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Project No: 297852

Project Acronym: RES Grid Integration

Project Full Name: Regulated Expansion of Electricity Transmission

Networks: the Effects of Fluctuating Demand and RES Generation

Marie Curie Actions

Final Report

Period covered: from 01/05/2012 to 30/04/2014 Date of preparation: 11/04/2014

Start date of project: 01/05/2012 Date of submission (SESAM):

Project coordinator name:

Prof. Claudia Kemfert

Project coordinatororganisationname:

DEUTSCHES INSTITUT FUER

WIRTSCHAFTSFORSCHUNG E.V.

Version: 1

Final Report

PROJECT FINAL REPORT

Grant Agreement number: / 297852
Project acronym: / RES Grid Integration
Project title: / Regulated Expansion of Electricity Transmission
Networks: the Effects of Fluctuating Demand and
RES Generation
Funding Scheme: / FP7-MC-IIF
Project start date: / 01/05/2012
Project end date: / 30/04/2014
Name, title and organisation of the scientist in
charge of the project's coordinator: / Prof. Claudia Kemfert DEUTSCHES INSTITUT
FUER WIRTSCHAFTSFORSCHUNG E.V.
Tel: / +493089789663
Fax: / +493089789113
E-mail: /
Project website address: /

FINAL PUBLISHABLE SUMMARY REPORT

This section normally should not exceed 2 pages.

This is a comprehensive summary overview of results, conclusions and the socio-economic impacts of theproject. The publishable report shall be formatted to be printed as a stand alone paper document. This reportshould address a wide audience, including the general public.

Please ensure that it:

- Is of suitable quality to enable direct publication by the REA or the Commission.

- Is comprehensive, and describes the work carried out to achieve the project's objectives; the main results,conclusions and their potential impact and use and any socio-economic impact of the project. Please mentionany target groups such as policy makers or civil society for whom the research could be relevant.

- Includes where appropriate, diagrams or photographs and the project logo, illustrating and promoting the workof the project.

- Provides the address of the project Website (if applicable) as well as relevant contact details.

Final Publishable Summary Report:

The main goal of this project was to enhance the understanding on how to regulate and expand transmission networks in the light of large-scale renewable-energy-source (RES) integration to electricity systems. The regulation of transmission operation and expansion is widely discussed by regulatory economists. Finding optimal mechanisms is difficult given the specific physical characteristics of electricity networks like negative local externalities due to loop flows obeying the Kirchhoff’s laws. Considering RES-specific issues in network regulation analysis further required to take into account some other complex special objectives and constraints. In particular, the timing of electricity dispatch in RES systems is more frequent and fluctuating than conventional electricity systems, and a renewable-integration process (which substitutes conventional energy with renewable sources) has an effect on the rents from congestion in the network. All these aspects have impacts on transmission investment decisions.

This research project then combined theoretical research on the regulation of transmission expansion with applications to different energy systems, and derived policy implications to help decision makers identify appropriate policies. In order to analyze such issues, we initially relied on the Hogan-Rosellon-Vogelsang (HRV) mechanism[1] which combines merchant and regulatory structures to promote the expansion of networks. Another approach to transmission expansion would be traditional central planning, which may either be carried out within a vertically integrated utility or by a regulatory authority. Another alternative might be traditional cost-of-service regulation. In contrast, transmission decisions could also be determined in a totally decentralized, non-regulated way. The HRV approach lies among these approaches, combining regulation (via price caps), and market incentives via property rights in electricity investment (financial transmission rights, FTRs). In this project we thus analyzed whether the unique variability and unpredictability characteristics of RES had an effect on transmission expansion decisions within the HRV analytical framework, as well as on investment decisions made under other regulatory regimes.

To address these issues, we first analyzed in Schill, Egerer and Rosellón (2014) (second revise-and-resubmit status at Journal of Regulatory Economics) the performance of different regulatory approaches for network expansion in the context of realistic demand patterns and fluctuating wind power. We applied these mechanisms to a stylized model of the Western European transmission network. We explicitly included both an hourly time resolution and fluctuating wind power, which substantially increased the real-world applicability of the approach. We solved the model numerically and compared the economic welfare outcomes, and the optimal levels of network expansion. We found that network extension in Western Europe not only increased social welfare due to diminished congestion, but also led to price convergence and therefore a large redistribution of social welfare.[2] Comparing different regulatory approaches, we found that the combined merchant-regulatory regime led to welfare outcomes far superior to other modelled alternatives.

Further, in Egerer, Rosellón and Schill (2014) (accepted for publication at The Energy Journal) we addressed the rationale for regulation of transmission investment under a renewable integration process characterized by the gradual substitution of conventional power (e.g., coal) with renewable energy sources (e.g., wind). This transition towards a low carbon electricity sector can have temporary or permanent exogenous shocks on transmission requirements. We studied different regulatory regimes for electricity transmission investment in such a context. An independent system operator (ISO) collects nodal-price payments from loads and pays the generators. The difference between these payments is the congestion rent, which is assumed to be transferred to the transmission company (Transco). We modeled then a welfare-maximizing benchmark (WFMax) in which a social planner makes combined decisions on network expansion and dispatch, as well as three different regulatory cases in which we assume the Transco to be unregulated regarding network expansion (NoReg), cost-regulated (CostReg), or price-capregulated (HRV). We compared these cases to a baseline without any network expansion. The different regulatory cases were analyzed under different stylized cases of changing technology generation over a timeframe of 20 years. We found that incentive price-cap HRV regulation performs satisfactorily under a renewable-integration process only when appropriate price weights in the price-cap formula are used.Ideally constructed quantity weights, brought back from welfare-optimal steady-state equilibrium, generally restored the beneficial properties of incentive regulatory mechanisms under renewable integration. However, we also searched to more down-to-earth weight alternatives. We thus found that, depending on the expected evolution of network congestion, either previous-period (Laspeyres), current-period (Paasche), or average Paasche-Laspeyres quantity weights appear to be appropriate choices. In particular, with the proper handling of weights, excessive network investments (that are usual in renewable integration processes) might not be a problem anymore.

In the previous studies we found, however, that a combined merchant-regulatory regime for network expansion also leads to a situation in which a substantial portion of the Transco’s income consists of a fixed tariff part. The over-time rebalancing of the two-part tariff carried out by the Transco, so as to expand the network, is such that the fixed fee is considerably higher than the decrease of the variable part. The fixed-tariff part also turns out to be relatively large compared to extension costs, a distributive issue that might be addressed through a proper choice of weight of profits in the welfare criterion. We therefore studied in Herrera and Rosellón (2014) (article in press at Energy Policy) the parameters that a regulator might use to achieve distributive efficiency (a task that had so far not been explicitly analyzed in the economics literature). In particular, we analyzed how different weight parameters affect the distributive characteristics of the incentive price-cap regulation. We found that a regulator's use of ideal (Laspeyres) weights tends to be more beneficial for the Transco (consumers) than for consumers (the Transco).

As described above, we performed applications of the models developed in this project to France, Germany, Belgium and the Netherlands. However, we also analysed such models in the context of other industries, such as natural gas (as in Neumann, Rosellón and Weigt, 2014, second revise-and-resubmit status at Networks and Spatial Economics) and other countries outside Europe (Ruiz and Rosellón, 2012, published at Energy Policy).

It must be mentioned that the above studies were developed under the assumption of existence of a system of nodal prices that provided congestion-rent signals for the network-expansion process. However, during the development of the project, a question arose regarding the feasibility of implementing nodal price systems in markets with a tradition of uniform-pricing schemes (such as Germany).

This motivated us to carry a deep analysis on issues related to implementation of nodal pricing regimes and associated needed financial hedges (financial transmission rights, FTRs). We then firstly put together a series of papers that analyzed these issues in a book published by Springer in its Lecture Note series (Rosellón and Kristiansen, 2013). We were able to attract to this volume some of the most internationally renowned authors in the subject.

Subsequently, we wrote a paper (Kunz, Neuhoff and Rosellón, 2014, accepted to be presented net June at the conference on Energy Industry at a Crossroads: Preparing the Low Carbon Future/TIGER FORUM, 2014, Toulouse, France) where we studied the shift from zonal pricing to smaller zones and nodal pricing so as to improve efficiency and security of the electricity-system operation. Such price changes however also shift profits and surplus between generators and consumers, so that individual actors that may lose might oppose such a reform. The initial allocation of FTRs in a newly created nodal-price system has then been one of the most highly disputed parts of market liberalization processes, as in New Zealand and Australia. In Europe there is nowadays a similar challenge, with considerable dimension of high respective shares that are competing for the pie. In our paper we developed a model to explore how an initial free allocation of FTRs at the time of a transition to nodal pricing could be designed so as to avoid revenue or cost shock. We explored how free allocation of FTRs to generators and loads can be used to mitigate distributional impacts. We researched on the metric to determine the proportion of rights to be allocated by the policy maker, and tested the results in a more realistic setting based on the hourly modelling of the German power system at nodal representation.

2. USE AND DISSEMINATION OF FOREGROUND

Section A (public) – DISSEMINATION MEASURES

This section should describe the dissemination measures, including any scientific publications relating toforeground and specify any applications for patents etc. Its content will be made available in the public domainthus demonstrating the added-value and positive impact of the project on the European Union.

Dissemination activities

Comments:

  • Conference on Energy Industry at a Crossroads: Preparing the Low Carbon Future/TIGER FORUM 2014, “Allocation of FTRs to Ease Transition to Nodal Pricing (joint with Friedrich Kunz and KarstenNeuhoff),” University of Toulouse, Toulouse, France, June 5-6, France
  • 28th Latin American Meeting of the Econometric Society: LAMES, “Testing Regulatory Regimes for Power Transmission Expansion with Fluctuating Demand and Wind Generation (joint with Wolf-Peter Schill, and Jonas Egerer),” Mexico D.F., Mexico, 31.10.2013 - 02.11.2013
  • Berlin Conference on Electricity Economics (2013): Modeling and Policy in the Energy Transformation – Germany, Europe, and Beyond, presentation of the book: Rosellón, J. and T. Kristiansen (eds.), (2013); Financial Transmission Rights: Analysis, Experiences and Prospects, Lecture Notes in Energy 7, Springer Verlag,ISBN: 978-1-4471-4786-2, Berlin, Germany, October 10th, 2013.
  • Berlin Conference on Electricity Economics (2013): Modeling and Policy in the Energy Transformation – Germany, Europe, and Beyond, "Power System Transformation towards Renewables: Effects on Optimal Network Expansion", Berlin, Germany, October 10th, 2013.
  • EnerTrain Autumn School (2013),Transmission Expansion and Regulation of Electricity Networks: Theory and Numerical Simulations,Juan Rosellón, Coordinated by the German Institute for Economic Research (DIW Berlin) and the Workgroup for Economic and Infrastructure Policy (WIP) at TU Berlin, Berlin, 07.10.2013 - 11.10.2013.
  • 13th European IAEE Conference 2013, “Towards Optimal Regulation of Transmission Network Investment under Renewable Integration,” Düsseldorf, Germany, August 18-21, 2013.
  • 10th International Conference on the European EnergyMarket (EEM13), “Towards Optimal Regulation of Transmission Network Investment under Renewable Integration,” Stockholm, Sweden, May 28-30, 2013.
  • National Congress on Basic Scientific Research (CongresoNacional de InvestigaciónCientíficaBásica), “An Incentive Mechanism for Electricity Transmission Expansion,” Mexican National Science Foundation (Conacyt), Cancún, Mexico, November 21-23, 2012.
  • Sustainability Cluster-Brown Bag Seminar, “Testing Regulatory Regimes for Power Transmission Expansion under RES Grid Integration,” German Institute for Economic Research (DIW Berlin), Berlín, Alemania, 24 October, 2012 (“kick-off” meeting).
  • Conference on „Modellgestützte Analysen für die Strommarktgestaltung zur Integration erneuerbarer Energien im Rahmen der Energiewende,“ German Institute forEconomic Research (DIW Berlin), Berlín, Alemania, 12 October, 2012.
  • INFRATRAIN, 2012, DIW Berlin.

Publications

The list of scientific publications (see article II.11 of the grant agreement) starting with the most important ones, should specify:

- publicationname,

- date and page in order to be able to identify it (see proposed template).

LIST OF SCIENTIFIC PUBLICATIONS, STARTING WITH THE MOST IMPORTANT ONES

No. / Title / DOI / Main author / Title of the periodical or theseries / Number,dateorfrequency / Publisher / Place ofpublication / Date ofpublication / Relevant pages / Permanent
identifiers (if
applicable) / Is openaccessprovided toThispublication? / Type
  1. W.P. SchillJ. Egerer, and J. Rosellón (2014), “Testing Regulatory Regimes for Power Transmission Expansion with Fluctuating Demand and Wind Generation,”Journal of Regulatory Economics, (second) revise and resubmit.
  2. Egerer, J., J. Rosellón and W-P. Schill (2014), “Towards Optimal Regulation of Transmission Network Investment under Renewable Integration,” proceedings of the 10th International Conference on the European Energy Market (EEM13), IEEE (Institute of Electrical and Electronics Engineers) Stockholm, Sweden.
  3. Egerer, J., J. Rosellón and W-P. Schill (2014), “Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion,” The Energy Journal, accepted for publication.
  4. Herrera, L. and J. Rosellón (2014), “On Distributive Effects of Optimal Regulation for Power Grid Expansion,” Energy Policy,article in press.
  5. Kunz, F., K. Neuhoff and J. Rosellón (2014), “Allocation of FTRs to Ease Transition to Nodal Pricing,” accepted to be presented net June at the Conference on Energy Industry at a Crossroads: Preparing the Low Carbon Future/TIGER FORUM, 2014, Toulouse, France.
  6. Neumann A., J. Rosellón and H. Weigt “Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market: A Proposed Merchant-Regulatory Mechanism,” Networks and Spatial Economics, Springer Verlag, (second) revise and resubmit.
  7. Rosellón, J. and T. Kristiansen (eds.), Financial Transmission Rights: Analysis, Experiences and Prospects, Lecture Notes in Energy 7, Springer Verlag, 2013, ISBN: 978-1-4471-4786-2.
  8. Ruiz, E. and J. Rosellón (2012),“Transmission Investment in the Peruvian Electricity Market: Theory and Applications,” Energy Policy, 45, pp. 238-245.

Section B (confidential) - EXPLOITABLE FOREGROUND AND PLANS FOR EXPLOITATION

This section should specify the exploitable foreground and provide the plans for exploitation. It will be kept confidential and will be treated as such by the REA and theCommission.

The applications for patents, trademarks, registered designs, etc. shall be listed according to the template B1 provided hereafter.

The list should, specify at least one unique identifier e.g. European Patent application reference. For patent applications, only if applicable, contributions to standards should be specified.

Not applicable.

3. SCIENTIST IN CHARGE QUESTIONNAIRE

RESEARCH TRAINING ASSESSMENT:

What is the size of the hosting research
group? / The size of the department of Energy, Transport and Environment (EVU) at DIW Berlin is: nineteen researchers, three research assistants, three PhD students, and two staff members.
How many researchers have you supervised, within the past 10 years? Of which funded by:
EC/Marie Curie actionsEC Other Funding / One funded by a Marie Curie action.
University fellowships / Four
National public bodies / Ten
Industry / One
Other
Other, please specify:
How many researchers have you supervised
within this project? / One
Corresponding to how many person months? / Twenty four months
Number of publications resulting directly from the research project: / Eight
Recruited researcher(s) and yourself / Two
Recruited researcher(s) alone / One
Recruited researcher(s) with authors other
than yourself / Thirty six
Participation of the recruited researcher(s) at conferences (number): / Eleven
Passive
Active / Eleven
How do you rate the overall success of the research training? / Excellent
General assessment: / The project was carried out in an excellent way regarding publications and research content. All the objectives were reached and, even more, avenues for future research were suggested.

RESEARCHERS ASSESSMENT:

Rate the overall level of the recruited researcher(s) integration in the research team and the host organisation with regards to:
participation in meetings/seminars / Very active participation.
discussions of results and project-relatedtopics / Intense discussions of results and topics in each of the conferences, seminars and day-to-day work.
co-operation with other team members / The researcher of the project coauthored studies with three researchers of the department of energy, transport and environment at DIW Berlin. He also cooperated informally in various events with many other researchers of the EVU team.
co-operation with other researchers of thehost institution / He coauthored papers with two researchers,informally cooperated with many other researchers at DIW Berlin (outside EVU), and coauthored other studies with thirty one researchers from other institutions.
Rate the overall performance of the recruited researcher(s) with regard to:
capacity to develop new skills and to benefitfrom training / Excellent.
productivity (researchresults/publications/international conferenceattendance) / Excellent.
communication skills / Excellent.
group leader skills (collaboration with othergroups/project management) / Excellent.
training and/or teaching skills / Excellent.
Comment: / The researcher of the project (Prof. Rosellón) also taught a workshop (Enertrain 2013) where he trained European PhD students on the topics of the project.

RESEARCH TRAINING OUTCOMES: