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The Influence of Policy Regime Risks on Investments in Innovative Energy Technology

Ernesto Garnier and Reinhard Madlener

Year: 2016
Volume: Volume 37
Number: Bollino-Madlener Special Issue
DOI: 10.5547/01956574.37.SI2.egar
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Abstract:
This paper dissects the ways in which policy regime risks influence decisions over innovative energy technology investments. We apply compound real options methodology to evaluate the investment in a virtual power plant platform and distributed energy resource (DER) assets in view of volatile electricity market prices and an uncertain future electricity market design. The analysis reveals two aspects of policy regime risks: a policy content effect relating to actual market dynamics resulting from a (new) policy regime, and a policy process effect relating to (uncertainty about) the speed and probability of a regime change. The paper underlines the importance of predictable policymaking to stimulate risky investment. It further details the need to account for technology-specific investment responses to different policy regimes and risks, caused by different degrees of market versus subsidy exposure and differences between platform versus non-platform technologies.



Improved Regulatory Approaches for the Remuneration of Electricity Distribution Utilities with High Penetrations of Distributed Energy Resources

Jesse D. Jenkins and Ignacio J. Pérez-Arriaga

Year: 2017
Volume: Volume 38
Number: Number 3
DOI: 10.5547/01956574.38.3.jjen
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Abstract:
Under increasing penetration of distributed resources, regulators and electricity distribution utilities face greater uncertainty regarding the evolution of network uses and efficient system costs. This uncertainty can threaten revenue adequacy and challenges both cost of service/rate of return and incentive/performance-based approaches to the remuneration of distribution utilities. To address these challenges, this paper proposes a novel methodology to establish allowed utility revenues over a multi-year regulatory period. This method combines several "state of the art" regulatory tools designed to overcome information asymmetries, manage uncertainty, and align incentives for utilities to cost-effectively integrate distributed energy resources while taking advantage of opportunities to reduce system costs and improve performance. We use a reference network model to simulate a large-scale urban distribution network, demonstrate the practical application of this regulatory method, and illustrate its performance in the face of both benchmark and forecast errors.



Optimal Procurement of Distributed Energy Resources

David P. Brown and David E. M. Sappington

Year: 2018
Volume: Volume 39
Number: Number 5
DOI: 10.5547/01956574.39.5.dbro
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Abstract:
We analyze the optimal design of policies to motivate electricity distribution companies to adopt efficient distributed energy resources (DER) and manage associated project costs. The optimal policy often entails a bias against new DER projects and implements cost sharing when DER projects are undertaken in order to foster cost containment while limiting excessive profit for the utility. Failure to adequately tailor the degree of cost sharing to the prevailing environment can raise procurement costs substantially. The distribution company may optimally be awarded more than the cost saving it achieves.Keywords: Distributed Energy Resources, Procurement, Regulation



Restructuring Revisited Part 1: Competition in Electricity Distribution Systems

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

Year: 2019
Volume: Volume 40
Number: Number 3
DOI: 10.5547/01956574.40.3.sbur
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Abstract:
This paper addresses the implications of the emergence of distributed energy resources (DERs) for competition in the electricity distribution systems. The regulations on industry structures in place today were designed in an era characterized by centralized resources and relatively price inelastic demand. In light of the decentralization of the power sector, regulators and policy makers must carefully reconsider how industry structure at the distribution level affects competition, market development, and cost efficiency. We analyze the economic characteristics of distribution network owners and operators, DER owners, and aggregators and retailers. We translate the foundational theories in industrial organization and the lessons learned during the previous wave of power system restructuring to the modern context to provide insight into three questions. First, should distribution system operations be separated from distribution network ownership in order to ensure the neutrality of the DSO role? Second, should DNOs be allowed to own and operate DERs, or should DER ownership be left exclusively to competitive actors? Third, does the emergence of DERs necessitate a reconsideration of the role of competition in the provision of aggregation services such as retailing? This paper is the first part of a two-part series on competition and coordination in rapidly evolving electricity distribution systems.



Restructuring Revisited Part 2: Coordination in Electricity Distribution Systems

Scott P. Burger, Jesse D. Jenkins, Carlos Batlle, and Ignacio J. Perez-Arriaga

Year: 2019
Volume: Volume 40
Number: Number 3
DOI: 10.5547/01956574.40.3.jjen
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Abstract:
This paper addresses the mechanisms needed to coordinate vertically and horizontally disaggregated actors in electricity distribution systems. The mechanisms designed to coordinate planning, investments, and operations in the electric power sector were designed with minimal participation from either the demand side of the market or distributed energy resources (DERs) connected at distribution voltages. The emergence of DERs is now animating consumers and massively expanding the number of potential investors and participants in the provision of electricity services. We highlight how price signals - the primary mechanism for coordinating investments and operations at the transmission level - do not adequately coordinate investments in and operations of DERs with network infrastructure. We discuss the role of the distribution system operator in creating cost-reflective prices, and argue that the price signals governing transactions at the distribution level must increasingly internalize the cost of network externalities, revealing the marginal cost or benefit of an actor's decisions. Price signals considered include contractual relationships, organized procurement processes, market signals, and regulated retail tariffs. This paper is the second part of a two-part series on competition and coordination in rapidly evolving electricity distribution systems.





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