policy objectives. These incentives can be
mitigated through institutional reform of the
power network. One option is to reform the
network company’s incentives through
performance-based regulation enforced by an
independent regulator. Another is to separate
network operation and ownership through the
creation of an independent system operator
(ISO). The UK and most European countries
currently use performance-based regulation,
while the USA uses the ISO model across its
transmission systems, for example in PJM
(the transmission system in the north-eastern
states), California and New York.
• Consider the use of locational pricing. Efficient network investment and operation make
use of information on network congestion. If
implemented, locational (nodal or zonal)
pricing can help reveal the cost of network
congestion. Nodal pricing is used in several
US states, Argentina, Chile, Ireland, New
Zealand, Russia and Singapore, while zonal
pricing has been adopted by most European
countries and Australia. However, locational
pricing has disadvantages as well as advantages. Importantly, locational pricing is most
effective once time-of-use pricing is fully
implemented across network users.
Third, take action to meet the challenges of a
decarbonised system. Rising electrification and
improvements in the efficiency of electrical
appliances will increase the uncertainty over the
future volume and location of demand for
transmission capacity. Flexible resources such as
electricity storage and demand response can
substitute for new network investment, so long as
sufficient investment incentives are present.
• Designate strategic zones for transmissionscale renewable generation to reduce planning and investment uncertainty. Renewable
energy resources may be located far from
demand centres and thus require large-scale
transmission investment. Uncertainty over the
volume and location of generation can be
mitigated through zoning.
• Ensure there is money available to encourage
flexible resources to offer a full range of
system services. The flexible resources needed for decarbonisation provide several system services, such as balancing and frequency
response, but there may be underinvestment if
the markets do not exist for these services.
Several electricity markets in the West run
demand curtailment markets, allowing flexible resources to generate revenues.
Fourth, prepare for the development of a
decentralised power system and its associated
digitalisation by coordinating investment in
decentralised resources, their control, balancing,
security and data flows.
• Coordinate investment in decentralised
resources. A coordination problem arises
when independent developers that lack information about the plans of other developers
make similar investments, creating overinvestment or, if the developers are risk-averse,
underinvestment. Either way, the result can be
inefficient. Solutions include formal processes
for multilateral resource planning and the
publication of current and consented resources, as used by the transmission and distribution system operators of Spain and Ireland.
• Determine how decentralised resources will
be controlled. While distribution networks
today are largely passive, an active distribution network is capable of accommodating
distributed resources. As the electricity system
becomes more active and complex, a single
system operator may start to rely on intermediaries, such as virtual power plants and
partners such as distribution system operators,
to assist with system balance. New systems of
control, with new computational requirements, administrative rules and institutional
characteristics, may then be employed,
reflecting new operational vulnerabilities.
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mitigated through institutional reform of the
power network. One option is to reform the
network company’s incentives through
performance-based regulation enforced by an
independent regulator. Another is to separate
network operation and ownership through the
creation of an independent system operator
(ISO). The UK and most European countries
currently use performance-based regulation,
while the USA uses the ISO model across its
transmission systems, for example in PJM
(the transmission system in the north-eastern
states), California and New York.
• Consider the use of locational pricing. Efficient network investment and operation make
use of information on network congestion. If
implemented, locational (nodal or zonal)
pricing can help reveal the cost of network
congestion. Nodal pricing is used in several
US states, Argentina, Chile, Ireland, New
Zealand, Russia and Singapore, while zonal
pricing has been adopted by most European
countries and Australia. However, locational
pricing has disadvantages as well as advantages. Importantly, locational pricing is most
effective once time-of-use pricing is fully
implemented across network users.
Third, take action to meet the challenges of a
decarbonised system. Rising electrification and
improvements in the efficiency of electrical
appliances will increase the uncertainty over the
future volume and location of demand for
transmission capacity. Flexible resources such as
electricity storage and demand response can
substitute for new network investment, so long as
sufficient investment incentives are present.
• Designate strategic zones for transmissionscale renewable generation to reduce planning and investment uncertainty. Renewable
energy resources may be located far from
demand centres and thus require large-scale
transmission investment. Uncertainty over the
volume and location of generation can be
mitigated through zoning.
• Ensure there is money available to encourage
flexible resources to offer a full range of
system services. The flexible resources needed for decarbonisation provide several system services, such as balancing and frequency
response, but there may be underinvestment if
the markets do not exist for these services.
Several electricity markets in the West run
demand curtailment markets, allowing flexible resources to generate revenues.
Fourth, prepare for the development of a
decentralised power system and its associated
digitalisation by coordinating investment in
decentralised resources, their control, balancing,
security and data flows.
• Coordinate investment in decentralised
resources. A coordination problem arises
when independent developers that lack information about the plans of other developers
make similar investments, creating overinvestment or, if the developers are risk-averse,
underinvestment. Either way, the result can be
inefficient. Solutions include formal processes
for multilateral resource planning and the
publication of current and consented resources, as used by the transmission and distribution system operators of Spain and Ireland.
• Determine how decentralised resources will
be controlled. While distribution networks
today are largely passive, an active distribution network is capable of accommodating
distributed resources. As the electricity system
becomes more active and complex, a single
system operator may start to rely on intermediaries, such as virtual power plants and
partners such as distribution system operators,
to assist with system balance. New systems of
control, with new computational requirements, administrative rules and institutional
characteristics, may then be employed,
reflecting new operational vulnerabilities.
516
S. Yaodong and A. Gillespie