Utility Business Models and Performance-Based Regulation

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​In a presentation for the U.S. Climate Alliance, Mark LeBel explored the promise of performance-based regulation as an alternative to traditional cost-of-service regulation for utilities.

Zukünftige Anforderungen an eine energiewendegerechte Netzkostenallokation

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Mit fortschreitender Energiewende werden fluktuierende Erneuerbare Energien immer zentraler bei der Energieversorgung. Für ein kosteneffizientes Energiesystem müssen die bestehenden industriellen und größeren kommerziellen Verbraucher sowie deren anstehende Elektrifizierung der Wärme- und Produktionsprozesse (Sektorenkopplung) darauf reagieren. Strompreise signalisieren dabei die Knappheiten und Überschüsse der Erzeugung. Auch das Netz ist schon heute sehr unterschiedlich ausgelastet. Trotzdem gilt, dass auch Knappheiten, die nur über kurze Zeiten auftreten, maßgeblich über einen kostenintensiven Netzausbau beseitigt werden. Kosteneffizient wäre es, auch die neuen und bestehenden Verbrauchseinrichtungen im industriellen Bereich und zur Schnellladung von Elektromobilen (Verbraucher mit registrierender Leistungsmessung) für eine Netzoptimierung einzusetzen.

Hier gewinnt die Frage nach Anreizwirkungen, einschließlich möglicher Hemmnisse und Fehlanreize, die von Netzentgelten (neben anderen Umlagen und Abgaben) ausgehen, stark an Relevanz: Es geht nicht mehr allein um eine „gerechte“ Kostenallokation, sondern um die Frage, ob energiewenderelevante Entwicklungen durch ineffiziente Bemessung und Strukturen der Netzentgelte unangemessen behindert werden.

Dieses Projekt betrachtet, wie die heutigen Regelungen zu problematischen Wirkungen bei der Netzkostenallokation führen können. Geeignete Weiterentwicklungen können sich dabei jedoch nicht auf kleine, kurzfristig umsetzbare Anpassungen und Ausnahmen beschränken. Deshalb werden hier grundlegendere Optionen andisktutiert. Das Ergebnis der Ausarbeitung soll dabei einen Impuls geben und keine konkret und detailliert ausgearbeiteten Vorschläge unterbreiten. Es soll vielmehr einen grundsätzlichen Diskussionsprozess anstoßen, der in die konkrete Ausarbeitung von Details und Implementierungen in der nächsten Legislaturperiode münden soll.

Fit and fair: The case for a European fund for targeted renovation

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This week European Commission Vice President Frans Timmermans revealed that any extension of carbon pricing to heating and transport would be accompanied by a “climate action social fund.” He states the purpose of this fund is to compensate for possible adverse effects, especially for the most vulnerable citizens.

Our new report Pricing is just the Icing assesses these impacts and carbon pricing’s role in the buildings sector. We propose ambitious regulatory reform and a socially focussed renovation fund — not unlike what Timmermans has proposed this week — supported by a gradual and measured introduction of carbon pricing, either at an EU or member state level.

Social climate spending is needed regardless of carbon pricing

Timmermans explains the necessity for this fund as a consequence of the introduction of carbon pricing, but it is needed and justified even if the Commission does not proceed with the pricing proposals. Europe has already set itself social objectives for the energy transition to be “just and inclusive” and for the Renovation Wave to alleviate energy poverty this decade.

Achieving these obligations will require significant new socially focussed climate measures. The introduction of carbon pricing would increase the need for such assistance and should accelerate the rate at which funding is dispersed.

The impact of the Fit for 55 Package will be felt by Europeans like no previous set of climate measures. The European Commission expects emissions from the residential buildings sector to fall by more than 60% by 2030 from 2015 levels as the Renovation Wave builds over the course of the decade.

To ensure that this transition delivers on the EU’s social goals and turns the tide on rising inequalities, there are opportunities across the entire Fit for 55 package to ensure that the benefits of the transition are available to low-income and vulnerable citizens.

Carbon pricing plays only a small role in buildings’ sector decarbonisation

In our report, we assess the role of carbon pricing in buildings decarbonisation. We examine the options open to the Commission, including extending the Emissions Trading System (ETS) or implementing a parallel ETS for the buildings sector. We conclude that neither of these options would be best for the sector.

We analyse how higher energy prices have a regressive impact in many different ways, including geographical impacts, income-based impacts and impacts based on a range of other factors, including efficiency of buildings, access to clean fuel alternatives and other horizontal inequalities.

To shield low-income and otherwise heavily burdened households from the impact of the carbon price on bills, some direct payments to support incomes or reduce energy bills will be required in the short term.

Efforts should be concentrated, however, on low-carbon investment. This permanently reduces heating bills, brings the full benefits of energy efficiency and decarbonisation, and reduces the need for ongoing income or energy bill support. These objectives require up-front investment, which should be a major priority for the new European fund.

Structuring a social renovation fund

This fund should contribute significant additional, dedicated funding for renovations targeted for specific household groups. Many European funds can be used for renovation but not many must be used for renovation.

Buildings therefore have to compete with other decarbonisation or recovery projects, which are often more centralised and rely on fewer dispersed stakeholders. Renovation finds it hard to compete.

Many European funds can be used for renovation but not many must be used for renovation.

The fund should frontload spending as one of the key policy measures to alleviate energy poverty this decade. Funding should ensure as many households as possible are helped to decarbonise in advance of any carbon pricing or mandatory renovations required by minimum energy performance standards.

The fund’s design should meet the following priorities:

  • Adequate to the scale of the need. All possible sources of funding should also be pursued to adequately resource the fund, including revenues from the existing EU ETS. If pricing is extended to the buildings and transport sectors, the equivalent of 100% of the new revenues at a minimum should be ringfenced, not as Timmerman’s proposes, “part of the revenues generated.”
  • Target all households in need, not just those in poorer geographical areas. Funding should be available to those already struggling with their energy bills and who will be additionally burdened by the carbon price. This includes households already in energy poverty, those on low-income who will be disproportionately burdened but have no investment ability to decarbonise, and those living in the worst-performing homes, using high-carbon fuels who will also experience high burdens. These households live in almost every community in Europe. Existing approaches to targeting European funds commonly use geographical eligibility — the Modernisation Fund is available to the 10 lowest income Member States and the Just Transition Fund is available to coal and carbon-intensive regions. Following this approach would not make funds available to all households who need them.
  • Reach delivery bodies at the right geographical/administrative level. Funding should be available where it can be used most effectively. For energy poverty alleviation, support is often best delivered at the local level, through local authorities, integrated renovation services and one-stop shops. Funding could be combined with technical assistance to cities, regions or communities.
  • Aim for swift dispersal. Funding should be dispersed to those that can use it quickly. Given the urgency of the climate and social goals this decade, there is no time to waste. The fund should be structured to ensure that money is released as quickly as possible and frontloaded to increase impact this decade. Assessment procedures and granting should be as streamlined as possible. To enable local delivery organisations and supply chains to scale up, and aggregators to build business models, funding should be available in short lead times.
  • Secure social impact. Funding should be governed by proportionate but adequate oversight and verification of impact. Given the scale of the funds that should be available and the granular level at which they will be spent, defining eligibility criteria, application and dispersal processes, reporting and verification all needs careful attention. They should ensure robustness and value for money and that the bureaucracy does not create barriers to the target recipients.

The commitment from the Commission to create a social fund is very welcome. Its design will be crucial. If it is dedicated to building renovation and is sufficiently large, targeted and quickly dispersed, the fund can significantly contribute to both its climate and social objectives.

A version of this article originally appeared in Euractiv.

Photo courtesy of Metro Centric / Flickr.

Challenges facing distribution system operators in a decarbonised power system

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The transition to clean energy is changing the nature of Europe’s power systems. Increasing electrification in the heat and transport sectors, more active consumers and the need to accommodate greater shares of wind and solar are impacting the fundamental design and operation of distribution networks. With the rise in community energy and local markets for energy and services, traditional generation capacity is transferring from the transmission to the distribution systems. These and other changes create a wide range of challenges and opportunities for distribution system operators.   

To successfully navigate this shift, distribution system operators will need to embrace changes in their role and structure, while exploring the world of digitalisation and innovation to manage their networks. Philip Baker  explores areas where  it will be necessary for distribution system operators to adapt in the future to ensure  a successful energy transition.  

With domestic consumers generating more capacity, distribution system operators will need to take a more active role in managing the network by tapping into the inherent flexibility these resources offer. To achieve this, they will need to develop the skills and facilities required to maintain security and quality of supply as they procure and manage the contributions of even hundreds of thousands of active consumers. These developments will also change their interaction with transmission system operators, as responsibilities threaten to overlap at times. Policymakers can ease this tension by examining potential changes to the roles of both transmission and distribution system operators to ensure effective system security and management.  

Regulators can incentivise distribution system operators by focussing on outcomes that reflect consumer needs and energy policy priorities, rewarding them for delivering these results in the most cost-efficient fashion. The policies will also address the way operators recover network costs. We will need to rethink network tariff designs to ensure we incentivise consumer behaviours that are consistent with the energy transition. 

Protecting Customers from Utility Information System and Technology Failures

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Information systems (IS) and information technology (IT), which continue to grow more innovative every year, promise improved communication, services and billing between utilities and customers, better and more reliable service, and greater visibility into the operations of utility grids. Advanced IS/IT systems are critical to ensuring that smart meters and other new technologies work effectively, sync with other systems, and reliably store, analyze, and maintain important data.

These technologies, however, can fail to live up to promises — and that entails a set of risks for utilities and customers, including the possibility of badly botched utility operations. This paper will help regulators consider how best to regulate the clear benefits of the technologies while weighing any potential associated risks by attempting to mimic how a competitive market would handle such technologies in non-monopolies.