Guidelines for improvement network regulation for enhancing the share of DG DSO revenues and incentives to integrate DG

Guidelines for improvement network regulation for enhancing the share of DG DSO revenues and incentives to integrate DG DG-GRID Workshop, Madrid, April 12, 2007

Objectives Development of guidelines for improvement on the short term of electricity distribution network regulation for enhancing the share of DG Main issues How DSO regulation should be changed for enhancing the share of DG Focus on DSO revenues and incentives to integrate DG Two perspectives General recommendations at EU level Specific guidelines at the national level www.dg-grid.org- 2

DSO regulation issues Outline DSO management models Network planning taking into account DG Incremental OPEX + CAPEX due to DG DSO performance on energy losses DSO performance on quality of service www.dg-grid.org- 3

DSO management models (1) The traditional DSO management model DSO is a regulated business INPUTS Passive management OUTPUTS System reinforcements -Demand increase -Improve reliability -Replace old assets CAPEX DSO quantity Area of service: demand -Number of users -kwh -kw peak O&M of installations Commercial services TSO charges OPEX quality Performance indicators -Energy losses -Quality of service www.dg-grid.org- 4

DSO management models (2) The new DSO management model with effective integration of DG INPUTS Active management OUTPUTS AM investments System reinforcements -Demand &DG increase -Improve reliability -Replace old assets CAPEX DSO quantity Area of service: Demand & DG -Number of users -kwh -kw peak O&M of installations Commercial services TSO charges O&M of AM OPEX quality Performance indicators -Energy losses -Quality of service -TSO ancillary services www.dg-grid.org- 5

DSO regulation issues Outline DSO management models Network planning taking into account DG Incremental OPEX + CAPEX due to DG DSO performance on energy losses DSO performance on quality of service www.dg-grid.org- 6

Network planning taking into account DG Article 14/7 of the EU electricity directive requires DSO to consider DG as an alternative to network expansion. Key questions: How current DSO regulation provides incentives for efficient investments? Is DG explicitly considered by DSOs in order to postpone or reduce network investment? www.dg-grid.org- 7

Network planning taking into account DG Country questionnaires Type of regulation for investment Rate of return Incentive regulation: price or revenue caps Incentive regulation plus ad-hoc explicit mechanisms Countries Finland, France, Germany, Italy Denmark, Netherlands, Spain UK Incentives for efficient network expansion NO. All investments are remunerated, including reinforcements due to DG. YES. Implicit incentive. DG required network reinforcements are not considered. YES. Incremental revenues associated to DG connections, and IFI and RPZ mechanisms. Guidelines Migrate to incentive regulation. Implement explicit mechanisms to take into account DG. Evaluate and refine already implemented mechanisms. www.dg-grid.org- 8

Network planning taking into account DG Main findings Rate of return may not induce DSOs for efficient investment Incentive regulation may induce DSOs for efficient investment In UK, the Engineering Recommendation P2/6 on security of supply considers DG contribution for network planning www.dg-grid.org- 9

Network planning taking into account DG R3 recommendation: Article 14/7 2003/54/EC Electricity directive stipulates that DG should be considered by DSOs when planning the development of the distribution network optimising the need for upgrading or replacing network capacity. DSOs should adopt a minimum cost approach by promoting DG contribution to the peak demand, if that is possible, and by implementing network control actions to optimize the use of existing facilities. Economic incentives for DSOs that achieve efficient network expansions should be implemented. Regulation level: National MS Regulators. www.dg-grid.org- 10

DSO regulation issues Outline DSO management models Network planning taking into account DG Incremental OPEX + CAPEX due to DG DSO performance on energy losses DSO performance on quality of service www.dg-grid.org- 11

Incremental OPEX & CAPEX due to DG Neutralise the negative impact of high DG penetration levels on DSO costs Network reinforcements Energy losses Active management Key questions How DSO costs (OPEX and CAPEX) are recognized when calculating DSO revenues? Is DG explicitly considered when calculating DSO revenues? www.dg-grid.org- 12

Incremental OPEX & CAPEX due to DG Country questionnaires Type of regulation for investment Countries Incremental OPEX & CAPEX due to DG Guidelines Rate of return or cost of service for both OPEX & CAPEX France, Germany YES, however there are not explicit treatment of them Migrate to incentive regulation. Rate of return for CAPEX. RPI-X for OPEX Finland, Italy Incremental CAPEX are explicitly included. There is not explicit treatment for incremental OPEX. Include specific treatment of incremental OPEX. Incentive regulation: price or revenue caps Denmark, Netherlands, Spain NO. Incremental OPEX and CAPEX are not considered. Implement explicit mechanisms to take into account incremental costs due to DG. Incentive regulation plus ad-hoc explicit mechanisms UK YES. Incremental revenues associated to DG connections, and IFI and RPZ mechanisms. Evaluate and refine already implemented mechanisms. www.dg-grid.org- 13

Incremental OPEX & CAPEX due to DG Main findings No specific treatment of incremental DSO costs due to DG In countries with rate of return regulation, as Finland, incremental CAPEX can be included in the Regulated Asset Base (RAB) Only UK with incentive regulation includes a specific DG capacity revenue driver DG-GRID has investigated different possibilities Compensation based on special RAB allowance A revenue driver for connected DG capacity (kw) as well as for DG electricity supply (kwh) www.dg-grid.org- 14

Incremental OPEX + CAPEX due to DG Recommendation R4 DSOs revenues should be calculated taking into account the incremental effect on CAPEX & OPEX of different DG penetration levels. There are several options to achieve this objective. DG- GRID project has investigated the one that includes as a DSO revenue driver the feed-in capacity and the energy delivered by DG. Other options are more complicated to formulate but they can be also considered depending on the particular DSO regulatory framework. Regulation level: National MS regulators. www.dg-grid.org- 15

DSO regulation issues Outline DSO management models Network planning taking into account DG Incremental OPEX + CAPEX due to DG DSO performance on energy losses DSO performance on quality of service www.dg-grid.org- 16

DSO performance on energy losses DG impact on distribution energy losses Low DG penetration usually would reduce losses High DG penetration usually would increase losses Key questions Do DSOs have incentives for energy losses reduction? Is the impact of DG on energy losses explicitly considered by DSO regulation? www.dg-grid.org- 17

DSO performance on energy losses Country questionnaires Incentives for losses reduction DSOs have not incentives DSOs have to compensate energy losses by buying them in the market DSOs have incentives to reduce losses below specific targets. Countries Austria, Finland, Germany France, Italy, Netherlands Denmark, Spain, UK Impact of DG on losses reduction incentives NO considered The impact of DG on DSO losses cost has not been considered. DG is compensated for avoiding losses only in the transmission network. The impact of DG on losses targets has not been considered. Guidelines Migrate to implement incentives Compensate DSO for incremental losses due to DG. If due to DG, losses decrease, DSO can credit DG for such benefit. Include specific impact of DG on DSO losses targets. An example: proposal in UK. www.dg-grid.org- 18

DSO performance on energy losses Main findings DSOs have incentives to reduce losses Two alternatives: DSOs buy energy losses DSOs have to meet specific losses targets Usually regulators do no consider the impact of DG on energy losses => DSOs assume the economic impact of higher or lower losses due to DG If DG increases losses, some compensation for DSOs should be implemented. For instance, a DSO revenue driver based on DG kwh injected. DG can be charged for that. If DG decreases losses, DSOs can provide some credits to DG for that. www.dg-grid.org- 19

DSO performance on energy losses Recommendation R5. Regulators should take into account current and estimated DG penetration levels in order to estimate their impact on energy losses for each DSO. In case of DSO has to compensate energy losses, i.e. losses cost is a part of the DSO controllable OPEX, DSOs should be compensated for incremental costs, if due to DG, losses increase. Otherwise, if losses decrease, DG operators can be credited for that. When setting energy losses targets for DSOs, regulators should take into account the impact of current DG penetration levels in order to estimate efficient energy losses targets for each DSO. Regulation level: National MS regulators. www.dg-grid.org- 20

DSO regulation issues Outline DSO management models Network planning taking into account DG Incremental OPEX + CAPEX due to DG DSO performance on energy losses DSO performance on quality of service www.dg-grid.org- 21

DSO performance on quality of service DSO performance on quality of service has become an issue under incentive regulation. Key questions? How incentives / penalties are implemented if DSO performance is better (worse) than required? DG can help to improve quality of service or is it a new source of potential problems? www.dg-grid.org- 22

DSO performance on quality of service Country questionnaires Incentives/penalties to meet quality of service targets Countries Contribution of DG to quality of service levels Guidelines DSOs have not incentives/penalties Austria, Denmark, Finland, France, Germany Neutral. Most of DSOs see DG as a potential problem rather as a control source. Implement incentives for quality of service improvements. Performance based regulation for quality of service Italy, Netherlands, Spain, UK Neutral. Most of DSOs see DG as a potential problem rather as a control source. Implement specific innovation actions to integrate DG as a control source for improving quality of service levels. www.dg-grid.org- 23

DSO performance on quality of service Main findings Performance based regulation for quality of service is spreading all over Europe Currently DG is seen by DSOs as a potential source of problems If DG becomes a new control source, DG can help DSOs to improve quality of service (islanding mode) There is a need of specific innovation actions taken by DSOs www.dg-grid.org- 24

DSO performance on quality of service Recommendation R6. Still is unclear the impact of DG, benefits and costs, on the quality of service provided by DSOs. In principle, quality of service targets for DSOs should not be changed due to DG network integration. DSO CAPEX and OPEX to meet current quality of service targets should be recognized through adequate DSO revenues. DSO should have incentives to look for new ways to improve quality of service including the use of DG. Regulation level: National MS regulators. www.dg-grid.org- 25

Conclusions (1) DG can postpone or reduce network investments incentive regulation in the right direction review of DSO planning criteria Incremental costs in CAPEX and OPEX due to DG should be compensated to DSOs Network reinforcements compatible with DG shallow connection charges Energy losses increments due to high DG penetration levels www.dg-grid.org- 26

Conclusions (2) DSO innovation actions should be incorporated into regulation to increase DG and network controllability improving quality of service optimizing the use of existing facilities A review of DSO operational criteria is required www.dg-grid.org- 27

End of presentation tomas.gomez@iit.upcomillas.es pablo.frias@iit.upcomillas.es www.dg-grid.org- 28