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The limitations of energy markets in promoting sustainable energy and the role of public energy policy in addressing these challenges. It explores the need for regulatory intervention to ensure the long-term availability of present energy sources, energy dependence and diversification, and the promotion of suitable technologies for sustainability objectives. The document also covers the regulation of support schemes for renewable energy and cleaner fossil technologies, energy efficiency targets, and the development of electricity and gas supply infrastructure.
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Source: IPCC (2007) 5
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Energy markets may ignore sustainability concerns long-term availability of present energy sources energy dependence / diversification of fuels need to promote technologies that are suitable for long-term sustainability objectives since energy prices fail to fully internalize these concerns. Why? Technical /practical difficulties in implementation high energy prices are not politically acceptable lack of long-term regulatory commitment Need to provide energy markets with some long- term vision
Some premises (1 of 3)
Where properly implemented, wholesale markets have led to improved performance & have mobilized significant investments Sound incentive-based regulation of distribution companies has reduced costs without impairing quality of service Despite some failures & implementation difficulties, the general trend in most liberalized power sectors is to proceed with the process of reforms 11 Some premises (2 of 3)
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Some premises (3 of 3)
The regulatory context for clean energy
Based on “Unlocking finance for clean energy”, www.chathamhouse.org.uk, 2009
“Clear, unambiguous policy objectives, with clear enforcement provisions Policy and regulation streamlined across all factors within the boundary of the deal: from planning approval to delivery Carefully designed incentive or support mechanisms to achieve targets or objectives Policy stability across a project-relevant duration Simplicity: to reduce complexity and variables that might add risk Near-term attention to infrastructure – the planning, integration and regulatory requirements – to ensure the overall system is optimized for significant uptake of RE, and demand-side options” Based on “Unlocking finance for clean energy”, www.chathamhouse.org.uk, 2009
for PHEVs, feedstock for biomass plants, etc.)
(renewables of different types, energy saving & efficiency, smart grids as an enabler, CCS, nuclear?) Designing a comprehensive energy strategy is more complex than just choosing the least cost solution policies may shift e.g., presently renewables are not the least expensive option to mitigate climate change, but they will be indispensable in the long run and have also side benefits (& inconveniences) at local level: How stable the support will be? regulatory instruments should adapt to technological changes (not the same risk when investing in mature vs. emergent technologies)
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Ideas for a regulatory response Refine the models of remuneration of distribution networks, so that the extra costs/benefits of accommodating DG & efficiency measures are recognized & negative incentives are minimized Find instruments to incorporate deployment of effective innovative technologies in the remuneration schemes Transmission capacity expansion must be based on comprehensive planning studies & responsibilities for implementation should be clearly assigned Pricing & remuneration of transmission should be transparent, low risk & convey efficient locational signals A tentative list of regulatory challenges (2 of 7)
Locational marginal pricing (nodal energy pricing) is the preferred solution, although it will find political resistance in the EU (not yet implemented in established markets; winners & losers) Locational transmission network charges (very much talked about, but only implemented in few power systems)
to mitigate market power & to dilute generation intermittency) The inter RTO seamless problem (US) Not attempted seriously yet The regional initiatives (EU) Still struggling at regional level
A tentative list of regulatory challenges (3 of 7)
Less “residual demand” / some impact on base-load technologies / more back-up capacity to provide operating reserves in the mix Regulatory instruments to achieve generation investment adequacy The case for support of peaking units (although all generation units are affected) becomes more apparent A large variety of regulatory schemes is presently used or under consideration 25 A tentative list of regulatory challenges (4 of 7)
Present system operation is not adequate to deal with really large volumes of intermittent generation, integration of demand response & seamless coordinated congestion network management in large interconnected power systems new paradigms in system operation Aggregators of active demand, micro-generation (including PHEVs) & distributed storage New approaches & flexibility in provision of ancillary services Perhaps security-driven hydro generation management 26
A tentative list of regulatory challenges (6 of 7)
Increment the regional / spatial dimension Fix market structural problems (vertical integration, excessive concentration) Political resistance to accept needed regulatory changes 29 A tentative list of regulatory challenges (7 of 7)
Has to be explicitly considered an energy policy in DCs Has always needed support schemes Specific financial & organizational models are needed to attract private investment
Issues: new hydro developments, adapt support schemes, financing (^30)
Question #2: How to make markets & public energy policies compatible?
Proper market design and policy enforcement for the competitive part of the system (competition policy) Proper regulatory mechanism design and policy enforcement for the natural monopoly part of the system (regulatory policy) Proper market arrangements and policy design for the handling of environmental effects of electricity and gas production and use (environmental policy) Market arrangements and policy design for securing security of supply/resource adequacy (public goods aspects) Proper overall design and policy enforcement
35 A tentative list of regulatory challenges (2 of 4)
Nuclear : if politically acceptable, it might need some regulatory commitment to reduce financial risks Clean coal (CCS) : presently only viable with regulatory support (until sufficiently high & stable CO2 prices exist) Renewables : same; support scheme should depend on level of maturity of technology, cost & rules for integration in the market (which affect the economic viability of other plants) Peaking plants : economic viability strongly depends on regulation of security of supply & intermittent generation
A tentative list of regulatory challenges (3 of 4)
Here energy prices, even with full internalization, might not be sufficient to achieve the desired consumer response (lack of information, high consumers’ discount rates, uncertainty in investments’ results, weak incentives, principal-agent problem, rebound effect) use additional instruments & target energy savings rather than efficiency, plus information Make use of standards or of other measures also directly seeking a net reduction in energy consumption (still, danger of free riding, inefficiency) It is OK to use a mix of regulatory instruments in this “second-best” world 36
Transitory arrangements (windfall profits) Windfall profits: consumers must be protected in different ways; this is a side effect of the application of CC-related instruments Regulatory stability & predictability Role of independent 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 (^37)