12 ieee power & energy magazine july/august 2015

gues

t edi

toria

l

Hugh Rudnick

economics of electricitythe market impacts of developments in supply

AAS THE FIRST ARTICLE In THIS issue indicates, electric power sectors worldwide have entered a new era and face many unprecedented options that transcend generation, transmission, distribution, and demand, creating conditions that threaten the traditional foundations of those sectors. Increas-ing environmental emission restric-tions on fossil fuels, the massive arrival of intermittent renewables, low-cost natural gas and combined cycle gen-eration revolutionizing energy prices, distributed generation transforming consumers into prosumers, demand response and smart grid and metering extending, innovations already being explored in regulatory approaches to drive electricity markets—these are just a few of new developments impact-ing the power sector.

With that framework in mind, we contacted authors from all over the world to reflect on these developments and share specific experiences, illustrat-ing how different countries and states are reacting to them. Preferably, we wanted to answer questions such as:

✔ How will these changes affect electricity prices to final con-sumers in the long term?

✔ How will they influence the re-muneration of the current conven-tional generation and networks?

✔ What changes may take place in the way businesses develop?

✔ Which are the primary challeng-es to market design?

The “In My View” column, by the Raymond Plank Professor of Global Energy Policy at Harvard University, William Hogan, questions the policy ap-proach that has been cho-sen around the globe to reduce emission impacts and externalities by forc-ing renewable technolo-gies through mandates or subsidies. He warns that solar levelized costs for 2019 entry would be 90% more expensive in the United States than an advanced gas combined cycle plant, even with emission taxes. He favors instead a better market design, through an emission tax, that would work through the market to affect production, consumption, and investment. He claims such a tax would better stimu-late technological innovation in economic renewable supply and in demand-side alternatives.

Our first article, by Randell John-son, provides a broad overview of the challenges faced in an era of unprec-edented options. He cautions that tradi-tional utility business models are under threat, with reduced demand for wheel-ing of energy through utility assets, de-creasing marginal costs deflating spot prices, and aggressive introduction of out-of-market subsidies. He looks at the “creative destruction” of the great innovations taking place and its im-pacts on electricity rates and prices, op-tions for future grids, energy transport, macroeconomic power sector futures,

the evolution of planning processes, power market structures, fossil fuels, and environmental regulations. He ar-gues that it will take future generations

to further exploit the broad implications of these innovations.

The second article, by José Pablo Chaves-Ávila, Klaas Würzburg, Tomás Gómez, and Pe-dro Linares, examines the impact of renewable sources on the Euopean Union (EU) electric-ity prices, with a closer look at the Spanish and German markets. In its search for a cleaner

energy matrix, Europe took the world-wide lead in promoting renewable energies, through generous feed-in-tariffs. For the 2030 horizon, the EU has agreed on ambitious targets: 40% reduction of greenhouse gas emissions, 27% of energy consumption from re-newables, and 27% increase in energy efficiency. This has resulted in differ-ent impacts on electricity markets, af-fecting wholesale markets, markets for ancillary services, network costs, and finally retail prices. Average retail resi-dential electricity prices have increased by 60.9% for Spain and 41.6% for Ger-many from 2007 to 2014.

The third article, by Arne Olson, Amber Mahone, Elaine Hart, Jeremy Hargreaves, Ryan Jones, Nicolai Schlag, Gabriel Kwok, Nancy Ryan, Ren Orans, and Rod Frowd, examines options to achieve a 50% renewable grid in

Digital Object Identifier 10.1109/MPE.2015.2423214Date of publication: 25 June 2015

Electric power sectors worldwide have entered a new era and face many unprecedented options.

14 ieee power & energy magazine july/august 2015

California by 2030, with high wind and solar penetration, under several scenar-ios. It examines the operational chal-lenges of achieving it, concluding there are no technical barriers, just different potential integration solutions. At high penetrations of renewable generation, a significant amount of renewable cur-tailment will be necessary to avoid overgeneration and to manage net load ramps, which will necessarily in-crease costs and final electricity rates. Finally, the authors examine the re-sultant greenhouse gas reductions and make several policy recommendations on regional coordination, renewable portfolio diversification, and identifi-cation of a sustainable, cost-effective renewable strategy.

The fourth article, by Bruce Moun-tain and Paul Szuster, looks at Aus-tralia’s 1.4 million solar roofs and the country’s opportunities and challeng-es. Sixteen percent of Australia’s de-

tached and semidetached houses have photovoltaic (PV) systems on their roofs, making it, by a wide margin, the global leader in rooftop PV installa-tion. The article assesses that rise, ex-plained by rising household electricity prices and significant capital subsidies (certificate schemes) and production subsidies (feed-in-tariffs), coupled with tax exemptions. Regulated house-hold tariffs have almost doubled in re-cent years and range up to US$304/MWh, making rooftop PV systems an attractive alternative. A debate is tak-ing place on whether the economics of local PVs is such that the established, centrally dispatched electricity model is now in a “death spiral,” declining demand for grid-supplied electricity leading to higher prices and declining demand. This trend will very much depend on the decline in battery costs.

The last two articles focus on how traditional network businesses are facing

the challenges. The fifth article, by Goran Strbac, Christos Vasilakos Konstantini-dis, Rodrigo Moreno, Ioannis Konstan-telos, and Dimitrios Papadaskalopoulos, discusses the importance of transmission pricing and investment coordination in facilitating the cost-effective integration of renewables, focusing on the incorpora-tion of massive offshore wind generation and interconnector projects in the North Sea, which will contribute to the decar-bonization of Great Britain. Transmis-sion investments by 2030 are projected between £20 and £50 billion, necessarily increasing consumers’ bills. To reduce that increase, and given the enormous uncertainties involved, it becomes im-perative that these investments are un-dertaken in an efficient and timely man-ner—depending on how transmission investment is undertaken (new criteria to consider) and how costs are allocated. The authors prove it is more cost-effec-tive to marginally over invest and run the

Don’t put your customers in the dark unnecessarily.

Protect your customers from more of the preventable outages with CAPE 14 protection analysis software

Electrocon’s CAPE (Computer-Aided Protection Engineering) software allows utilities to determine if their networks are compliant with NERC PRC-019, PRC-023, PRC-026 and other industry standards. The CAPE-TS Link™ option gives electric power engineers a unique tool to evaluate the fast, wide-area control needed to avoid cascading outages and blackouts. Realistic device models make CAPE the most powerful protection simulation software available.

CAPE 14

Electrocon International, Inc.405 Little Lake Drive, Suite C

Ann Arbor, Michigan USA 481031-734-761-8612 or toll free in US: 1-888-240-4044

eii@electrocon.com www.electrocon.com

16 ieee power & energy magazine july/august 2015

risk of stranded assets than under invest and considerably constrain the available wind energy output.

The sixth article, by Furong Li, Jose Wanderley Marangon-Lima, Hugh Rudnick, Luana M. Marangon-Lima, Narayana P. Pad-hy, Gert Brunekreeft, Javier Reneses, and Chongqing Kang, dis-cusses the challenges faced by distribution pricing under growing distributed generation, de-mand-side management, and smart grid developments. The majority of the tariff structures and charging methodologies in practice worldwide were developed in the 1970s and 1980s, with distribu-tion being one of the most conservative segments of the electricity chain and the one that could be hurt first. Charg-

ing methodologies, cost drivers and al-location methods, pricing structures,

and the need to reform them are reviewed for seven countries around the world.

The future looks troublesome for the power sector, and the need is urgent to iden-tify adequate market incentives for clean-er energy matrices.

Developing countries are drawing strategies to force supply through ar-bitrarily designed technology paths, defined by the state, not considering substantial uncertainties nor learn-ing from past mistakes made by the developed world that are caus-ing huge burdens on final consum-ers. This is further complicated by mounting environmental concerns,

added to growing emergent social unrest, questioning electricity infra-structure expansion. The need is to innovate in new supply technologies, new environmental/social schemes, and, specially, in good electricity market design.

We thank the authors for their time and dedication and the articles they’ve provided and IEEE Power & Energy Magazine for the opportunity to reflect on and analyze such relevant matters challenging future markets. Special congratulations to Editor Mel Olken for his continuous 13 years of service, transforming the magazine into the flagship publication of the IEEE Power & Energy Society, publishing highly acclaimed articles written for and by professionals, representing the full spectrum of power and energy across the world.

p&e

The need is urgent to identify adequate market incentives for cleaner energy matrices.

Advanced modeling and analysis features include:• Comprehensive capabilities for voltage, transient, small signal, and frequency stability assessment

• Integration with EMS/WAMS for on-line DSA to assess security of real-time system conditions

• Computation of secure operation regions (stability limits)

Experience and support:

• Prominent provider of the on-line DSA technology with over 40 installations worldwide including 7 out of 9 ISOs in North America

• Consulting services for custom software and model development, system studies, and training

Dynamic Security Assessment Software

Offering a simple, user-friendly interface with extensive analysis options, DSAToolsTM is a suite of software tools for power system analysis. The software is designed for applications in both off-line studies and on-line dynamic security assessment.

www.dsatools.com

Contact us:dsainfo@powertechlabs.com

SSATTSATVSAT

• Recommendation of remedial actions

81022-0005