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... 627 km of underground cable Approx 330 substations Maximum demand 54,400 MW Units transmitted 308.5 TWh Major power plants connected 84 Investment challenges ... – PowerPoint PPT presentation

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1
Investment in TransmissionEconomics of
Electricity Markets IDEI Toulouse, 2-3 June
2005
  • Jon Carlton Director of Network Strategy

2
Agenda
  • 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

3
Who 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

4
National 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

5
Investment 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

6
Are 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

7
Does 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

8
Technical 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)

9
Transmission 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

10
Planning 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

11
Uncertainty in future generation pattern
Generation Demand
1200
2200
2171
Background A
3667
Background B
6719
9815
7716
12027
3611
5941
1196
1988
1988
1483
12
Effective 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

13
Some 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)

14
Other 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

15
TSO, 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

16
Summary 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
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