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But this is an arduous task & it
will not happen by itself
An emission path with good chances of
meeting the <2ºC target:
“in order to achieve a stabilization level of 450 ppmv
CO2 eq, emissions from Annex I Parties would need
to be between 25 per cent and 40 per cent below
1990 levels in 2020, and between 80 per cent to 95
per cent below 1990 levels in 2050.”
Source: IPCC (2007) 5
Energy policy in a low-carbon
economy
A sustainable economy has to be based on a
sustainable energy model, where the power sector is
a key component
The current regulatory paradigm of the power sector
has to be reconsidered in this new context, where
public energy policy will play a major role
6
7
Limitations of energy markets (1 of 2)
Advantages of markets are well known
Energy markets are successful if structure is right
& there are no interferences
although they are complex & may go wrong in
many ways
But there are limitations
Network activities are natural monopolies
(perhaps) Adequate margin of installed generation
supply may require some regulatory intervention
8
… and more limitations (of interest here)
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
Limitations of energy markets (2 of 2)
Some premises (1 of 3)
Creating well functioning competitive wholesale &
retail markets for electricity is very challenging, both
technically & politically, & cannot be applied anywhere
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)
There is a serious (& justified) global concern about
climate change & this will affect energy policy &
power sector investments profoundly intense
political oversight & interference is anticipated
Security & sustainability will have at least the
same priority as efficiency in the regulatory design
New & emerging clean technologies will be crucial
in attaining a sustainable power system model, but
their development & commercial deployment will
typically need regulatory support
12
Some premises (3 of 3)
It is anticipated a large penetration of renewable &/
or intermittent &/or distributed generation in
many power systems
The availability of communication & control
technologies plus current trends in regulation &
consumer behavior signal a strong future active
demand response
Political developments, economic rationality &
network reinforcements lead to an integration of
existing power systems & markets into larger
entities 13
The regulatory context for clean energy
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 & well-
established regulatory framework
Based on “Unlocking finance for clean energy”, www.chathamhouse.org.uk, 2009
Key features of “investment grade”
energy policy
“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
More on a sound clean energy policy
Besides a sound regulatory support scheme, any massive
deployment of a clean technology requires also attention
to
development of the required underlying
infrastructure (connection to electricity networks, plugs
for PHEVs, feedstock for biomass plants, etc.)
including any authorization procedures, among other
surrounding factors that need to be solved for the
support scheme to be efective
There are some reasons for concern
“Clean energy” technologies are very diverse
(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)
23
Detail
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)
Efficient locational signals & constraints management
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)
Geographical expanse ➔ markets integration (needed
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)
Changes in the generation technology mix induced
by renewable / intermittent / distributed generation
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)
Changes in system operation with strong presence
of renewable / intermittent / distributed generation &
active demand response
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)
Other obstacles or barriers that markets do not solve
by themselves (or fast enough) without external
intervention
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)
Lack of access to electricity in developing countries
(DCs) is a key component of the lack of sustainability of
the present energy model
Rural electrification
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
Regarding CC a key issue is to promote large-scale
grid-connected renewable deployment
Issues: new hydro developments, adapt support schemes, financing (^30)
Question #2: How to make markets & public energy policies compatible?
How much regulation does
liberalization need?
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)
Choice of instruments to make possible a clean
technology mix in electricity generation
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
Reduced, but not negligible, space for the market
A tentative list of regulatory challenges (3 of 4)
Choice of instruments to make energy efficiency &
conservation (EEC) (technology with largest potential &
most cost-effective) possible at a required level
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
A tentative list of regulatory
challenges (4 of 4)
Other regulatory concerns
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)
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