Title:
1Investment in TransmissionEconomics of
Electricity Markets IDEI Toulouse, 2-3 June
2005
- Jon Carlton Director of Network Strategy
2Agenda
- National Grid Transco
- Who we are and what is our experience?
- Drivers of Investment
- Role of competitive markets and congestion
- Technical rules vs Economic Assessment
- Incentives for Investment and the Role of
Independent Transmission - Consideration of some of the practical challenges
- Summary and Conclusions
3Who are National Grid Transco?
- Formed in late 2002 through merger of Lattice
Group and National Grid Group - International energy delivery business with
market capitalisation of 20billion - Focused on ownership, operation, development of
energy networks - Electricity and Gas
- Principal Electricity Investments
- TSO for England and Wales SO for GB
- Significant Transmission and Distribution
Businesses in the Northeast United States
4National Grid Electricity Transmission System
- Operating voltages 400kV and 275kV
- 13,786 km of overhead line 627 km of underground
cable - Approx 330 substations
- Maximum demand 54,400 MW
- Units transmitted 308.5 TWh
- Major power plants connected 84
5Investment challenges for National Grid in the UK
ASSET AGE PROFILE
- DRIVERS OF TRANSMISSION INVESTMENT
- Ageing coal-fired generation
- And tighter emissions limits
- New gas-fired generation
- Renewables
- Especially wind power
- Asset replacement
- Driven by asset age and condition
6Are competitive electricity markets conducive to
network investment?
- There is no automatic linkage between competitive
markets and network security some of the most
secure networks are where unbundling and
competition have been introduced. - Some transmission systems may have been designed
to get output of a companys own generation to
its native load, rather than for trade in
electricity this is where investment may be
most needed. - In some cases trade facilitated by excess
capacity already inherent in transmission systems - In any event, effective investment incentives
required looking forward
7Does congestion provide the answer to where
investment is required?
- Can be a valuable signal to where investment is
required and provide an economic justification - But patterns of congestion can change according
to the disposition and operation of generation
and be influenced by outage programmes - In practice there may be legitimate reasons why
congestion revenues alone may be insufficient to
fully remunerate required investment
8Technical rules do we need them and if so what
is their place?
- Need to ensure we understand what is actually
required versus what engineers would ideally like
to have!! - Market can largely ensure demands for energy are
met, but there may be questions as to the
temporal or geographical balance - Supply and demand have to be matched in real time
- Reactive power for voltage control must be
provided locally - Supply quality and reliability are important
considerations - But market mechanisms can often be used eg to
ensure economic provision of ancillary services
(eg reactive power, response and reserve)
9Transmission Investment requires.
- Companies whose prime focus is transmission
- New ways of
- Planning
- Managing capital investment
- Understanding asset performance and health
- Effectively managing risk
- Examples
- Planning against a background of uncertainty
- Advanced asset management techniques
- Just in time asset investment, complemented by
SO contracting options
10Planning investment against an uncertain
background
- Location and timing of new projects which will
actually proceed are uncertain - Need to avoid prospect of failure to provide
capacity or be left with stranded assets - Hence need to adopt just in time investment
complemented by use of System Operator incentive
schemes
11Uncertainty in future generation pattern
Generation Demand
1200
2200
2171
Background A
3667
Background B
6719
9815
7716
12027
3611
5941
1196
1988
1988
1483
12Effective regulatory incentives
- Forward looking rather than based on historic
view - Drivers to provide capacity when required
- Combination of sound economics and pragmatism
- Avoidance of undue complexity and cost
- Need to consider how asset replacement is
effectively incentivised, not just provision of
new capacity
13Some attributes of appropriate incentives
- Investments which are customer driven
- The role of capacity auctions
- Recognition that Unit Cost Allowances will only
approximate the cost of a specific project - Thus may need transportation charges to cater for
under- or over-funding from auctions - Asset replacement
- Sufficient returns to make this attractive to
shareholders - But regulator must have assurance on outputs (ie
that investments are efficient and timely)
14Other Practical Challenges for Investment
- Environmental challenges
- Not just visual amenity
- Flora
- Fauna
- Health concerns (eg EMFs)
- Planning processes
- Important that due process is seen to be followed
- Objectors and interveners must be allowed a voice
- Governments have a role in streamlining planning
processes - Companies also need to be innovative
- Getting more capacity out of existing assets
obviates need for new build
15TSO, SO, TO Does the industry structure matter?
- Transmission companies must be independent from
market participation and possess financial
strength - A real focus on transmission as a core activity
- Cost efficiency
- Innovation
- Ability to respond to incentives
- Strong incentivisation of system operator may
require it to be backed by asset ownership - Efficiency of operation is facilitated by tight
integration of SO and TO functions - ISOs and separate TOs may be dictated by
inherited structures and property rights
16Summary and Conclusions
- Investment occurs where companies have
transmission as a prime focus, not a subsidiary
activity - Investment in an unbundled competitive market
needs investment in new processes, new tools and
good people - But this will only occur if the right financial
(and hence regulatory) incentives are present - Market mechanisms have a key role in
incentivising efficient operation and investment,
complemented by sensible technical guidance - The debate on industry structures will continue,
but incentivised and integrated TO and SO
functions have demonstrable benefits