Investment and Infrastructure Ronan Bolton University of Leeds w/ Adam Hawkes Imperial College
Outline 1. Infrastructure and energy security 2. Infrastructure investment questions for national governments in liberalised market contexts Developing new policy instruments for LC investment Dealing with new risks and uncertainties From short term efficiencies to long term transformation 3. Implications for different infrastructure sectors (gas and electricity) 4. The governance challenges a systems perspective
Infrastructure and energy security 20 year review of gas disruptions: many, though not all, gas supply crises result from equipment and infrastructure failures, and extreme weather, as opposed to politically motivated or other deliberate interventions (Skea et al., 2012) E.On analysis of electricity blackouts (Boston, 2013):
Infrastructure and energy security Long term trends (years/decades): Liberalisation, climate change, investment cycles, economic growth Short term effects: technical failure, strikes, extreme weather Mitigation responses: operational and strategic Seconds Decades ICT systems Organisational and human resources Market signals Governance regime
Governments and infrastructure investments Public good characteristics - difficult to disaggregate the costs and benefits of an integrated infrastructure to a single actor or group of actors High upfront capital costs and long asset lives - The short term costs of operating and expanding an infrastructure system will fall relative to the average costs of the existing sunk investment which are spread out over a long period of time Uncertainties in long term energy demand - over-capacity is desirable to ensure supply can meet demand without significant price spikes, but who would invest in this infrastructure given the risk that it will not be used? Risks for investors and customers: protect customers from monopoly prices whilst providing long term reassurances to investors government as a mediator
Moving away from markets? A new governance dynamic? Developing new policy instruments for LC investment Dealing with new risks and uncertainties From short term efficiencies to long term transformation Market led Government led
Developing new policy instruments for LC investment DECC: We currently have adequate capacity, but there are risks to security of supply over the medium term as around a fifth of capacity available in 2011 has to close within this decade key challenge is not only replacing capacity but the nature of the generation which comes on stream i.e. that it is compatible with the UK s climate change and renewable energy commitments.
Developing new policy instruments for LC investment Potential funding gap excluding energy efficiency investments (Ernst and Young, 2010)
The EMR and Energy Bill The EMR - strike prices and capacity mechanism Deal with structural barriers and additional investment risks that low carbon generators face in liberalised electricity markets Reduce cost of capital and attract new sources of investment Address the needs of investors credible counterparty, levy control framework, decarbonisation target Will this attract new sources of (non-conventional) investment? Or creating new uncertainties? Strong government intervention leading to a new market-government hybrid governance model - An ideological struggle?
Dealing with new risks and uncertainties Gas sector uncertainties: Declining conventional gas production from the continental shelf LNG trade and increased pipeline interconnection underpinning an integration of traditionally regional markets; possible transition away from oil index-linked pricing of long term gas contracts Use of gas in balancing intermittent renewable generation in the power system Changing supply sources e.g. shale & rising worldwide demand e.g. Asia Gas as a transition or a destination fuel?
Systemic risks - Should government intervene? For Exposure to international markets and rising gas demand increases risk of high impact low probability event, potentially impacting electricity supply UK has lower than average storage capacity Many EU countries have public service obligations Market based measures e.g. cashout reforms not adequate to reflect value of security to customers Against UK has a diversity of supplies from LNG and interconnectors Market has delivered significant investment in the past and government intervention may crowd out private sector May reduce commercial incentives for new LNG import projects May interrupt a broad trend towards more open markets in Europe
From short term efficiencies to long term transformation - Regulated networks Pipes and wires: Non-competitive activities which need to be subjected to price controls RPI-x, placed clear incentives on network companies to reduce the costs of operating their asset base Least cost/incremental approach - Solutions tend to be biased towards network reinforcement and capacity expansion Regulatory innovation: LCNF and RIIO signal a shift away from seating the assets and short term thinking New ways of planning network investments: BAU investment vs. smart - active network management, demand response, storage, etc contribute en masse to providing security Enhanced Transmission Investment Incentives: Investing ahead of need
Governance challenges from a systems perspective 1. Policy complexity: energy security as part of a complex policy mix Tradeoffs between climate change commitments, security and preference for market mechanisms Can markets reflect value of security to customers? 2. Whole systems approach Synergies between regulated and competitive parts of the system - avoid institutional silos Increasing interdependencies across gas and electricity sectors Infrastructure planning and demand side integration 3. Multi-actor dynamic New relationship being forged between government and market hybrid governance What role for civil society? Need for broad based societal buy-in 4. Articulating pathways Explore options and avoiding early lock-in