BEWP No. 34
Regulatorische Anreize für ein effizientes Engpassmanagement für Stromnetzbetreiber in der ARegV: FlexShare und FOCS
Bremen Energy Working Papers No. 34, August 2020
Abstract: Die Zunahme von Netzengpässen durch dezentrale Erzeuger erfordert eine aktive regulatorische Beanreizung von Maßnahmen des Engpassmanagements (EPM) als Alternative zum konventionellen Netzausbau. Gleichzeitig soll der Kostenanstieg mittels Effizienzanreizen begrenzt werden. Für die geplante Anpassung der ARegV im Rahmen von NABEG 2.0 ist ein Sliding-Scale-Mechanismus in der Diskussion, der einen Teil der EPM-Kosten in das Budgetprinzip der ARegV überführt. Das zunehmende Risiko externer Kosteneinflüsse gefährdet jedoch das Ziel der Maßnahmenneutralität zwischen operativen EPM-Maßnahmen und kapitalintensivem Netzausbau. In diesem Paper wird mit „FlexShare & FOCS“ ein Anreizsystem entwickelt, das eine Sliding-Scale-Komponente (FlexShare) um das Instrument eines „fixed-OPEX-CAPEX-Share“ ergänzt (FOCS). Bei diesem zweistufigen Ansatz wird ein Teil der beanreizten Kosten wie Kapitalausgaben regulatorisch aktiviert und verzinst. Durch den Kapitalkostenabgleich wird das Erlösrisiko begrenzt und einer möglichen CAPEX-Verzerrung entgegengewirkt. Simulationsrechnungen mit einem Regulierungsmodell zeigen, dass hierdurch Wohlfahrtsverbesserungen erzielt werden können, da bei gleichem Risiko höhere Effizienzanreize gesetzt werden können.
BEWP No. 33
Incentive regulation of electricity networks under large penetration of distributed energy resources – selected issues
Gert Brunekreeft, Julia Kusznir, Roland Meyer, Madoka Sawabe and Toru Hattori
Bremen Energy Working Papers No. 33, March 2020
Abstract: The rapid growth of Distributed Energy Resources (DER) and their integration into network presents currently the greatest challenges for many network operators worldwide in terms of network stability and power quality. To meet these challenges not only huge investment in grid expansion and smart grid technologies is required, but also the network regulation needs to adapt from cost efficiency towards investment and innovation. We analyze the recent experiences with the regulatory framework in several countries facing significant challenges of large penetration of DER. We discuss several selected regulatory issues that are important for promoting needed investment while ensuring cost efficiency, such as the length of regulatory period, X-factor, and allowed rate of return. We conclude that in the era of smart grids, incentive regulation requires a long-term perspective and needs to address the regulatory risks and uncertainties related to investment into grid expansion and smart grid technologies. To do so, incentive regulation should be supplemented by more innovative, investment-friendly regulatory measures. Additional supplementary mechanisms such as output-based regulation would be useful to achieve the regulatory goals and develop fully functional and consumer-oriented smart grid, though details for their implementation still have to be worked out.
BEWP No. 32
OPEX-risk as a source of CAPEX-bias in monopoly regulation
Gert Brunekreeft and Margarethe Rammerstorfer
Bremen Energy Working Papers No. 32, February 2020
Abstract: This paper shows with a formal model that under monopoly regulation, OPEX-risk can be a source for a CAPEX-bias. If OPEX and CAPEX are substitutes, the regulated firm can reduce the risk of the firm and thereby reduce the true cost of capital by rebalancing OPEX and CAPEX. If the allowed rate-of-return on capital is not influenced by the firm’s actions, this creates a margin between the allowed rate-of-return and the true cost of capital. We examine two remedies: first, fixed-OPEX-CAPEX-share (FOCS) which is a variation of TOTEX-regulation and second, OPEX-mark-up. FOCS internalizes the CAPEX-bias and can be implemented easily. The OPEX-mark-up is effective, but it will be challenging to reach the optimum.
BEWP No. 31
How decentralization drives a change of the institutional framework on the distribution grid level in the electricity sector – the case of local congestion markets
Bremen Energy Working Papers No. 31, November 2019
published in Energy Policy, Vol.145, October 2020
Abstract: The increasing share of renewables in the electricity system results in congestion on all network levels. To address this congestion, the EU Commission proposed that distribution network operators become responsible for local congestion management. Within this paper we analyze the institutional implications of the introduction of local congestion markets (also referred to as flexibility markets) and identify three discrimination concerns related to the DSO’s role on these markets. We will argue that the standard governance models (legal unbun-dling, ownership unbundling, IDSO) do either not sufficiently address the identified discrimination concerns, or come with additional challenges which make their application less feasible. Instead, we discuss two novel ap-proaches: The introduction of Independent Distribution Operators (IDO) or alternatively, a Common Flexibility Platform (CFP). While the IDO results in a change of the regulatory regime in Europe, the CFP could be applied given the current European unbundling rules. Since the CFP does not require stronger unbundling of DSOs, we recommend to investigate this solution further.
BEWP No. 30
Assessment of the drafted German Integrated National Energy and Climate Plan
Marius Buchmann, Julia Kusznir, and Gert Brunekreeft
Bremen Energy Working Papers No. 30, September 2019
published in Economics and Policy of Energy and the Environment, 1, 2019 pp. 85–96
Abstract: Germany is struggling to meet its 2020 greenhouse gas (GHG) emission and climate goals. Against this background, we analyze the current draft National Energy and Climate Plan (NECP) that sets out how Germany aims to achieve its national and European climate goals by 2030. We introduce the current stage of the country’s climate policy and, by looking at the different emission reduction measures under discussion, examine why Germany will probably miss its CO2 emissions reduction goals. We conclude that, based on the climate package announced in September 2019, Germany will get closer to the achievement of its 2030 targets than was anticipated in the NECP draft; nevertheless, the new climate package leaves a significant gap between the new measures and the 2030 climate goals.
BEWP No. 29
TOTEX Malmquist Index for RPI-X Regulation: Does it Correctly Estimate the True Frontier Shift?
Roland Meyer, Gert Brunekreeft, and George Elias
Bremen Energy Working Papers No. 29, July 2019
published in Journal of Regulatory Economics 58, 78–97(2020)
Abstract: The X in CPI-X regulation aims to adjust price or revenue allowances to changes in total factor productivity and input prices. If calculated correctly, both terms together correspond to the change in efficient costs which can be determined by applying a cost Malmquist index. However, regulators typically lack the required data on input quantities and prices. As an alternative, regulation authorities may apply a TOTEX Malmquist index to measure the total cost change. We study under which conditions this total cost change correctly estimates the true efficient cost change. Overall, we conclude that the TOTEX Malmquist approach can be used for CPI-X regulation. However, regulators should be aware of the limitations and make adjustments in the implementation where necessary.
BEWP No. 28
Constrained Connection for Distributed Generation by DSOs in European Countries
Ken Furusawa, Gert Brunekreeft, and Toru Hattori
Bremen Energy Working Papers No. 28, January 2019
Abstract: A high penetration of renewable energy sources (RES) connected to the distribution network due to Feed-in-Tariff (FIT) brought many challenges for DSOs. With the responsibility to connect, DSOs may be required to make investment in the network. In order to connect distributed generation (DG) while deferring the investment, European DSOs use “constrained connection” by which DG is connected conditional on the curtailment. Different approaches for constrained connection in Europe exist and case studies of the different approaches in Germany, France, and UK show that the relative acceptability of DG and ease of curtailment by DSOs are different, depending on the energy policy background and technology available in each country.
BEWP No. 27
Cross-border Electricity Interconnectors in the EU: the Status Quo
Gert Brunekreeft and Roland Meyer
Bremen Energy Working Papers No. 27, February 2018
Abstract: An important goal of the European Commission is the promotion of the internal energy market (here specifically electricity), which requires sufficient and adequate cross-border interconnector capacity. However, cross-border interconnector capacity is scarce and, more importantly, the progress of interconnector capacity expansion is too slow. As a result, the Commission has proposed several policy measures to accelerate interconnector investment. This paper provides an overview of the policy debate on interconnector expansion and studies two particular points. First, the effects of network regulation on the interconnector investment and the policy proposals to improve the investment incentives, and more specifically, how to deal with risks. Second, we study the policies and effects of capacity remuneration mechanisms (CRMs) on the use of and the need for cross-border interconnector capacity.
BEWP No. 26
Regulatorische Herausforderungen für Multi-Use-Speicher in Stromverteilnetzen – ein Ausschreibungsmodell
Roland Meyer, Gert Brunekreeft, Martin Palovic und Daniel Speiser
Bremen Energy Working Papers No. 26, May 2017
Abstract: Stromspeicher erscheinen derzeit vor allem in Form von Multi-Use-Speichern wirtschaftlich darstellbar, die nach Bedarf für Netzzwecke eingesetzt werden und um am Strommarkt Handelserlöse zur erzielen. Die technischen Anforderungen aus Netzsicht erfordern in der Regel, dass die Initiative für einen solchen Speicher vom Netzbetreiber ausgeht. Darf ein rechtlich entflochtener Verteilnetzbetreiber (VNB) jedoch selbst einen solchen Speicher errichten und betreiben, wenn sich kein günstigerer Marktinvestor findet? Die regulatorischen Herausforderungen liegen vor allem in den Entflechtungsregeln, die eine direkte Handelsaktivität untersagen. Das in diesem Beitrag skizzierte Drei-Stufen-Modell zeigt, wie eine entflechtungskonforme Bereitstellung und der Betrieb auch eines VNB-eigenen Speichers mittels Ausschreibungen erreicht werden können. Fragen der Diskriminierungspotenziale und Effizienzanreize werden durch die Form der regulatorischen Kostenbehandlung adressiert: Um effiziente Anreize in beiden Ausschreibungen sicherzustellen, sollte der Gebotspreis des VNB maßgebend für die Kostenanerkennung sein.
BEWP No. 25
Information Management in Smart Grids - The Need for Decentralized Governance Approaches
Bremen Energy Working Papers No. 25, September 2016
published as "The Need for Competition between Decentralized Governance Approaches for Data Exchange in Smart Electricity Grids - Fiscal Federalism vs. Polycentric Governance", The Journal of Economic Behavior and Organization, Volume 139, 106-117
Abstract:The energy transition is dramatically changing the electricity supply industry in Germany implying two big trends. First, significant market entry by third parties (i.e., non-incumbents). Based on empirical evidence, we argue that the emergence of third parties is the immediate result of the large-scale integration of renewable energy sources. The electricity supply industry is changing quickly from a top-down, single-firm game to a decentralized multiple-player system, with far-reaching consequences for the governance and regulatory structure. Second, the incumbent players are facing disruptive challenges: under pressure of the energy transition, conventional centralized generation is losing profit margins very quickly. We analyze the disruptive challenges and sketch how the incumbents respond by splitting their activities into an old business, which is likely to be phased-out, and a new, future-oriented business: renewable energies, the distribution business, and customer-oriented solutions.
BEWP No. 24
The Rise of Third Parties and the Fall of Incumbents Driven by Large-Scale Integration of Renewable Energies: The Case of Germany
Gert Brunekreeft, Marius Buchmann, and Roland Meyer
Bremen Energy Working Papers No. 24, April 2016
published in The Energy Journal, Vol. 37, No. 2, 243-262.
Abstract: The energy transition is dramatically changing the electricity supply industry in Germany implying two big trends. First, significant market entry by third parties (i.e., non-incumbents). Based on empirical evidence, we argue that the emergence of third parties is the immediate result of the large-scale integration of renewable energy sources. The electricity supply industry is changing quickly from a top-down, single-firm game to a decentralized multiple-player system, with far-reaching consequences for the governance and regulatory structure. Second, the incumbent players are facing disruptive challenges: under pressure of the energy transition, conventional centralized generation is losing profit margins very quickly. We analyze the disruptive challenges and sketch how the incumbents respond by splitting their activities into an old business, which is likely to be phased-out, and a new, future-oriented business: renewable energies, the distribution business, and customer-oriented solutions.
BEWP No. 23
Evaluation of Strategy of Power Generation Business under Large-Scale Integration of Renewable Energy
Gert Brunekreeft, Marius Buchmann, Toru Hattori, and Roland Meyer
Bremen Energy Working Papers No. 23, March 2016
Abstract: The German energy transition massively alters the market structure of electricity supply and forces incumbent electric utilities to rethink their business strategies. We analyze three main developments that undermine the former market dominance of the “Big 4” incumbents in Germany. First, nuclear phase-out reduces their market shares and creates financial risk of nuclear waste decommissioning. Second, the large-scale integration of renewables fosters market entry from third parties and intensifies competition. Third, a possible coal-phase out in combination may have positive effects on market revenues but tends to increase regulatory risk. In total, incumbents face “disruptive Challenges” and need to find new value-creating products and services beyond sole energy supply. Promising focus areas are renewable energies, the distribution business, and smart, customer-oriented solutions.
BEWP No. 22
Information Management in Smart Grids - Who Should Govern Information Management to Balance Between Coordination and Competition on the Distribution Grid Level?
Bremen Energy Working Papers No. 22, March 2016
published as "Governance of data and information management in smart distribution grids: Increase efficiency by balancing coordination and competition", Utilities Policy, Vol. 44, 2017, 63-72
Abstract: Smart grids should increase coordination on the distribution grid level and facilitate new market opportunities (I.e. competition on a level playing field). Information management is becoming a new task in the electricity supply chain. It is an enbaler for the development of smart grids. Therefore, the governance of information management should as well efficiently balance between coordination and competition. Within this paper we analyse which role from the energy sector could govern the information management system. We conclude that neither of identified roles within the energy sector governing information management could secure both coordination and competition, at the same time. Therefore, new governance approaches (or new roles) are required.
BEWP No. 21
Anreizregulierung bei Stromverteilnetzen: Effizienz versus Investitionen
Gert Brunekreeft and Roland Meyer
Bremen Energy Working Papers No. 21, April 2015
published in Perspektiven der Wirtschaftspolitik, 17(2): 172–187
Abstract: In Deutschland wird derzeit die Ausgestaltung der Anreizregulierungsverordnung für Energienetze für die dritte Regulierungsperiode (ab 2019) diskutiert. Im Kern steht der sachgerechte Umgang mit dem hohen Investitionsbedarf, vor dem viele Netzbetreiber stehen. Die preisbasierte Anreizregulierung im eigentlichen Sinne zielt primär auf Kosteneffizienz, während das Ziel der Investitionsanreize in den Hintergrund rückt. Umgekehrt ist es bei kostenbasierter Regulierung. Jetzt stellt sich die zentrale Frage, wie die beiden Ziele „Effizienz“ und „Investitionen“ gleichermaßen erreicht werden können, sprich: „effiziente Investitionen“. Dieser Aufsatz beschreibt und bewertet die derzeitige Debatte aus praktischer und theoretischer Sicht und schlägt einen Regulierungsansatz mit „Optionalität“ vor.
BEWP No. 20
Distribution Planning and Pricing in View of Increasing Shares of Intermittent, Renewable Energy in Germany and Japan
Christine Brandstätt, Gert Brunekreeft, Ken Furusawa, and Toru Hattori
Bremen Energy Working Papers No. 20, March 2015
Abstract: In response to the global climate challenge many countries are faced with increasing shares of energy from renewable sources in their power supply. The integration of RES (renewable energy sources) generation however entails technical as well as institutional challenges for power grids. This study relies on recent experiences of German distribution network operators in network planning and network pricing and looks at their transferability to Japan.
Distributed generation may cause problems of voltage variation and asset overloading in conventional power grids. Technical solutions for these problems are available and well-known yet require considerable investments. The study presents regulatory incentives for network operators to take efficient means to maintain supply quality. With distributed generation self-supplying customers may contribute too little to network cost and new generators and flexible consumers may cause significant investment by uncoordinated siting and operation. An adequate pricing scheme can serve to sustainably finance the infrastructure while at the same time giving incentives to coordinate network users. This study points out options for network charging in grids with high shares of distributed generation from renewable sources.
BEWP No. 19
Entflechtung in Netzsektoren - ein Vergleich
Peter Abegg, Michael Brinkmann, Gert Brunekreeft, Georg Götz, Jan Krancke, Christoph Müller und Claudia Schmidt
Bremen Energy Working Papers No. 19, October 2014
published in Netzwirtschaften und Recht, Beilage, 1/2015, 1-16, April 2015
BEWP No. 18
Information Governance in Smart Grids - A Common Information Platform (CIP)
Christine Brandstätt, Gert Brunekreeft, Marius Buchmann, and Nele Friedrichsen
Bremen Energy Working Papers No. 18, June 2014
published as "Balancing between competition and coordination in smart grids - a Common Information Platform (CIP)", Economics of Energy & Environmental Policy, 6 (1), 2017.
Abstract:The commercial value added in electricity distribution networks and smart grids is increasing. Concerns about competition on a level-playing field are raised. The debate on vertical network unbundling is reaching the distribution networks. Primary driver for this discussion is the requirement to exchange information in smart grids in a neutral and non-discriminatory way. Against the background of the unbundling discussion for distribution networks, we introduce a new approach: the Common Information Platform (CIP). The CIP tries to balance better between competition and coordination. The CIP adds two new dimensions. First, it "unbundles" information and data management as the key step in the value chain. Correspondingly, the CIP avoids such drastic measures as network ownership unbundling and legal unbundling will suffice. Second, it does not "separate" information and data management from the sector, but rather involves third parties in the rule-making process; the governance structure is "common" instead of "independent".
BEWP No. 17
Cross-Border Effects of Capacity Mechanisms: Do Uncoordinated Market Design Changes Contradict the Goals of the European Market Integration?
Roland Meyer and Olga Gore
Bremen Energy Working Papers No. 17, June 2014
published in Energy Economics, 51, 2015, 9–20
Abstract:This paper analyses cross-border effects of a strategic reserve (SR) and reliability options (ROs) based on a two-country simulation model. Using a game-theoretic approach, the countries' policy options for capacity remuneration mechanisms (CRMs) are analysed with respect to welfare and distribution effects. An SR tends to narrow down the market, while ROs intensify price competition. However, cross-border effects are most likely negative for consumers and producers in total in the case of a unilateral implementation of a CRM, and market design changes should be coordinated.
All results are strongly driven by possible changes in competition and market power. In practice, the market design decision should also consider possible regulatory failures that might lead to further market distortions. The risk of market design flaws seems larger for full capacity markets such as ROs than for an SR, which requires only minor adjustments to the market design.
BEWP No. 16
Unbundling of Electricity Transmission System Operators - An Experience Report
Gert Brunekreeft, Mika Goto, Roland Meyer, Masahiro Maruyama, and Toru Hattori
Bremen Energy Working Papers No. 16, March 2014
Abstract:The purpose of this research is to evaluate the impact of vertical unbundling on German electric utilities. Our research mainly relies on in-depth interviews with sector-experts from the German utilities. We will discuss both short-term changes and the long-term impact on competition in the electricity market as well as the impact on costs and security of supply. Overall, we have two main conclusions. First, the major step in the unbundling process is from “lean legal unbundling” to “fat legal unbundling”; additional steps beyond that are small, both in benefits and in costs. Second, the benefits of unbundling in terms of increased competition do not come for free: unbundling is costly and it is important to balance cost and benefits in the reform process.
BEWP No. 15
Network Unbundling and Flawed Coordination: Experience from the Electricity Sector
Bremen Energy Working Papers No. 15, January 2014
published in Utilities Policy, Vol. 34, 2015, 11-18
Abstract:What is a good balance between competition and coordination? On the upside, unbundling in network industries promotes competition, but this should be balanced against the downside of unbundling, that is, the cost of coordination. Firm-internal coordination falls away and must be replaced by external market mechanisms. This is a non-trivial task. The cost of flawed coordination resulting from frag- mentation can be substantial and policy should focus more on market mechanisms and governance structures to secure better coordination. This paper examines the problem of coordination and discusses with real-world examples why the market faces difficulty in providing effective coordination.
BEWP No. 14
Auction Design for a Strategic Reserve Market for Generation Adequacy: On the Incentives under Different Auction Scoring Rules
Gert Brunekreeft, Roland Meyer, and Margarethe Rammerstorfer
Bremen Energy Working Papers No. 14, September 2013
Abstract:How should we select winning bids of generation units for strategic reserves that consist of capacity bids and energy bids? In this paper, we analyze two selecting mechanisms (scoring rules): “simultaneous” and “sequential”. In case of a simultaneous scoring rule, capacity and energy bids are weighted and combined to a single score based on which the cheapest bids are selected. Under sequential scoring rule the selection depends solely on capacity bids. In both cases the energy bids are used to form the merit order for dispatch. We find that the main difference between the simultaneous and sequential scoring mechanism is that under sequential scoring the bids are biased towards lower capacity bids and higher energy bids, since it is only the capacity part that “opens the door” to the reserve market. We find that a simultaneous scoring is favorable from a welfare perspective, since it avoids the strategic incentives for excessive mark-ups on energy costs and limits the incentives for collusive behavior. This reduces the risk of inefficient selection and dispatch of reserve units compared to a sequential scoring mechanism.
BEWP No. 13
The Need for more Flexibility in the Regulation of Smart Grids – Stakeholder Involvement
Nele Friedrichsen, Christine Brandstätt, and Gert Brunekreeft
Bremen Energy Working Papers No. 13, February 2013
published in International Economics and Economic Policy, 11(1), 2014, 261-275
Abstract:Energy and climate policy drive large scale integration of distributed generation and demand side management, with massive consequences for distribution grids. New technologies and actors shape the transformation of electricity networks towards smart systems. We argue that future regulation of smart grids needs to allow more flexibility. Firstly, the core of network monopoly starts to weaken allowing for more third party involvement. Secondly, the increasing number and heterogeneity of stakeholders makes “one-size-fits-all” regulation simply less suitable, whilst regulation needs to take account of various interests. In this paper we discuss stakeholder involvement and make policy recommendations to render regulation of smart systems more flexible.
BEWP No. 12
On the Role of International Benchmarking of Electricity Transmission System Operators Facing Significant Investment Requirements
Bremen Energy Working Papers No. 12, October 2012
published in Competition and Regulation in Network Industries, 13(1), 2-23, 2011
Abstract:Electricity networks currently face massive investment requirements. This paper argues that, given the investment requirements, (international) benchmarking is not an adequate tool for the regulation of transmission system operators (TSO). Errors in the outcomes of benchmarking will likely distort network investment and therefore the costs of doing it wrong are high. The paper discusses options to reduce the weight of benchmarking in TSO regulation and options that do not rely on benchmarking at all. Overall, facing massive
investment requirements, it seems desirable to switch to a regulatory system with ex-ante investment approval and away from ex-post benchmarking.
BEWP No. 11
Governing Smart Grids - the Case for an Independent System Operator
Bremen Energy Working Papers No. 11, November 2011
published in European Journal of Law and Economics, 39(3), 553-572
Abstract:The next years should bring about a rapid transformation of the electricity sector towards high levels of renewable generation. Smart grids are seen as the silver bullet responding to the challenge of integrating renewables, managing flexibility, and keeping the costs down in distribution networks. Network unbundling on the other hand is essential for competition in the liberalized electricity industry. It forces independence of the networks and thereby eliminates concern that incumbent integrated (network) firms discriminate against new entrants. With smart grids the unbundling questions become relevant for distribution networks because active control in smart grids entails discrimination potentials. However, smart grids exhibit coordination needs for system efficiency and unbundling eliminates firm-internal coordination. An independent system operator seems to be an appropriate compromise solution. It eliminates discrimination incentives and serves coordination needs, thereby striking a balance between both competition and efficiency goals.
BEWP No. 10
Improving Investment Coordination in Electricity Networks Through Smart Contracts
Christine Brandstätt, Gert Brunekreeft, and Nele Friedrichsen
Bremen Energy Working Papers No. 10, September 2011
Abstract:Smart contracts based on voluntary participation and optionality can be a low transaction cost solution to implement locational signals in distribution networks and thereby avoid network investment. This paper examines the efficiency properties of smart contracts. Based on a three-node example network we show that cases exist in which smart contracts can achieve a pareto-improvement compared to the status-quo even with voluntary participation. With the pareto improvement at least one party is better of under a smart contract without worsening the situation for anyone else. We note that this requirement is very restrictive and leaves significant potential for efficiency improvements by smart contracts untapped. We then discuss the implementation of smart contracts with incentive regulation. There are two main tasks for the regulator: allowing network operators flexibility to offer such contracts and incentivizing network operators to do so.
BEWP No. 09
The Effect of Monopoly Regulation on the Timing of Investment
Jörg Borrmann and Gert Brunekreeft
Bremen Energy Working Papers No. 09, May 2011
Abstract:This paper contributes a theoretical analysis of the effects of divergent types of regulation on the timing of monopoly investment in a setting with lumpy investment outlays. Concentrating on the case where investment increases the regulatory asset base, we distinguish between price-based regulation and cost-based regulation. Under cost-based regulation, investment triggers a change of regulated prices, whereas, under price-based regulation, investment does not affect them. To motivate investment, we focus on wear and tear leading to replacement investment and on demand growth resulting in expansion investment. Our main conclusion is that cost-based regulation accelerates investment compared to price-based regulation.
BEWP No. 08
The Timing of Repeated and Unrepeated Monopoly Investment under Wear and Tear and Demand Growth
Jörg Borrmann and Gert Brunekreeft
Bremen Energy Working Papers No. 08, May 2011
Abstract:In an intertemporal model, we analyze the timing of irreversible and lumpy monopoly investment under certainty. There are two reasons for investing, i.e. wear and tear leading to replacement investment and demand growth leading to expansion investment. Both in a single investment setting and in a repeated investment setting, we find that a firm maximizing discounted social welfare invests earlier than an identical firm maximizing discounted profits. The investment date of an identical firm maximizing a discounted convex combination of social welfare and profits lies between these polar cases. All results apply both to replacement investment and to expansion investment.
BEWP No. 07
Locational Signals to Reduce Network Investments in Smart Distribution Grids: What Works and What Not?
Christine Brandstätt, Gert Brunekreeft, and Nele Friedrichsen
Bremen Energy Working Papers No. 07, April 2011
published in Utilities Policy, 19(4), 2011, 244-254
Abstract:Locational pricing can reduce the investment needs arising in distribution networks from the transformation towards smart grids with high shares of renewable generation. We analyse different approaches. Locational signals in a general tariff plan for either energy or network pricing require substantial system reform which impedes feasibility. We propose smart contracts with locational elements as hybrid form. System reform is only modest since contractual solutions emerge in smart grids anyhow. The responsibility for tariff setting stays with the network operator. The regulator’s task is limited to incentivizing efficient network investment and allowing network operators maximum flexibility in contract design.
BEWP No. 06
Vertical Economies and the Costs of Separating Electricity Supply – A Review of Theoretical and Empirical Literature
Bremen Energy Working Papers No. 06, April 2011
published in Energy Journal, 33 (4), 2012, 161-185
Abstract:Motivated by the European movement towards a separation of electricity networks from the competitive functions generation and supply this paper reviews theoretical and empirical literature on vertical synergies in electricity supply. In the analysis a clear distinction is made between four different unbundling options leading to different forms and magnitudes of synergy losses. Apart from coordination economies a main source of scope economies seems to result from a market risk effect if generation and retail are separated. Accordingly, the European policy of network unbundling (either transmission or distribution) results in synergy losses between 2 and 8 percent due to coordination losses, while an unbundling option that includes a separation between retail and generation, as observed in some U.S. states, may lead to a permanent cost increase of 20 percent or more due to a significant risk increase.
BEWP No. 05
Regulation and Regulatory Risk in the Face of Large Transmission Investment
Gert Brunekreeft, and Roland Meyer
Bremen Energy Working Papers No. 05, February 2011
published in Competition and Regulation in Network Industries, 12(2), 2011
Abstract:Most transmission systems in Europe are currently in need of large network expansions, in particular to cope with increasing shares of load remote renewable energy sources. Given that the scope for further cost reductions is largely exhausted, we observe a paradigm shift into the direction of implementing more cost-pass-through elements into price-based regulation to strengthen the necessary investment incentives. Regulatory emphasis is shifting from costreductions to promoting investment. Obstacles to investments arise in particular from regulatory risk and efficiency risk. Addressing these topics, we recommend a move towards more cost-based approaches, with ex-ante investment approval and less reliance on ex-post benchmarking.
BEWP No. 04
How to deal with negative power price spikes?—Flexible voluntary curtailment agreements for large-scale integration of wind
Christine Brandstätt, Gert Brunekreeft, and Katy Jahnke
Bremen Energy Working Papers No. 04, December 2010
published in Energy Policy, 39(6), 2011, 3732-3740
Abstract:For the large-scale integration of electricity from renewable energy sources (RES-E), the German system seems to reach its limits. In 2009, the electricity wholesale market experienced serious negative prices at times of high wind and low demand. The feed-in system in Germany consists of a fixed feed-in price, a take-off obligation and a RES priority rule, and in practice only very restrictive use of RES-E curtailment. Exactly the latter is the problem. We argue that the overall performance of the system would improve seriously by lifting the restrictions on the use of voluntary curtailment agreements, while retaining the priority rule as such. Since generators of RES-E can only improve under this system reform, investment conditions improve, leading to higher installed RES-E capacity. This in turn implies that reduced wind output due to curtailment can actually be offset by higher wind output in all periods in which there is no problem.
BEWP No. 03
Vertical Unbundling and the Coordination of Investment in Electric Systems – On ‘Cheap Talk’ and deep charging
Gert Brunekreeft and Nele Friedrichsen
Bremen Energy Working Papers No. 03, August 2010
published in Competition and Regulation in Network Industries, 16(5), 2015, 378-403
Abstract:This paper addresses the investment coordination problem in a vertically separated electricity supply industry in the absence of locational pricing. In an electricity system, investments in network and power plants need to be coordinated. Unbundling eliminates firm-internal coordination. Information exchange might restore coordination if communication is truthful. Based on model results we analyse whether cheap talk of generator investors would be credible and hence informative for network investment decisions. We show that due to perverse incentives, this is not generally the case. We propose cost-reflective, locational network pricing as a coordination device to internalize the incentive problem.
BEWP No. 02
Social Cost Benefit Analysis of Interconnector Investment: A Citical Appraisal
Michiel de Nooij
Bremen Energy Working Papers No. 02, July 2010
published in Energy Policy, 39(6), 2011, 3096-3105
Abstract:This paper examines the economic analysis (social cost-benefit analysis) underlying two decisions to build an interconnector (NorNed and the East–West interconnector) in Europe. The main conclusion is that current interconnector and transmission investment decisions in Europe are unlikely to maximize social welfare. The arguments are as follows. (i) It is unclear how much demand for transmission capacity and interconnectors actually exists, and thus the benefits of investment are unclear. (ii) Both analyses underlying the investments studied are incorrect, to the point where, in one case, even the sign may be wrong. (iii) The main criticism concerns the fact that they do not take the resulting changes in generator investment plans into account and ignore the (potential) benefits of increased competition. (iv) Several smaller issues can be improved, such as the discount rate used. (v) Decisions at the European level are taken very differently, and approval may depend on which authority grants approval. (vi) Interconnector decisions receive the most attention, although most money goes to transmission investments. Two research recommendations for future improvements are formulated.
BEWP No. 01
The Effect of Monopoly Regulation on the Timing of Investment
Jörg Borrmann and Gert Brunekreeft
Bremen Energy Working Papers No. 01, February 2010
Note that this paper is not available anymore. For a revised version see BEWP No. 09 above.