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Economics of Energy & Environmental Policy
Volume 7, Number 1

Comparing Interstate Regulation and Investment in US Gas and Electric Transmission

Seabron Adamson

DOI: 10.5547/2160-5890.7.1.sada
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The interstate electric and natural gas sectors in the United States share some common regulatory elements, although the simpler economics of network expansion in gas pipelines allow the industry to operate on a contract-based framework that would be highly inefficient in electric transmission. The strong incentives for new pipeline development have allowed new gas pipeline infrastructure to be built quickly. Federal policymakers have created a range of policies to encourage new regulated electric transmission investment, but actual investment levels have remained relatively low. Recent experience suggests that cost allocation for multi-jurisdictional electric transmission projects remains a key issue.

A Primer on Transmission Benefits and Cost Allocation

William W. Hogan

DOI: 10.5547/2160-5890.7.1.whog
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The cost of transmission facilities must be allocated to those within the transmission planning region that benefit from those facilities in a manner that is at least roughly commensurate with estimated benefits." (FERC, 2010, p. 91) Benefits include reliability, economic and public policy related impacts. Turning the principle into a workable policy is important as a support for restructured electricity markets. A challenge is to make the different measures of benefits commensurable, and to find approximations that honor the principle without imposing a standard of perfection. A framework for such cost allocation uses examples from existing models and transmission investment studies to describe how the cost allocation principle could apply within the limits of available analytical capabilities.

Transmission Expansion Benefits: The Key to Redesigning the Regulation of Electricity Transmission in a Regional Context

Luis Olmos, Michel Rivier, and Ignacio Pérez-Arriaga

DOI: 10.5547/2160-5890.7.1.lolm
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Achieving a sufficient and efficient development of the transmission grid in the new low-carbon and region-wide coordinated electricity markets being created will be central to their success. This requires setting up the required institutional framework and cost allocation arrangements, which is specially challenging when the relevant market covers several independent countries or administrative areas (like states or provinces). The features of the set of institutions to have in place and the interactions among them, as well as the network cost allocation arrangements implemented, are critical issues to ensure an efficient and sufficient development of the grid. This paper addresses those issues and argues that they should be defined with the aim to properly take into account the benefits to be produced by network reinforcements, since these are driven by the benefits they produce. This article discusses how the expected benefits of transmission network expansion projects should affect the organization of the expansion of the grid, the expansion planning algorithms applied and the allocation of the cost of network reinforcements. After discussing the definition of the principles to be applied to these activities in an integrated system, the implications of these in a regional, or multi-system, context are provided.

Can Simple Regulatory Mechanisms Realistically be used for Electricity Transmission Investment? The Case of H-R-G-V

Ingo Vogelsang

DOI: 10.5547/2160-5890.7.1.ivog
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While simple regulatory mechanisms in the form of price caps have been implemented with success in the telecommunications sectors of many countries, they are much less used in the electricity sector and if so not as a tool to guide transmission investment. This paper takes one particular mechanism from a very abstract concept to an approach that deserves serious consideration as the regulatory approach for electricity transmission investment. For this purpose, some adjustments of the original mechanism have to be made to take care of the rent extraction issue and to provide fairness among user groups. To the extent that reliability can be assessed and measured in monetary terms, it can also become part of the reward structure of the Transco. Most of the environmental issues associated with transmission investment can best be addressed by environmental rather than electricity regulators. A comparison of the adjusted mechanism with a central planning approach and a stakeholder bargaining approach to transmission investment brings out tradeoffs between the approaches but leads to a favorable assessment of the mechanism for practical applications.

Electricity Network Charging in the Presence of Distributed Energy Resources: Principles, Problems and Solutions

Michael G. Pollitt

DOI: 10.5547/2160-5890.7.1.mpol
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This paper discusses the principles of electricity network charging in the light of increasing amounts of distributed generation and the potential for significant increases in electric vehicles or distributed electrical energy storage. We outline cost reflective pricing, traditional public service pricing, platform market pricing and customer- focused business model pricing. We focus on the particular problem of how to recover network fixed costs and a recent example from Australia. We conclude that there are serious issues for regulators to address, but that potential solutions at the distribution level may already exist at the transmission level.

Batteries, Interconnectors and Institutions: The Case of South Australia

Bruce Mountain and Jamie Carstairs

DOI: 10.5547/2160-5890.7.1.bmou
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In South Australia rapid expansion of grid-connected and distributed renewable generation has contributed to the closure of coal-fired electricity production and placed greater reliance on the remaining fossil-based generation and imports on meeting demand when South Australian renewable production is low. Concentrated wholesale markets and gas scarcity now explain higher wholesale electricity prices and lower security of supply. Possible solutions include expansion of distributed and grid-scale batteries, pumped hydro generation, dispatchable flexible generation, increasing demand-side participation or expanding transmission connection to the bigger electrical systems in New South Wales and Victoria. In Australia, the process for interconnector development is self-assessed proposals by transmission companies and regulatory approval of the outturn expenditure for inclusion in the regulated asset base. However, these self-assessments do not provide appropriate incentives. In particular, they are likely to crowd out unregulated solutions including grid-scale batteries. An independent transmission planning authority that does not have a financial interest in network expansion is likely to assess competing alternatives more objectively. Introducing competition for the development (and ownership) of new network assets also merits consideration. Experience in other countries in this area is encouraging.

Energy System Transition in the Nordic Market: Challenges for Transmission Regulation and Governance

Anna Grigoryeva, Mohammad R. Hesamzadeh, and Thomas Tangerås

DOI: 10.5547/2160-5890.7.1.agri
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The energy system in the Nordic countries faces changes driven by increasing integration with the rest of Europe and changes to the generation mix. These developments pose challenges with respect to future network development and operation. We focus on three major aspects: market integration; generation and network adequacy; the need for more flexibility and frequency control. We describe factors behind these problems and present possible solutions within the Nordic context. One conclusion is that supranational cooperation should be further improved.

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