REALISEGRID. Final Conference. Brussels, May TSO incentivization policies for cross-border transmission development

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1 REALISEGRID Final Conference Brussels, May 2011 TSO incentivization policies for cross-border transmission development M. Urbani - OME G. Migliavacca and A. L Abbate - RSE

2 Outline Background Building cross-border interconnections in Europe: goals and barriers Regulation of transmission investment : regulated approaches and merchant lines option RES and grid infrastructure Cross-border transmission investments: costs, benefits, incentives and Policy recommendations TSOs and financial markets 2

3 Background The electricity sector liberalization has modified the European energy panorama: unbundling - markets integration - new firm strategies TSOs (natural monopoly): asnew companies in a regulated environment, some of them have been privatized and in case of stock companies, they need to make profits. The regulator has to enforce a planning investment policy favouring the social welfare achievement. The increasing penetration of variable generation obliges to rethink the whole European transmission system: huge investments required to intensify European coordination A regulatory framework should be then implemented to provide TSOs with clear incentive schemes in order to foster a pan- European transmission development. 3

efficiently for meeting reliability standards) and making

4 Cross-border Interconnections in Europe: Policy Goals The trade-off is between minimizing network costs (investing efficiently for meeting reliability standards) and making additional investments for facilitating: Competition and RES integration 4

5 Cross-border Interconnections Investments: Main drawbacks 5

6 Transmission Investments Regulation: Regulatory Approaches 6

7 Regulated Investments: Cost of Service Regulation Financial risk very small Advantageous with major investment and economic uncertainties No incentives to reduce costs No incentive to invest if the rate-of-return is too low Risk of overinvestment Asymmetry of information 7

8 Regulated Investments: Incentive Regulation Incentive to promote efficiency Inconvenient with long-term and lumpy investments No incentive if the performance index does not reflect real costs Risk of underinvestment 8

9 Merchant transmission investments Merchant lines will not be an "alternative" to regulated investments as they represent a limitation to the market liberalization and a ultima ratio (Art. 17, Reg. 714/2009). It will be less expensive for the network users as a whole to pay the cost of the line than to pay the congestion rent (CEER, 2004) Profit-driven investors will have an incentive to maximize profits rather than welfare (Joskow &Tirole, 2005). There is a risk that the construction of a merchant line prevents the one of a regulated line. However, without a certain remuneration incentive scheme, an unregulated investor could be more enticed to invest in a crossborder merchant line than a TSO in a regulated asset, especially when the lumpiness is significant. An increase of merchant interconnectors (especially HVDC) has been recorded in Europe in the latest years. In some cases the exemption has been granted for the starting years (7-10 years e.g.), before making the interconnector a regulated asset (e.g. Estlink 1). 9

10 RES and grid infrastructure RES connection cost allocations: from deep to super-shallow Super-shallow grid integration charging policy option has been developed in the GreenNet-Europe projects recently for large scale offshore-wind farms 10

11 RES and grid infrastructure If grid related cost of RES integration are allocated to TSOs, a re-design of financial RES support instruments should be envisaged (e.g. like feed-in tariffs) 11

12 Cross-border Network Investments: Costs & Benefits 12

13 Cost-benefit analysis and Incentives 13

14 Policy Recommendations: cost-benefit KPI Also, national regulators should recognize extra-territorial costs in their Regulatory Asset Base (regulatory gap). Such approach would minimize the TSOs investment risk. 14

15 Cost-benefit analysis and cross-border incentives TSOs are not motivated to build new cross-border links in situations in which: 1. they operate a power exporting system, where the local customers could see a reduction of their social welfare. This reduction could be compensated either via cross-subsidization between importing and exporting countries (less probable) or via welfare transfer from producers to consumers of the exporting country. On the other side, in an importing system, there is always a social welfare increase. In the coupling of two systems, one importing and one exporting, there is always a global social welfare increase. 2. they operate the power system of a transited country (or area). An extensive concept of the Inter-TSO Compensation (ITC) would then be necessary. Cross-border incentives and the related KPI can be crucial elements for stimulating trans-national investments 15

16 Policy Recommendations: Towards a new ITC mechanism? The present formulation of ITC significantly deviates from a truly cost-reflective scheme and does not send good incentives A new ITC (or just a stricter interpretation of Art.13-6, Reg. 714/2009) covering investment costs and not only operative ones, could be a suitable solution: 1) for creating a broader regional and pan-european consensus 2) for allocating costs between regions in a standardized way 3) for balancing incentivization drivers for CBT investments Art.13-6: The costs incurred as a result of hosting cross border flows shall be established on the basis of the forward looking long run average incremental costs, taking into account losses, investments in new infrastructure ( ) 3 March 2011 ENTSO-E puts in place an enduring ITC but incentives remain weak. 16

17 Policy Recommendations: TSOs proactive behavior In a liberalized power market, transmission and generation investments are decoupled, thus the investments coordination is more difficult, especially between two different countries. EC coordinators approach: successful but not enough. Literature (Glachant & Rious, 2010) suggests to anticipate the transmission infrastructure construction for facilitating new generation development, minimizing social costs and attracting market entries. Proactive TSO s behavior is risky and uncertain as the demand forecasting is, but could create a virtuous circle, avoiding congestion increase during the period of construction/connection and reducing social welfare losses EU is expected to establish guidelines on maximum delays in the national procedures. 17

18 Policy Recommendations: the hybrid solution 18

19 TSOs and financial issues 19

20 The de-bottlenecking problem: a wider view 7. Act on public opinion and on compensation policy (bottomup) 8. Boost TSO investment optimality 1. Build-up new infrastructure 2. Anticipate needs in the planning 6. Reform the electricity market 5. Refurbish the existing infrastructure 3. Speed up and harmonize legal procedures (top-down) 4. Facilitate merchant investment wherever convenient 20

21 Lack of cross-border infrastructure: some final considerations A new regulatory approach that balances short-term and long-term interests is needed, because incentives for efficient network operation do not necessarily also provide incentives for new long-term investments. Short-term tariff reductions (politically envisaged) push TSOs to less invest in expensive long-term investments as this would raise the asset base on which most tariffs are calculated. Only 25% of all congestion revenues earned in the period has been reinvested in interconnectors, the rest has been allocated to lower tariffs in the short-term. As congestion is often driven by price differences, alleviating congestion may increase the price in the low-price region. Regulators at this losing side of the interconnector might oppose such an investment: national vs. European interests. ACER can only propose or sort disputes, but today should be able to pass new regulations to guarantee pan-eu interests. Social costs of excess capacity are much smaller than the costs of under capacity, don t forgetting benefits: Competition, RES, Reliability 21 21

22 Acknowledgements J. Kappauf (OME), H. Auer (EEG), G. Lettner (EEG), I. Losa (RSE) and M. Osthues (TUDO) co-authors of D3.6.2 President Dobbeni (ENTSO-E) Professor Glachant and V. Rious (FSR) X. Gallet, G. de Saint-Martin (RTE-I) C. Vergine, P. Antonelli, A. Sallati (TERNA) K. Jansen, M. van der Meijden (TenneT) K. Reich, O. Wadosch (Verbund-APG) 22

23 Thank you for your attention REALISEGRID 23

REALISEGRID. WP3 Final Workshop. Rome - 31 March TSO incentivization policies for cross-border transmission development

REALISEGRID. WP3 Final Workshop. Rome - 31 March TSO incentivization policies for cross-border transmission development REALISEGRID WP3 Final Workshop Rome - 31 March 2011 TSO incentivization policies for cross-border transmission development WP3.6 ongoing results OME & RSE Outline Background Building cross-border interconnections