFromenergy-onlytoflexibility-onlydispatch:ST-FlexprocurementToaddressflexibilityrequirementsofrenewable-basedpowersystems,existingmarginalistmarketsandcentraliseddispatchwillhavetoevolvetowardsshort-termflexibilityprocurementmechanisms(ST-Flex)adaptedtodispatchcarbon-neutralflexibleresourcessuitableforthecharacteristicsofarenewableenergy-basedpowersystem.Bythisevolution,ST-Flexwillbecometheotherpillarofthedualprocurementapproach.Havingtheseallocationinstrumentsalignedwiththecharacteristicsofflexibleresourcesanddecoupledfromthelong-termprocurementofelectricityallowshigherdiversityinparticipatingflexibilityresourcesandcaneffectivelyandefficientlyguideoperationandinvestmentdecisionsinflexibility.Newflexibilityresourcesaresubstantiallydifferentfromtraditionalonesunderalleconomic,technicalandevensocialperspectives(RGI,2020).ST-Flexprocurementmustcaterforthesepeculiaritieswhenevolvingfromcurrentstructures.Buttoalargeextent,thefundamentalsandexperienceneededfortheST-Flexpillararealreadybeingcreatedwithincurrentorganisationalstructures.Hence,withaholisticvisionasanadditionalcomponent,asmoothevolutioncouldbeexpected.Theevolutionfromcurrentstructurestotheflexibilitypillarofdualprocurementislikelytobringaboutapartialmigrationofresourcescurrentlydispatchedunderancillarymarketsorregulatednearreal-timesettlementstoST-Flexprocurement.Ancillaryserviceswillstillbeneededunderthedualorganisationalstructure.Ancillaryservicesarethelastresource“toolbox”forthesystemoperatortobeabletomanagenear-real-timeimbalancesandguaranteethesuccessfuloperationofthepowersystemunderallcircumstances.TheST-Flexpillarofthedualorganisationalstructurecreatesadedicatedspaceforflexibleresourcestoefficientlycontributetotheoperationofthepowersystem,andhencereducesthesizeofthesystemoperator’sneeded“toolbox”.ProposalsforsimilardynamicsforpartialmigrationfromancillaryservicestoflexibilityprocurementcanbefoundinRGI(2020).Conceptually,intheshorttermthiswoulddifferentiatetwoformsofdispatchingflexibility:inenergyandcapacityterms.TheST-Flexprocurementwoulddispatchflexibilityinenergyterms(similartohowcurrentwholesalemarketsandcentraliseddispatchdo)untilgateclosuretime(whichwouldbeclosertorealtimethantoday’sorganisationalstructures,tofacilitateparticipationofavailableflexibilityresources).Intheremainingancillaryservices,flexibilitywouldbedispatchedincapacityterms,intheformofanavailablecapacitytobeusedbythesystemoperatorincaseofneed.TechnologicalandstakeholderdiversitywouldbemuchhigherinST-Flexprocurement,withthesystemoperatorlikelystickingwiththoseflexibilityresourcesthatareeasiertomanagecentrally.Ontopofthis,asdiscussedabove,therecouldbeaneedforanLT-Flexcomponent(incapacityterms)thatwouldcomplementtheST-Flexcomponentinguaranteeingflexibilityadequacy,mainlyduringthetransitionperiod.TheaccumulatedexperiencewithcapacitymechanismscouldhelptoshapetheLT-Flexcomponent.171Avisionforrethinkingpowersystemorganisationalstructures:ThedualprocurementmechanismBothliberalisedandpublicownershippathwayscandeliverdualprocurementIneveryjurisdictionthetransitionofthepowersystemorganisationalstructurestartsfromdifferentsocial,economicandpoliticalstandpoints.Theappropriatetransitionpathwayforeachjurisdictiondependsonitssocio-economic-politicalframework.Potentialpathwayscanbroadlybeclassifiedasliberalisedorpublicownership.Butcommontrendscanalreadybeobservedinboth:Forinstance,theproliferationofauctionedPPAscanbeinterpretedasadditionalregulationinliberalisedsystemsorasaliberalisationelementincentrallyplannedsystems.Theendpointoftheorganisationalstructuretransitionislikelytohavecommonelementsinbothliberalisedandpublicownershippathways,sincetheyshareafinalultimateobjective:aligningpowersystemorganisationalstructureswitheconomicandsocialgoals,therebymaximisingthevalueforthepowersystemandsociety.Moreover,progressingalonganyofthesepathwayswillrequireacommoncompass:improvinggovernance,buildingonstrengthsandovercomingshortcomings.Thespecificbalanceofcollaboration,regulationandcompetitionispath-dependentandwillbeshapedinanimprovedgovernance.Inthissenseacertaindegreeofconvergencebetweenpublicownershipandliberalisedtransitionpathwayscanbeexpected(Figure47).Thisreportaimedatprovidinginsightsthatfacilitateundertakingthesetransitionpathwaysinaninclusivewaywithregardtothedifferentsocio-economic-politicalframeworks.IRENAwillcontinuetosupportthetransitionofpowersystemorganisationalstructurestowardsthoseneededforasustainablerenewable-basedsystemthatcontributestosocialvaluecreation.FIGURE47.ConvergenceoforganisationalstructuresfollowingtheliberalisedandpublicownershippathwaysOrganisationalstructureconvergence:AlignedeconomicandsocialgoalsDierentsocial,economica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