levels of control are required, and only partial
optimisation is possible.
Finally, decentralisation will require the risks
to data privacy and cybersecurity to be effectively managed. Decentralisation will be accompanied by a very significant extension of digital
technology across all distributed resources and
will create risks to data privacy and cybersecurity. Protocols to manage data use and control
these risks can be developed and implemented.
2.2.6 Network Arrangements
to Address Current
Challenges
Best practice arrangements are needed to ensure
efficient network provision. Section 2.2.5 describes
challenges in efficient network provision, and how
these challenges will grow as power systems
decarbonise and decentralise. International experience since the liberalisation of electricity markets
has produced strong evidence—based on best
practice in network arrangements—on how to meet
the challenges of efficient network provision. Current best practice arrangements provide a foundation
for new arrangements to meet future challenges
arising from decarbonisation and decentralisation.
These best practice arrangements comprise:
• an institutional model to align incentives with
public policy objectives: an institutional
model is needed that mitigates monopolistic
behaviour and incentivises networks to invest
in appropriate network infrastructure and
operate it efficiently;
• strategic transmission planning: determining
the appropriate profile of new transmission
investment is a complex process that requires
strategic planning;
• the appropriate level of locational pricing:
investing in and operating networks efficiently requires an understanding of current
network congestion; and
• a regime for merchant transmission investments: merchant transmission investors have
the potential to deliver more adequate
investment than a single-owner network.
(1) An institutional model to align incentives
with public policy objectives
An institutional model is needed that mitigates
monopolistic behaviour and provides networks
with incentives to invest in appropriate network
infrastructure and to operate that infrastructure
efficiently. Two institutional models that can
create an efficient regime are the transmission
system operator (TSO) model with performancebased regulation, and the independent system
operator (ISO) model. 0 highlights the key differences between these two models: a TSO both
owns and operates the transmission system,
requiring strong regulation; while an ISO is a
system operator that is fully separated from
ownership of all network resources. Several
intermediate models also exist, for example,
where the system operator and transmission
owner are legally separate companies but owned
by the same parent company (Fig. 29).
As shown in Fig. 30, most electricity systems
have moved from vertically integrated monopoly
utilities before liberalisation to a TSO or ISO model
today. In 1985, Chile was the first country to adopt
the ISO model. The UK shifted from vertical
integration to a TSO with a performance-based
regulation structure in 1990, with Germany following suit in 1998. Following the orders of FERC
(the US electricity regulator), Pennsylvania-New
Jersey-Maryland (PJM) and California (CAISO)
transitioned from a vertically integrated structure to
the ISO model in the late 1990s.
(1) TSO with performance-based regulation
A TSO is an entity that both owns and operates
the transmission system; it therefore has incentives for monopolistic behaviour. The TSO owns
all the network assets and is also responsible for
planning, deployment and operation of the system. The TSO model is prevalent in most European countries.
Performance-based regulation is needed to
align a TSO’s incentives with public policy
objectives. A TSO is difficult to regulate as it has
better information than the regulator on the costs
it faces. This gives rise to one of two problems. If
the regulator tries to prevent monopoly
Special Report 1: A Study of China’s Energy Supply Revolution
89
optimisation is possible.
Finally, decentralisation will require the risks
to data privacy and cybersecurity to be effectively managed. Decentralisation will be accompanied by a very significant extension of digital
technology across all distributed resources and
will create risks to data privacy and cybersecurity. Protocols to manage data use and control
these risks can be developed and implemented.
2.2.6 Network Arrangements
to Address Current
Challenges
Best practice arrangements are needed to ensure
efficient network provision. Section 2.2.5 describes
challenges in efficient network provision, and how
these challenges will grow as power systems
decarbonise and decentralise. International experience since the liberalisation of electricity markets
has produced strong evidence—based on best
practice in network arrangements—on how to meet
the challenges of efficient network provision. Current best practice arrangements provide a foundation
for new arrangements to meet future challenges
arising from decarbonisation and decentralisation.
These best practice arrangements comprise:
• an institutional model to align incentives with
public policy objectives: an institutional
model is needed that mitigates monopolistic
behaviour and incentivises networks to invest
in appropriate network infrastructure and
operate it efficiently;
• strategic transmission planning: determining
the appropriate profile of new transmission
investment is a complex process that requires
strategic planning;
• the appropriate level of locational pricing:
investing in and operating networks efficiently requires an understanding of current
network congestion; and
• a regime for merchant transmission investments: merchant transmission investors have
the potential to deliver more adequate
investment than a single-owner network.
(1) An institutional model to align incentives
with public policy objectives
An institutional model is needed that mitigates
monopolistic behaviour and provides networks
with incentives to invest in appropriate network
infrastructure and to operate that infrastructure
efficiently. Two institutional models that can
create an efficient regime are the transmission
system operator (TSO) model with performancebased regulation, and the independent system
operator (ISO) model. 0 highlights the key differences between these two models: a TSO both
owns and operates the transmission system,
requiring strong regulation; while an ISO is a
system operator that is fully separated from
ownership of all network resources. Several
intermediate models also exist, for example,
where the system operator and transmission
owner are legally separate companies but owned
by the same parent company (Fig. 29).
As shown in Fig. 30, most electricity systems
have moved from vertically integrated monopoly
utilities before liberalisation to a TSO or ISO model
today. In 1985, Chile was the first country to adopt
the ISO model. The UK shifted from vertical
integration to a TSO with a performance-based
regulation structure in 1990, with Germany following suit in 1998. Following the orders of FERC
(the US electricity regulator), Pennsylvania-New
Jersey-Maryland (PJM) and California (CAISO)
transitioned from a vertically integrated structure to
the ISO model in the late 1990s.
(1) TSO with performance-based regulation
A TSO is an entity that both owns and operates
the transmission system; it therefore has incentives for monopolistic behaviour. The TSO owns
all the network assets and is also responsible for
planning, deployment and operation of the system. The TSO model is prevalent in most European countries.
Performance-based regulation is needed to
align a TSO’s incentives with public policy
objectives. A TSO is difficult to regulate as it has
better information than the regulator on the costs
it faces. This gives rise to one of two problems. If
the regulator tries to prevent monopoly
Special Report 1: A Study of China’s Energy Supply Revolution
89