export 80 MW to City B (in total
130 MW). Because the capacity of the
interconnection is fully utilised, expensive
generators in City B serve the rest of the
local demand (10 MW). As a result, the
system price equals the cost of the generators in City B ($20/MWh), and the total
cost is $2,800 (140 MW x $20/MWh).
9.1.3 Challenges in Network Provision
As electricity systems decarbonise and decentralise, the challenges of planning, delivery,
operation and cost recovery are changing for
network service providers.
(1) The challenges of network provision
The challenge of efficient provision encompasses
planning, delivery, operation and cost recovery.
Challenges in planning and delivery of electricity
networks arise due to uncertainty over future
electricity demand and the difficulty of coordinating network investment with independent
generators. Challenges in operation arise from
the capacity constraints of the network, the
complexity of the system and the unpredictability
of flows of electricity. Challenges in cost recovery arise due to the natural monopoly characteristics of electricity networks and the difficulties
of mitigating monopoly behaviour with conventional regulation:
• Planning and delivery. The planning and
delivery of electricity networks faces uncertainty over future electricity demand and
difficulties in coordinating network investment with independent generators. First, the
volume and location of future demand is
uncertain and depends on population growth,
changes in settlement patterns, changes in
industrial structure, technology and economic
growth. Network planners judge where network assets will be required. Second, while
vertically integrated utilities plan generation
and network investment simultaneously, 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
underutilise their assets.
• 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.
• 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 through designing
tariffs which recoup capital, operation and
maintenance costs for the network owner, and
passing these costs through to network users.
In the case where the network operator is also
the network owner, it operates as a monopoly,
and faces incentives to underinvest in network infrastructure while charging 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.
560
S. Yaodong and A. Gillespie
130 MW). Because the capacity of the
interconnection is fully utilised, expensive
generators in City B serve the rest of the
local demand (10 MW). As a result, the
system price equals the cost of the generators in City B ($20/MWh), and the total
cost is $2,800 (140 MW x $20/MWh).
9.1.3 Challenges in Network Provision
As electricity systems decarbonise and decentralise, the challenges of planning, delivery,
operation and cost recovery are changing for
network service providers.
(1) The challenges of network provision
The challenge of efficient provision encompasses
planning, delivery, operation and cost recovery.
Challenges in planning and delivery of electricity
networks arise due to uncertainty over future
electricity demand and the difficulty of coordinating network investment with independent
generators. Challenges in operation arise from
the capacity constraints of the network, the
complexity of the system and the unpredictability
of flows of electricity. Challenges in cost recovery arise due to the natural monopoly characteristics of electricity networks and the difficulties
of mitigating monopoly behaviour with conventional regulation:
• Planning and delivery. The planning and
delivery of electricity networks faces uncertainty over future electricity demand and
difficulties in coordinating network investment with independent generators. First, the
volume and location of future demand is
uncertain and depends on population growth,
changes in settlement patterns, changes in
industrial structure, technology and economic
growth. Network planners judge where network assets will be required. Second, while
vertically integrated utilities plan generation
and network investment simultaneously, 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
underutilise their assets.
• 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.
• 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 through designing
tariffs which recoup capital, operation and
maintenance costs for the network owner, and
passing these costs through to network users.
In the case where the network operator is also
the network owner, it operates as a monopoly,
and faces incentives to underinvest in network infrastructure while charging 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.
560
S. Yaodong and A. Gillespie