SYMPOSIUM “ENERGY SUSTAINABILITY & COMPETITIVE MARKETS” Chair in Energy Sustainability IEB, Barcelona, January 29, 2013
Energy sustainability & competitive markets: Some regulatory challenges Ignacio J. Pérez-Arriaga Instituto de Investigación Tecnológica (IIT) & BP Chair on Energy & Sustainability, Comillas University (Madrid, Spain) CEEPR, MIT (Boston, USA)
Markets & energy policy in a low-carbon economy A sustainable economy has to be based on a sustainable energy model, where the power sector (& the closely related gas sector) is a key component The current regulatory paradigm has to be reconsidered in this new context, where public energy policy will play a major role This adds a new perspective to the present deliberation on the energy sector regulatory model & the role of regulators 2
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What is meant by a sustainable energy model? It must satisfy some minimum requirements Tolerable environmental impact Reasonably fair universal access (worldwide) to modern forms of energy supply
It must facilitate a reliable, lasting & affordable energy access that is compatible with maintaining or increasing the aggregated capital that makes human welfare possible (natural, built, knowledge, cultural, human relations)
Acceptably equitable access to surpluses
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“The currently observed changes to the Earth System are unprecedented in human history. Efforts to slow the rate or extent of change – including enhanced resource efficiency and mitigation measures – have resulted in moderate successes but have not succeeded in reversing adverse environmental changes. Neither the scope of these nor their speed has abated in the past five years. As human pressures on the Earth System accelerate, several critical global, regional and local thresholds are close or have been exceeded. Once these have been passed, abrupt and possibly irreversible changes to the life-support functions of the planet are likely to occur, with significant adverse implications for human well-being.”
UNEP, “GEO5, Global Environment Outlook”, June 6, 2012
UNEP GEO5, 2012
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Source: UN Environmental Program (UNEP), GEO5, June 2012
HOW CAN WE EXPRESS THE VALUE OF A CLIMATE POLICY UNDER UNCERTAINTY?
Compared with NO POLICY
What would we buy with STABILIZATION of CO2 at 550 ppm?
A NEW WHEEL with lower odds of EXTREMES
MITwheels http://web.mit.edu/globalchange
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How to improve /redesign the power sector’s regulation to facilitate the implementation of sustainable policies?
The new context for power sector regulation Security & sustainability will have at least the same priority as efficiency in the regulatory design This serious (& justified) global concern will affect energy policy & power sector investments profoundly intense political oversight & interference is anticipated New & emerging clean technologies will be crucial in attaining a sustainable power system model, but their development & commercial deployment will typically need regulatory support 10
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Power system challenges for 21st century How can power systems be transformed to become fully decarbonized by 2050? support electrification of transport & heating? integrate large amounts of intermittent &/or distributed generation? make full use of ITC? fully incorporate consumer response & choice? plan & build huge volume of new infrastructure required? encourage innovation & new business models? make markets & governments compatible?
reliably, efficiently & with acceptable environmental impact? 11
Future power markets will ... be far-reaching geographically & well-integrated value & remunerate supply flexibility, demand & (later) storage participation, external support require advanced functions by system operators & redefine the enabling role of networks & DSOs include new business models in energy efficiency services aggregation of demand & distributed generation
make use of improved capacity mechanisms have strong mutual interaction with gas markets 12
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Looking for a strategy
Energy & sustainability
Major items in a strategy A vision / plan for the future A sound regulatory approach & institutions Provision of universal energy access Be ready for strong penetration of intermittent renewables Networks as enablers of the new paradigms
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How to make markets & public energy policies compatible?
Start with a long-term vision / plan ”When there is no vision, people perish” (Proverbs, 29:18)
“A compelling vision, backed up by precise, simple, clear policy, needs to be implemented if larger institutions and investors are to create the argument internally that a greater proportion of the balance sheet needs to be available for sustainable energy”
Source: Chatham House, “Unlocking finance for clean energy”, 2009, www.chathamhouse.org.uk
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First, indicative planning What is intended to accomplish? (national & supranational energy policies require long-term analysis with sustainability criteria) indicative planning (IP) The IP procedure is meant to characterize meaningful energy development paths that meet any prescribed high level (sustainability & others) targets, in order to facilitate political decisions Note that, once one path is chosen, IP is more than just prospective analysis (find what could happen) has normative character (identify what has to be done to make sure that a future with some desirable features happens) 17
EU Electricity Directive, 2009 Art. 2: “… In relation to security of supply, energy efficiency/demand side management and for the fulfillment of environmental goals and goals for energy from renewable sources, … Member States may introduce the implementation of long-term planning, taking into account the possibility of third parties seeking access to the system.” Art. 7.2: “Member States shall lay down the criteria for the grant of authorisations for the construction of generating capacity in their territory. In determining appropriate criteria, Member States shall consider: … (j) the contribution of the generating capacity to meeting the overall Community target of at least a 20 % share of energy from renewable sources in the Community’s gross final consumption of energy in 2020... and (k) the contribution of generating capacity to reducing emissions.” Art. 10: “Member States shall implement measures to achieve the objectives of social and economic cohesion and environmental protection, which shall include energy efficiency/demand-side management measures and means to combat climate change, and security of supply, where appropriate. Such measures may include, in particular, the provision of adequate economic incentives…”
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The boundary conditions 2050 EU Roadmap for a low-carbon economy 80-95% reduction target in GHG emissions
Need to fix the energy policy after 2020
(with the
current policies the GHG reduction would be 40%)
Much uncertainty on 2050… but we are only one investment cycle from that date No U-turn in the EU energy market liberalization strategy 19
The EU 2050 Climate Change Roadmap
Source: “A Roadmap for moving to a competitive low carbon economy in 2050”, EU 20 Commission (DG Climate), COM(2011) 112 final, March-8-2011
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Source: Helen Donoghue, DG Energy, EU Commission.
Source: Helen Donoghue, DG Energy, EU Commission.
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The EU 2050 Climate Change Roadmap The EU Energy Roadmap 2050
Source: “ASource: RoadmapHelen for moving to a competitive low carbon economy in 2050”, EU Donoghue, DG Energy, EU Commission. 23 Commission (DG Climate), COM(2011) 112 final, March-8-2011
Requirements for a sound vision / plan Any vision / plan has to be backed-up by objective quantitative analysis (a sound & transparent model)
Open debate among stakeholders with public participation & information and subject to due process Commitment to the plan by the main political parties (this matter should be above party politics) 24
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Objective model-based decision making IMPORTACIONES 4.95 EJ / 82.7% / -0.1%
EXPORTACIONES DE ELECTRICIDAD 0.03 EJ / 0.5% / +3.0%
ENERGÍA PRIMARIA 5.98 EJ / 100% / +2.2%
ENERGÍA FINAL* 5.99 EJ / 100.3% / +1.0%
GENERACIÓN ELÉCTRICA Y COGENERACIÓN ENERGÍA SOLAR 0.04 EJ / 0.7% / +43.0% ENERGÍA EÓLICA 0.16 EJ / 2.6% / +15.6% ENERGÍA HIDRÁULICA 0.14 EJ / 2.4% / +49.6% BIOMASA, RESIDUOS Y BIOCARBURANTES 0.27 EJ / 4.5% / +39.0%
1.74 EJ 29.1% +2.2%
2.43 EJ 40.7% -0.9%
PÉRDIDAS TÉRMICAS
CALOR ÚTIL COGENERADO PÉRDIDAS
ENERGÍA NUCLEAR 0.68 EJ/11.3% / +17.5% AUTOCONSUMOS 0.21 EJ / 3.5% / -2.7% ELECTRICIDAD ÚTIL 1.00 EJ 16.8% +0.4%
CARBÓN 0.23 EJ / 3.8% / -17.5% 0.97 EJ / 16.2% / -7.8%
RED ELÉCTRICA
0.94 EJ 15.8% +9.4%
MNM, S y C** QUÍM. OTRAS
0.22 EJ / 3.3% / +11.0%
GAS NATURAL 0.31 EJ / 5.2% / -7.3% RED DE GAS GAS NATURAL LICUADO 0.98 EJ /16.4% / +2.0%
CONSUMO INDUSTRIA
REGASIFICA DORAS
0.37 EJ / 6.2% / -8.6%
DERIVADOS DEL PETRÓLEO 0.51 EJ / 8.5% / -10.1%
S. TERCIARIO
1.20 EJ 20.1% +3.7%
S. RESIDENC. S. PRIM.
CONSUMO SECTOR USOS DIVERSOS
2.56 EJ 42.7% +0.9% PETRÓLEO CRUDO 2.24 EJ / 37.4% / +0.3%
COMBUSTIBLES PROCESADOS 2.03 EJ / 39.9% / -0.1%
3.01 EJ 50.4% +4.3%
AVIÓN
1.56 EJ 26.1% -1.6%
CARRETERA
FERROC. BARCO
FRONTERA DE ESPAÑA 1. Valor EJ 2. % Consumo total E primaria 3. Crecimiento (+ ó -) respecto a año anterior (%)
REFINERÍAS Y OTRAS TRANSFORMACIONES ENERGÉTICAS
*ENERGÍA FINAL: CONSUMOS TOTALES ENERGIA FINAL + EXPORTACIONES+ PÉRDIDAS + AUTOCONSUMOS **MNM, S Y C: MINERALES NO METÁLICOS, SIDERURGIA, Y CONSTRUCCIÓN
REDES DISTRIBUCIÓN COMBUSTIBLES
CONSUMO TRANSPORTE
DERIVADOS DEL PETRÓLEO EXPORTADOS 0.30 EJ / 5.1% / +2.1%
A sound regulatory approach with credible & competent regulatory institutions
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Need for huge investments Europe's energy system requires investments of ca. €1 trillion by 2020 of which €200 billion is needed for electricity and gas networks alone http://ec.europa.eu/energy/publications/doc/2011_energy2020en.pdf
This does not include investment in large-scale electricity storage that is difficult to quantify precisely today and are expected to grow significantly in the next decade. 27
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Global Energy Assessment report
Recommendations
(1 of 2)
1. Energy Systems can be transformed to support a sustainable future 2. An effective transformation requires immediate action 3. Energy efficiency is an immediate and effective option 4. Renewable energies are abundant, widely available & increasingly cost-effective 5. Major changes in fossil energy systems are essential & feasible
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Global Energy Assessment report
Recommendations
(2 of 2)
6. Universal access to modern energy carriers & cleaning cooking by 2030 is possible 7. An integrated energy system strategy is essential 8. Energy options for a sustainable future bring substantial multiple benefits for society 9. Socio-cultural changes as well as stable rules and regulations will be required 10.Policy, regulations & stable investment regimes will be essential 30
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Source: Platts Industry Survey Report: Trends in European Power Generation January 2013
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An adequate regulatory context for clean energy For the most part the market for clean
energy is policy-driven (for a good reason) In a policy-driven market regulation itself is a risk Therefore, to unlock finance for clean energy there is a need for “investment grade”
policy 33
Policy needs to be “loud, long & legal” Loud Policy instruments make a difference, so that investments in clean energy become commercially attractive
Long Policy instruments are sustained for a period that is consistent with the financial characteristics of the project
Legal Policy instruments are based on a clear, stable & wellestablished regulatory framework Based on “Unlocking finance for clean energy”, www.chathamhouse.org.uk, 2009
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The role of regulators These issues should be explicitly included within the responsibilities of energy regulatory agencies Governments should set the high level targets & approve an “indicative” sustainable plan Regulators should design the regulatory instruments to make this possible within a market environment
Regulatory stability & predictability. Regulation must be “loud, long & legal” 35
What can be said about the situation in Spain? Lack of a plan or vision Regulation is in the hands of the government Very limited responsibilities of the independent regulatory authority (& it will be worse soon)
There is no respect for the due process Decisions are made without transparency, public debate or predictability
Key appointments to regulatory positions ignore professional qualifications for the job 36
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How to get there (2050)? Carbon policy strategies after 2020: The debate on intermediate targets
Should technology targets be set for 2030? Of course, NOT Deployment (energy) targets for renewables: make it more expensive to meet the carbon targets waste resources that could be better used to stimulate low-carbon innovation disrupt markets discovery processes undermine the European Trading Scheme (ETS)
Source: Dr. Simon Less, Policy Exchange, London. Eurelectric Conference, Jan-2011.
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Should technology targets be set for 2030? Of course, NOT Instead, energy policy after 2020 should: keep it simple focus on carbon price as “the” instrument & avoid technology-specific deployment targets focus (politically) on achieving a long‐term, credible carbon pricing framework focus any subsidies on stimulating most valuable innovation, while balancing R&D & learning-bydoing & overcome behavioral barriers to energy efficiency
Should technology targets be set for 2030? YES, of course Carbon price, for the time being, is not loud (too low to make an impact), long (no agreement after 2012) or legal (credible) enough Any progress in this direction is very welcome
Investment in subsidized technologies needs an adequate & credible regulatory framework Clear targets & strong enough economic signals by 2030 for renewables & efficiency Adequate support instruments for R&D & deployment for each technology But avoid picking winners as much as possible
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Remember that sound energy policies are typically compromises between competition & regulation . When dealing with these involved issues… avoid regulatory fundamentalisms!
“All competition is imperfect; the preferred remedy is to try to diminish the imperfection. Even when highly imperfect, it can often be a valuable supplement to regulation. But to the extent that it is intolerably imperfect, the only acceptable alternative is regulation. And for the inescapable imperfections of regulation, the only available remedy is to try to make it work better” Alfred Kahn, “The economics of regulation” MIT Press, 1988
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Regulatory challenges in the provision of universal energy access
What do we mean by “universal energy access”? “Access to energy services that are clean, reliable and affordable for cooking, heating, lighting, health, communications and productive uses” Energy for a Sustainable Future” (UN AGECC 2010 ) The IEA has set 2030 as the target year to achieve universal access to modern energy services. 44
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Lack of access to electricity in the world Source: International Energy Agency, WEO 2010
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Example of a very much needed regulatory intervention Energising Development
The EU talks about committing 50 M€/yr immediately & raising several hundred M€ to leverage private funds; IEA WEO-2011 estimates a need of about 48b€/year to 46 achieve energy access for all by 2030
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Isolated rural community in Cajamarca (Peru). Example of dispersed population. Source: Julio Eisman. Acciona Foundation. Peru Microenergia.
Source: Perú Microenergía
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Regulation for universal access
A list of challenging issues Characterization of electrification projects Technology (from grid extension to off-grid) Form of ownership Delivery model (fee-for-service, dealers, hybrids) Financing mechanisms / types of subsidies (connection vs. consumption; targeted vs. untargeted) Process of selection of operators (competition in the market or for the market, by project, by cluster, by yardstick) & parameters to be bid (tariffs, connection charges, minimum required subsidies, number of new connected consumers) Risk allocation (between consumers, suppliers & government)
Quality of service standards Assignment of maintenance responsibilities
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Be ready for a strong penetration of intermittent renewable generation
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Impacts of the integration of intermittent generation Impact on electricity generation Dispatch, market performance & prices under different IG support mechanisms
Future electricity generation mix Future bulk power system operation
Impact on transmission network expansion, cost allocation Impact on distribution network expansion, distribution system operation & tariffs 51
Why energy markets? In the midst of so much regulation With such tough challenges
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Issues to be addressed Are energy markets meeting the needs for an efficient, secure & clean supply satisfactorily? In the present context of strong sustainability & security oriented policy measures How to improve / redesign market regulation to facilitate that these policies reach their objectives efficiently? How to make these policy measures compatible with the functioning of energy markets? 53
Design of electricity markets is difficult It has been learned that creating well functioning competitive wholesale & retail markets for electricity is very challenging, both technically & politically, & cannot be applied anywhere Where properly implemented, wholesale markets appear to have led to improved performance & have mobilized significant investments Despite some failures & implementation difficulties, the general trend in most liberalized power sectors is to proceed with the process of reforms, albeit typically augmenting regulatory intervention 54
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Integration of intermittent generation
What is to be expected? It is already happening (strongly nonlinear effects on operation & prices) plant cycling loss of efficiency & extra costs zero or negative market prices wind curtailment need for more plant flexibility & demand response & storage
Leitmotiv: Strong intermittency penetration will reveal existing flaws in markets design & limitations 55 of current analysis models
Open regulatory issues
Generation & wholesale markets Mitigation of intermittency impacts (flexible generation, demand response, storage, interconnections) How to attract the right generation mix? Targeted capacity mechanisms? Flexibility mechanisms?
Interaction of gas & electricity markets 56
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A case example
(*)
How do solar & wind output affect generation dispatch & spot market prices in a specific power system? How do solar & wind penetration affect the optimal generation mix? Case example: 2 representative weeks in a stylized version of the Spanish power system Different levels of penetration of wind and solar Nuclear is frozen; only coal & CCGT respond Results obtained with the LEEMA computer model, Institute for Research in Technology, Comillas University (Madrid, Spain). Collaboration Comillas-MIT Energy Initiative. Researchers: Carlos Batlle, Pablo Rodilla & Andrea Veiga.
Base case escenario: No PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
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5 GW non dispatchable solar PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
10 GW non dispatchable solar PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
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15 GW non dispatchable solar PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
20 GW non dispatchable solar PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
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25 GW non dispatchable solar PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
30 GW non dispatchable solar PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
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35 GW non dispatchable solar PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
35 GW non dispatchable solar PV 14-20 June
CCGT
8-14 November
Coal
Nuclear
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Base case scenario: no wind 14-20 June
CCGT
8-14 November
Coal
Nuclear
5 GW wind 14-20 June
CCGT
8-14 November
Coal
Nuclear
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10 GW wind 14-20 June
CCGT
8-14 November
Coal
Nuclear
15 GW wind 14-20 June
CCGT
8-14 November
Coal
Nuclear
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20 GW wind 14-20 June
CCGT
8-14 November
Coal
Nuclear
25 GW wind 14-20 June
CCGT
8-14 November
Coal
Nuclear
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30 GW wind 14-20 June
CCGT
8-14 November
Coal
Nuclear
35 GW wind 14-20 June
CCGT
8-14 November
Coal
Nuclear
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Optimal generation capacity mix as a function of PV & wind penetration levels
Increasing wind penetration level (MW)
The electricity networks as enablers of the new paradigm
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A tentative list of regulatory challenges The need for adequate transmission & distribution networks Establish proper remuneration of distribution networks with distributed generation & active demand response Design, operation & control of distribution networks have to be adapted & costs will increase need for new network models & regulatory schemes (see detail in next slide)
Attain adequate investment levels in transmission networks with much intermittent/renewable generation The existing network (e.g. in the US & EU) lacks adequate interconnection capacity among regions, a comprehensive approach to coordinated transmission expansion & the institutional capability for an effective implementation
What could be new in network regulation? The underlying criteria “The overriding objective of a future regulatory framework for energy network companies is to encourage them to play a full role in the delivery of a sustainable energy sector & deliver long-term value for money network services for existing and future consumers “RIIO is designed to promote smarter gas and electricity networks for a low carbon future”
(OFGEM, RIIO A new way to regulate electricity networks, Final report of the RPI-X@20 project, 2010) 78
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What could be new in network regulation? The underlying criteria “It is in the interests of consumers that a company that delivers these outcomes is rewarded. Delivery will require significant investment and we will ensure that network companies that deliver efficiently are able to raise the required finance at a reasonable cost to existing and future consumers.”
(OFGEM, RIIO A new way to regulate electricity networks, Final report of the RPI-X@20 project, 2010) 79
And to finish…
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Inventing the future In the present circumstances, the objective of a developed society should be to grow better and not to grow more (in physical terms) We have to evolve from the industrial paradigm of continued statistical growth to a new paradigm of deliberate restraint and moderation. (the precautionary principle)
Only radical innovation in our energy model will make this possible The role of sound & stable regulation & independent & competent regulatory institutions cannot be overemphasized 81
Thank you for your attention
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