MikeDG, commenting on my last blog on this subject, focuses
on other competition analogies in telephony, and poses the question of how much
difference there is likely to be between transmission and distribution
networks. So I will try to partially answer this question while at the same
time reflecting on the conflicting objectives to which network charging in the
power sector might be subjected. I cannot pretend to have a clear and
unambiguous answer, and it is probable that no solution will satisfy all the
objectives, but it is at least worth rehearsing the questions.
One set of basic challenges stems from the fact that there
is a strong case for using network pricing to convey economic messages for
energy production and consumption, given the network structure that is already
in place, but also to influence future investment in production and consumption
and in the network infrastructure itself. The problem is that these worthwhile
objectives can themselves produce conflicting answers, for the simple reason
that there is a huge gulf between short run marginal costs, which matter for
operational purposes, and long run marginal costs, which include the much
larger capital costs associated with constructing or reinforcing transmission
and distribution networks.
The other set of challenges stem from the history of the
electricity sector, and the high voltage transmission and lower voltage distribution
networks within it, as regulated monopolies. On the one hand this means that
private investors have to be guaranteed a “reasonable” rate of return on their
investment. But it also means that they are subject to a number of constraints
that reflect social objectives, such as requirements to provide something
approaching a universal service, and to set prices that are deemed to be fair
and equitable, even if this conflicts with economic efficiency.
It is also in this context that competition issues are most
likely to arise. Electricity networks are usually assumed to be natural
monopolies, and this assumption is now generally much stronger than it is for
mobile telephony. The competition issues are not about competing networks but relate
to regulatory and licence requirements for network operators to provide broadly
similar non-discriminatory terms to all parties in those competitive markets,
such as power generation and retail supply of electricity, which depend on the
network for transport to their customers.
Given these potentially conflicting objectives and
constraints for network pricing, the transformation to a low carbon power
sector is going to pose some new problems, not least because of the additional
electrical loads associated with electric vehicles. Here are a few.
1.
Network operators want to encourage consumers to
avoid overloading networks at peak times, and can impose time of day charges
for network usage that are highly differentiated and reflect operational
objectives, short term costs and capacity constraints. But with conventional
approaches to time of day tariffs, attempts to smooth peaks can be highly
unstable, requiring regular tariff adjustments which undermine the incentive
properties as far as consumers are concerned. Large commercial consumers can
shift their load significantly through battery technology and other demand
management measures, but if the utility is relying on highly differentiated
prices to recover its allowed revenue requirement it will be forced back to
higher reliance on fixed charges, negating any investment the consumers have
put.
2.
The basic structure of network costs is that
they are dominated by the fixed costs associated with the network, essentially
the costs associated with installing wires and transformers. The future of the
power sector is one which is increasingly dominated by fixed rather than
variable (fuel) costs in generation and storage as well as in the networks, and
this will put an increasing pressure on utilities to reflect this in charging
structures. If they do not, then they may be vulnerable to cherry picking and
adverse selection problems from customers going “off-grid” and paying too
little for the back-up services they receive.
3.
Traditional regulatory pressures will militate
in the opposite direction, continuing to seek an equitable approach to pricing
that essentially equates to an averaging of costs over all units consumed.
4.
There is evidence that some new loads, including
electric vehicles and heat pumps, will pose particular issues in rural
networks, which have relatively tight thermal and voltage constraints. Dealing
with this may require much more differentiated pricing signals, but this will
run against traditional practices and also raise discrimination questions.
We should expect these factors to generate an increasing
number of analytic and policy issues as we move towards an increasing electrification
of the energy economy.
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