Regulation, efficiency and the incentive dilemma with smart grid investments SASE 2011

Transcription

1 Regulation, efficiency and the incentive dilemma with smart grid investments SASE 2011 Christine Müller Madrid, 24 June

2 Agenda Project background: IRIN Regulation and smart grids Context Approach Theory Results Conclusion 1

3 Project background: IRIN The research project IRIN - Innovative Regulation for Intelligent Networks - deals with the design of an adequate institutional framework that supports efficient and effective network development towards smart grids. Central research questions are: Advancing incentive regulation with respect to smart grids? (WIK) Which network pricing system sends effective signals for efficient coordination of network, generation and load installations? (BEI) Which advancements should be made to incentive regulation to adequately account for network innovation and transformation? (Öko-Institut) Are changes required to the current legal framework? (RUB) 2

4 Energy networks and regulation Grid-bound energy supply: natural monopoly (subadditive cost function) Cournot-price (monopolist sets price above marginal cost) market failure justifies regulatory action (network access and network charges) Aim: provide regulatory incentives that network operators actively pursue welfare-economical aims allocative efficiency productive efficiency dynamic efficiency (technological progress/innovation) 3

5 New challenges in the energy sector The regulatory classification of technological progress in grid-bound energy supply becomes increasingly crucial due to ambitous decarbonisation and sustainability targets These imply new challenges for networks due to: Distributed, intermittent, offshore generation patters (renewables) Connection of new energy sources / bi-directional energy flows Demand-side management/prosumer Intelligent network control mechanisms (ICT) needed to integrate remote and fluctuating production units efficiently into the grid 4

6 Key: Smart Grids Smart grids are considered as the key to tackle these challenges. This requires investments/innovation and the right (regulatory) incentives.. Source: European Technology Platform Smart Grids 5

7 Regulatory dilemma? Do current forms of incentive regulation provide the right incentives or do we face a regulatory dilemma with respect to investments and innovation in a smart grids context? Allowed tariffs (regulated) Benefits due to cost reduction Cost of network operation Increasing network investment needs due to decarbonisation and sustainability targets t Source: WIK 6

8 Approach Analysis and evaluation of cost- and incentive based regulatory regimes in terms of their incentivation of investments and innovation in energy networks Reference: three efficiency measures Basis: literature review 7

9 Regulation Investments Theory Efficiency measures Allocative efficiency (static) Theoretical foundation for the regulation of a natural monopoly Objective: Pareto-optimum (marginal cost = marginal utility) But: Production not necessarily cost efficient Productive efficiency (static) Given output with minimal cost Focus of regulatory measures: efficiency gains/cost reduction Maximise welfare with constant technology Dynamic / innovative efficiency Dynamic sector development: investment and innovation Long term value for money Maximum welfare over time / short term static inefficiency 8

10 Theory Cost- vs. incentive-based regulation: regulatory approach Rate-of-Return Rate-of-Return / Cost-Plus Regulator allows fixed return on capital which cannot be exceeded by the regulated company Cost-Plus Revenues are limited to a certain markup on the effective costs of production Incentive Regulation Price-Cap / Revenue-Cap Regulator ex-ante approves a price or revenue cap and determines an inefficiency reduction path ( x-factor ) per regulatory period Benchmarking ( as-if competition ) If company succeds in reducing costs below targets it may retain the obtained surplusses Yardstick Competition (YC) Tariffs derived from virtual reference firm (yardstick) based on average cost of reference companies Cost reduction (catch-up) according to yardstick Penalty/reward depends on companies individual situation vis-à-vis the yardstick 9

11 Theory Cost - vs. incentive-based regulation: investment incentives Rate-of-Return Rate-of-Return / Cost-Plus Incentive to maximise CAPEX within the threshold of the allowed return (A-J-effect) No incentives to invest efficiently and to reduce CAPEX Cost-Plus Incentive to artificially boost cost as they are directly transformed in regulated tariffs Waste of resources ( gold-plating ) Incentive Regulation Price-Cap / Revenue-Cap Incentive to reduce costs depends on level and design of x-factor (benchmarking) Strong incentives to short-term cost reduction (especially OPEX) Risk of plunge in CAPEX (focus on short-term efficiency gains, no incentives for long term optimisation of capital structure) Yardstick Competition Strong incentive to invest efficiently Issue of comparability Risk of collusion / investment retention 10

12 Theory Cost- vs. incentive-based regulation: incentives for innovation How to incentivise innovation (CAPEX intensive asset innovation) in a smart grid context? Network innovation in grid-bound energy supply are rather discussed cursorily in academic literature Experiences mainly come from other infrastructure markets (telecoms) Overall conclusion from academic theory: difficulty/challenge to anchor adequate regulatory incentives to enhance dynamic efficient investments No sound theoretical treatise on the role of dynamically efficient investments in grid-bound energy supply 11

13 Results (1) Efficiency measure Cost-based regulation Incentive-based regulation Allocative efficiency Productive efficiency Dynamic efficiency Process innovation (OPEX) (Asset-) innovation (CAPEX) Academic void 12

14 Results (2) Investment categories and their incentivation* Type of investment Objective Replacement Art Ersatzinvestition der Investition investment Expansion Erweiterungsinvestition Art der Investition investment (Asset)-innovation Art Netzinnovation der Investition Angemessenes Niveau der Capacity Adequate level of Art Versorgungs- der Investition (Integration Art der Investition EEG-/CHP- Art Smart der Investition Grids grids continuity of supply zuverlässigkeit /Offshore plants) Instrument Q-Element** Art der Q-Element Investition Bonus/Malus Investment budgets (TSO) Investitionsbudgets Art der E-Factor (DSO)*** Regulatory Mechanism Standards (mit Pönalen) Cost Internalsierung internalisation Konzept der dnb Kosten Cost-based regulation Regulatorische Akzeptanz dilemma * On the basis of the German regulatory framework ** Planned for 2012 (reliability) *** Includes component for DG 13

15 Conclusion Dynamic efficient investments are the essential catalyst to facilitate smart grids to tackle the overarching sustainability and decarbonisation targets. Theory: Incentive regulation does not sufficiently stimulate dynamic efficiency in the sense of explicit regulatory stimuli for asset innovation leading to a dynamically efficient CAPEX allocation (in a smart grid context). Complex trade-offs to adjust the right incentives (regulatory dilemma) Terra incognita in economic theory/academic literature Further enlargement on this topic within IRIN 14

16 WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH Christine Müller Postfach Bad Honnef Germany Tel.: Fax: