integrated utilities coordinate their plans for
generation and network investment, in a liberalised electricity system, generation and network
investment are carried out by separate organisations. Without coordination, generators face the
risk that their revenues may be curtailed by network congestion, and networks face the risk that
generators will underuse their assets.
(2) Operation
Balancing the electricity system is challenging
due to system complexity and the unpredictability of electricity flows. With many sources of generation and consumption, as well as
network constraints, the optimal level of production and consumption for each source is a
complex calculation. Furthermore, due to the
physical laws governing electricity networks, the
precise flows of electricity through the network
depend on the volumes of consumption and
production of each generator and user and cannot
be predicted in advance.
(3) Cost recovery
Electricity networks are natural monopolies. One
of the roles of the system operator is to levy
charges to pay the network owner. This is
achieved by designing tariffs that recoup capital,
operation and maintenance costs for the network
owner, and passing these costs through to network users. When the network operator is also
the network owner, it operates as a monopoly
and is incentivised to underinvest in network
infrastructure and charge high prices to
consumers.
Innovative arrangements are needed to mitigate monopoly behaviour effectively. Electricity
networks are characterised by high capital costs
and economies of scale. For these reasons, electricity networks are natural monopolies, with a
single network serving a given area. The conventional approach to mitigating monopolistic
behaviour in a natural monopoly is regulation.
However, regulators have imperfect information
on current network costs and how these costs can
be reduced over time as productivity improves.
Depending on the type of regulation, network
companies may face incentives to overstate their
costs or to overinvest.
(2) Future changes: decarbonisation and
decentralisation
Potential changes in key characteristics of the
electricity system are encompassed within two
broader trends: decarbonisation of electricity and
the wider energy system; and decentralisation of
system resources, as summarised in Fig. 28.
These changes, and their implications for the
challenges of efficient network provision are
described below in turn.
(1) Decarbonisation
Decarbonising an electricity system requires
changes in generation technologies and
far-reaching changes in patterns of electricity
demand. Generation technologies will shift from
fossil generation to low-carbon generation, that
is, a mix of carbon capture and storage, nuclear,
biomass and renewables. Electricity demand will
be affected by increases in demand from electrification of end-use sectors, particularly heat and
transport, as well as decreases in demand from
greater efficiency of electrical appliances. There
will also be a shift in the profile of demand, as
low-carbon flexible resources (electricity storage
and demand-side response) emerge to balance
the relatively inflexible generation profile of
nuclear and renewables.
These changes are likely to make harder the
challenge of planning and delivering network
infrastructure. Future volumes of demand will be
more difficult to forecast, due to uncertainty over
the level of electrification of end-use sectors and
improvements in the efficiency of electrical
appliances. Another element of uncertainty is the
degree to which low-carbon flexible resources
will reduce peak demand and, therefore, the level
of network capacity.
Low-carbon flexible resources can be substituted for new network investments, thus reducing
network costs. However, as these resources provide different system services (balancing, frequency
response,
network
congestion
mitigation), there may be underinvestment in
Special Report 1: A Study of China’s Energy Supply Revolution
87
generation and network investment, in a liberalised electricity system, generation and network
investment are carried out by separate organisations. Without coordination, generators face the
risk that their revenues may be curtailed by network congestion, and networks face the risk that
generators will underuse their assets.
(2) Operation
Balancing the electricity system is challenging
due to system complexity and the unpredictability of electricity flows. With many sources of generation and consumption, as well as
network constraints, the optimal level of production and consumption for each source is a
complex calculation. Furthermore, due to the
physical laws governing electricity networks, the
precise flows of electricity through the network
depend on the volumes of consumption and
production of each generator and user and cannot
be predicted in advance.
(3) Cost recovery
Electricity networks are natural monopolies. One
of the roles of the system operator is to levy
charges to pay the network owner. This is
achieved by designing tariffs that recoup capital,
operation and maintenance costs for the network
owner, and passing these costs through to network users. When the network operator is also
the network owner, it operates as a monopoly
and is incentivised to underinvest in network
infrastructure and charge high prices to
consumers.
Innovative arrangements are needed to mitigate monopoly behaviour effectively. Electricity
networks are characterised by high capital costs
and economies of scale. For these reasons, electricity networks are natural monopolies, with a
single network serving a given area. The conventional approach to mitigating monopolistic
behaviour in a natural monopoly is regulation.
However, regulators have imperfect information
on current network costs and how these costs can
be reduced over time as productivity improves.
Depending on the type of regulation, network
companies may face incentives to overstate their
costs or to overinvest.
(2) Future changes: decarbonisation and
decentralisation
Potential changes in key characteristics of the
electricity system are encompassed within two
broader trends: decarbonisation of electricity and
the wider energy system; and decentralisation of
system resources, as summarised in Fig. 28.
These changes, and their implications for the
challenges of efficient network provision are
described below in turn.
(1) Decarbonisation
Decarbonising an electricity system requires
changes in generation technologies and
far-reaching changes in patterns of electricity
demand. Generation technologies will shift from
fossil generation to low-carbon generation, that
is, a mix of carbon capture and storage, nuclear,
biomass and renewables. Electricity demand will
be affected by increases in demand from electrification of end-use sectors, particularly heat and
transport, as well as decreases in demand from
greater efficiency of electrical appliances. There
will also be a shift in the profile of demand, as
low-carbon flexible resources (electricity storage
and demand-side response) emerge to balance
the relatively inflexible generation profile of
nuclear and renewables.
These changes are likely to make harder the
challenge of planning and delivering network
infrastructure. Future volumes of demand will be
more difficult to forecast, due to uncertainty over
the level of electrification of end-use sectors and
improvements in the efficiency of electrical
appliances. Another element of uncertainty is the
degree to which low-carbon flexible resources
will reduce peak demand and, therefore, the level
of network capacity.
Low-carbon flexible resources can be substituted for new network investments, thus reducing
network costs. However, as these resources provide different system services (balancing, frequency
response,
network
congestion
mitigation), there may be underinvestment in
Special Report 1: A Study of China’s Energy Supply Revolution
87