the TSO to focus on longer-term
investments, such as smart meters.
RIIO provides a wider set of performance incentives than did RPI-X, but at
a cost of greater complexity and
reduced transparency.
(2) Independent system operator
An independent system operator (ISO) is a system operator that is fully separated from ownership of all network resources. The ISO performs
all system operation functions, including allocating network capacity among generators and
consumers to respect the physical characteristics
of the network, carrying out residual balancing to
ensure electricity is delivered to where it is most
valued, and maintaining the stability of the
electricity system. In an ISO model, the transmission network resources are owned by one or
more transmission owners (TOs). The ISO levies
charges from generators and/or consumers for
use of the transmission system and pays these
charges to the TOs. Typically, an ISO is also
responsible for planning new transmission
investments, either mandating TOs to carry out
these investments or organising competitive
tenders to facilitate delivery of investment.
An ISO is usually a non-profit entity.
Separation of operation from ownership
removes the system operator’s incentives to
charge monopoly prices. An ISO may be a
non-profit organisation or may earn profits on
revenues for system operation. As an ISO does
not earn profits determined by revenues from use
of the transmission system or by the costs of
transmission investments, it has no incentive to
charge tariffs that are higher than needed to
recover the investment costs of the transmission
network, or underinvest in transmission assets.
Unlike a TSO, therefore, an ISO does not need
performance-based regulation.
The ISO’s functions can be specified by its
mandate and its behaviour can be governed by a
set of rules. The mandate could be to minimise
the total cost of meeting a given reliability
standard. Rules could govern processes for
transmission planning and investment; providing
grid connections to new system resources;
administering competitive tenders for new network assets; levying charges for network use;
and monitoring market power in the electricity
system.
Nevertheless, it is desirable to have in place a
mechanism to incentivise the ISO. It is unlikely
to be possible to specify a set of rules that perfectly incentivise the management to meet the
ISO’s mandate. That is, to encourage the ISO to
carry out the planning, investment and operation
of the transmission system to strike the best
possible balance between reliability of electricity
supply and economic efficiency of the network.
Imposition of financial penalties on the ISO is
likely to be a poor incentive mechanism as ISO
revenues are likely to be small relative to the
welfare losses arising from poor performance in
operating the system. Instead, well-designed
management incentives may be needed.
The ISO model is prevalent in North and
South America. Chile, Argentina and Peru were
early adopters of the ISO model. There are a
large number of ISOs in the USA, each covering
a transmission network.
(2) Strategic transmission planning
The design of new transmission investment is a
complex process and requires strategic planning.
Specific challenges are the uncertainty in volume
and location of future demand; the coordination
problem facing generation and network investors; and the large number of possible transmission investments. These challenges can be
mitigated by strategic planning. Key characteristics of strategic planning include:
• Define the objectives of new transmission
investment. Transmission planning is more
effective when the objectives of new investment are clearly defined. These include reliability (security and adequacy of supply) and
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S. Yaodong and A. Gillespie
investments, such as smart meters.
RIIO provides a wider set of performance incentives than did RPI-X, but at
a cost of greater complexity and
reduced transparency.
(2) Independent system operator
An independent system operator (ISO) is a system operator that is fully separated from ownership of all network resources. The ISO performs
all system operation functions, including allocating network capacity among generators and
consumers to respect the physical characteristics
of the network, carrying out residual balancing to
ensure electricity is delivered to where it is most
valued, and maintaining the stability of the
electricity system. In an ISO model, the transmission network resources are owned by one or
more transmission owners (TOs). The ISO levies
charges from generators and/or consumers for
use of the transmission system and pays these
charges to the TOs. Typically, an ISO is also
responsible for planning new transmission
investments, either mandating TOs to carry out
these investments or organising competitive
tenders to facilitate delivery of investment.
An ISO is usually a non-profit entity.
Separation of operation from ownership
removes the system operator’s incentives to
charge monopoly prices. An ISO may be a
non-profit organisation or may earn profits on
revenues for system operation. As an ISO does
not earn profits determined by revenues from use
of the transmission system or by the costs of
transmission investments, it has no incentive to
charge tariffs that are higher than needed to
recover the investment costs of the transmission
network, or underinvest in transmission assets.
Unlike a TSO, therefore, an ISO does not need
performance-based regulation.
The ISO’s functions can be specified by its
mandate and its behaviour can be governed by a
set of rules. The mandate could be to minimise
the total cost of meeting a given reliability
standard. Rules could govern processes for
transmission planning and investment; providing
grid connections to new system resources;
administering competitive tenders for new network assets; levying charges for network use;
and monitoring market power in the electricity
system.
Nevertheless, it is desirable to have in place a
mechanism to incentivise the ISO. It is unlikely
to be possible to specify a set of rules that perfectly incentivise the management to meet the
ISO’s mandate. That is, to encourage the ISO to
carry out the planning, investment and operation
of the transmission system to strike the best
possible balance between reliability of electricity
supply and economic efficiency of the network.
Imposition of financial penalties on the ISO is
likely to be a poor incentive mechanism as ISO
revenues are likely to be small relative to the
welfare losses arising from poor performance in
operating the system. Instead, well-designed
management incentives may be needed.
The ISO model is prevalent in North and
South America. Chile, Argentina and Peru were
early adopters of the ISO model. There are a
large number of ISOs in the USA, each covering
a transmission network.
(2) Strategic transmission planning
The design of new transmission investment is a
complex process and requires strategic planning.
Specific challenges are the uncertainty in volume
and location of future demand; the coordination
problem facing generation and network investors; and the large number of possible transmission investments. These challenges can be
mitigated by strategic planning. Key characteristics of strategic planning include:
• Define the objectives of new transmission
investment. Transmission planning is more
effective when the objectives of new investment are clearly defined. These include reliability (security and adequacy of supply) and
566
S. Yaodong and A. Gillespie