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Economics of Energy & Environmental Policy
Volume 6, Number 1

Symposium on ‘Prosumage and the Future Regulation of Utilities’

Prosumage and the future regulation of utilities: An introduction

Christian Von Hirschhausen

DOI: https://doi.org/10.5547/2160-5890.6.1.cvh
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The objective of this EEEP symposium is to assess recent developments in prosumage-including technical and economic trends, the impacts of different regulatory settings, and theirrelationships to utility strategy and regulation in the light of recent trends-and to sketch outpotential future pathways. The symposium brings together in-depth analyses of the prosumagephenomenon and broader issues of future utility regulation, and also addresses topics of pricing,vertical and horizontal cooperation or unbundling, net metering, the role of technologychoices, among others.

Prosumage of solar electricity: pros, cons, and the system perspective

Wolf-Peter Schill, Alexander Zerrahn, and Friedrich Kunz

DOI: https://doi.org/10.5547/2160-5890.6.1.wsch
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We examine the role of prosumage of solar electricity, i.e. PV self-generation combined with distributed storage, in the context of the low-carbon energy transformation. First, we devise a qualitative account of arguments in favor of and against prosumage. Second, we give an overview of prosumage in Germany. Prosumage will likely gain momentum as support payments expire for an increasing share of PV capacities after 2020. Third, we model possible system effects in a German 2035 scenario. Prosumage batteries allow for a notable substitution of other storage facilities only if fully available for market interactions. System-friendly operation would also help limiting cost increases. We conclude that policymakers should not unnecessarily restrict prosumage, but consider system and distributional aspects.

“Prosumage” and the British Electricity Market

Richard Green and Iain Staffell

DOI: https://doi.org/10.5547/2160-5890.6.1.rgre
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Domestic electricity consumers with PV panels have become known as "prosumers"; some of them also have energy storage and we have named the combination "prosumage". The challenges of renewable intermittency could be offset by storing power, and many engineering studies consider the role and value of storage which is properly integrated into the 'smart grid'. Such a system with holistic optimal control may fail to materialise for regulatory, economic, or behavioural reasons. We therefore model the impact of naive prosumage: households which use storage only to maximise self-consumption of PV, with no consideration of the wider system. We find it is neither economic for arbitrage nor particularly beneficial for shaving peaks and filling troughs in national net demand. The extreme case of renewable self-sufficiency, becoming completely independent of the grid, is still prohibitively expensive in Britain and Germany, and even in a country like Spain with a much better solar resource.

Consumers or prosumers, customers or competitors? - Some Australian perspectives on possible energy users of the future

Iain MacGill and Robert Smith

DOI: https://doi.org/10.5547/2160-5890.6.1.imac
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Governance arrangements for electricity industries commonly claim the interests of consumers as their paramount objective. This would suggest a key decision making role for energy users, in all their diversity. However, the industry's critical role in societal, welfare, large environmental impacts, and the challenges of ensuring it's secure and reliable operation, all represent key shared long-term interests requiring high levels of coordination. The role of energy users within many electricity industries has transitioned over time from clients to citizens, then to consumers and now, in restructured industries, to customers. Increasingly, however, emerging distributed energy technologies including photovoltaics, storage and 'smart' loads are offering energy users new industry roles as prosumers rather than just consumers, and utility business partners, or potentially even utility competitors, rather than just customers. This paper outlines some of the experiences of energy users in the Australian National Electricity Market over the past decade as more than 15% of households have installed PV systems, and incumbent industry stakeholders and policy makers have struggled to reconcile formal market principles of encouraging energy user participation, with the realities of what such participation can do to existing business models. Australia's experience holds broader relevance as electricity industries worldwide look to better manage the challenges posed by prosumers while facilitating the societal benefits they can bring, particularly with the growing capabilities and falling costs of PV and energy storage systems. More generally, facilitating greater engagement with energy users will likely be essential in establishing the societal consensus required for the profound and highly disruptive transformation to a cleaner energy future.

A regulatory framework for an evolving electricity sector: Highlights of the MIT utility of the future study

Ignacio J. Pérez-Arriaga, Jesse D. Jenkins, and Carlos Batlle

DOI: https://doi.org/10.5547/2160-5890.6.1.iper
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The electric power sector is once again evolving. A variety of distributed energy resources and improving computation, communication, and control technologies create an unprecedented degree of choice for electricity consumers, choices that are poorly guided by electricity rates and other incentives designed for a comparatively simpler era. These technologies also create new tools for regulated utilities, competitive suppliers, and other businesses to employ in the provision of electricity services. This paper summarizes the findings of a two-year, multidisciplinary MIT Energy Initiative research effort, the Utility of the Future study, and outlines a framework for proactive electricity regulation, market, and policy reform designed to enable the efficient evolution of the power sector over the next decade and beyond. Recommendations include a comprehensive system of efficient prices and charges for all electricity users, enhanced regulation of distribution utilities, careful reconsideration of industry structure to avoid conflicts of interest, and improvements to electricity markets. Together, this framework is intended to establish a level playing field for the provision and consumption of electricity services and enable the integration of a cost-effective combination of centralized generation, conventional network assets, and emerging distributed resources, whatever that mix may be.

Balancing between competition and coordination in smart grids - a Common Information Platform (CIP)

Christine Brandstätt, Gert Brunekreeft, Marius Buchmann, and Nele Friedrichsen

DOI: https://doi.org/10.5547/2160-5890.6.1.cbra
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The commercial value added in electricity distribution networks and smart grids is increasing. Concerns about competition on a level-playing field are raised. The debate on vertical network unbundling is reaching the distribution networks. Primary driver for this discussion is the requirement to exchange information in smart grids in a neutral and non-discriminatory way. Against the background of the unbundling discussion for distribution networks, we introduce a new approach: the Common Information Platform (CIP). The CIP tries to balance better between competition and coordination. The CIP adds two new dimensions. First, it "unbundles" information and data management as the key step in the value chain. Correspondingly, the CIP avoids such drastic measures as network ownership unbundling and legal unbundling will suffice. Second, it does not "separate" information and data management from the sector, but rather involves third parties in the rule-making process; the governance structure is "common" instead of "independent".


Climate Policy with the Chequebook – An Economic Analysis of Climate Investment Support

Karol Kempa and Ulf Moslener

DOI: https://doi.org/10.5547/2160-5890.6.1.kkem
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Across the globe, climate policy is increasingly using investment support instruments, such as grants, concessional loans, and guarantees - whereas carbon prices are losing importance. This development substantially increases the risk of inefficient public spending. In this paper, we examine the ability of finance instruments to effectively and efficiently address market failures related to clean energy investments. We characterise these market imperfections - emission externalities, knowledge spillovers and capital market imperfections - and identify their negative impacts on the investor-relevant risk-return characteristics. We argue that finance instruments are able to address the effects of these market failures. However, a carbon price is superior in internalising the emission externalities. With respect to the latter two inefficiencies, investment support instruments can effectively compensate the market failures if designed appropriately. We further provide policy recommendations on the choice of finance instruments to address the various market failures and guidance on how to use these instruments avoiding inefficient government spending.

An Option Analysis of the European Union Renewable Energy Support Mechanisms

Laura N. Haar and Lawrence Haar

DOI: https://doi.org/10.5547/2160-5890.6.1.lhaa
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We examine the economic efficiency of incentive mechanisms used to promote Renewable Energy (RE) across the European Union (EU) by looking at returns to investors along with any negative externalities or social costs. Using electricity price data from 2009 to 2013, we evaluate the RE support mechanisms adopted by some of the largest EU economies. We explain the limitations of various metrics used to inform incentives for RE and propose an alternative metric reflecting investor requirements. Our results show that while the EU schemes were effective in delivering RE capacity, the incentives provided were overly generous and economically inefficient. To assess the indirect costs of RE in liberalized electricity markets we employ real option theory to quantify the costs of hedging and pricing the exposure faced by conventional fossil fuel generators required to accept RE under dispatch priority. We find that the cost of hedging against random RE output under dispatch priority is expensive while increasing RE in liberalized markets, by depressing prices and increasing price volatility, may place greater burden on conventional, dispatchable generators. As support for RE is presented as a public good, we argue that economically efficient RE support mechanisms require recognizing both their direct and indirect costs.

Performance Incentives in Capacity Mechanisms: Conceptual Considerations and Empirical Evidence

Paolo Mastropietro, Pablo Rodilla and Carlos Batlle

DOI: https://doi.org/10.5547/2160-5890.6.1.pmas
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Performance incentives are elements of capacity mechanism design aimed at prompting committed agents to manage their resources in such a way that they eventually meet their obligations when the system is tight. These incentives can be introduced in practice by means of two different (but non-conflicting) approaches in capacity mechanisms. First, performance incentives can be linked to constraints on tradable quantities (the so-called firm capacity or firm energy), which limit the amount of "reliability" that a given resource may sell in the mechanism, and which may be recalculated penalising potential unfulfilments. Second, they can be implemented as financial penalties for failure to comply with the commitments foreseen in the capacity contract. The first approach has been applied since the outset of capacity markets. The second did not receive much attention in the early stages of the implementation of adequacy mechanisms, but there is a growing trend on implementing it in modern designs. In this paper, after framing the problem conceptually, empirical evidence (particularly from Colombia, ISO New England, PJM, United Kingdom, and France) is compiled to reveal current trends in enhancing short-term performance in capacity mechanisms.

Book Reviews

Book Reviews

The Economics of Infrastructure Provisioning: The Changing Role of the State, edited by Arnold Picot, Massimo Florio, Nico Grove, and Johann Kranz - Book Review by: Kåre Petter Hagen

Future of Utilities—Utilities of the Future. How Technological Innovations in Distributed Energy Resources will Reshape the Electricity Power Sector, edited by Fereidoon P. Sioshansi - Book Review by: Georg Erdmann

An Evaluation of Japanese Environmental Regulations—Quantitative Approaches from Environmental Economics, by Toshi H. Arimura and Kazuyuki Iwata - Book Review by: Barbara Breitschopf

Improving Energy Decisions: Towards Better Scientific Policy Advice for a Safe and Secure Future Energy System, by Bert Droste-Franke, Martin Carrier, Matthias Kaiser, Miranda Schreurs, Christoph Weber and Thomas Ziesemer - Book Review by: Yukari Niwa Yamashita

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