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Location, location, location
FSR Executive SeminarWhich network for which market design?
Martin CrouchJune 2014
• Unbundling networks from generation decisions implies a need to coordinate.• Economics: prices are a means to an end; the end is efficient outputs• The outputs come from decisions to build (or close), to operate
• Locational signals (prices) can inform generation (demand) decisions• What are the options?• Is there evidence to support the theory? How big is the prize?
• Can locational signals directly inform transmission investment decisions?• Regulation based on value rather than cost?
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Overview
Options for locational signals• None
– single bidding zone, postage stamp pricing
• Transmission charges– flow-based model
• Energy prices– nodal– zonal
• Other– queues, non-price signals – rewards for being constrained
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Options• Single price (postage stamp)
• Single energy price market and administered transmission charging
• Multiple energy prices (market splitting)– nodal– zonal
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Arguments for bidding zones are well understood...E.g. this slide presented at the Florence Forum.
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Do locational signals affect generation investment?
CCGT build in England and Wales (illustrative)
1991-1994 1998-2002
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Source: National Audit Office report based on Ofgem/National Grid data
Are re-dispatch costs material?
Total balancing costs
Components
Transmission decisions• Transmission decisions take account of projections about
generation and demand (including location)• Difficult to predict: GB experience with “user commitment”,
auctions for gas transmission capacity
• On a European scale, market coupling gives us zonal prices• Current price signals don’t (can’t) tell us where to build
transmission – timing mismatch
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Can we use future price signals?• Why?
– regulation is an imperfect substitute for competition– competition rewards value, regulation traditionally based on costs– price differences tell us value => use the information
• We recognise:– congestion rents ≠ value; but we could calculate value, could address incentive to under-
size– keeping down cost of capital is key to value for money infrastructure– if the developer captures full value, no value for consumers (value>economic costs)
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Ofgem’s cap and floor proposals(published 23 May, consultation open to 18 July 2014)
• Regulatory regime for interconnection– moving regulation from costs to value– structured process
• application window for groups of projects • “needs case” assessment of socio-economic benefit of project
– in the current GB position, congestion rents taken as a proxy for fair share of value, without over-complication
– still rely on costs for cap and floor, to keep cost of capital lower
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