The role of network regulation in the transition towards a low-carbon European power system

In response to global environmental challenges, the European Union (EU) has set itself a long-term goal of reducing GHG emissions by 80-95%, when compared to 1990 levels, by 2050. Essentially, the EU has established three key energy policy objectives related to the competitiveness, sustainability, and security of supply, which are underpinned by long-term energy targets. These targets include an increase of energy efficiency by at least 27% compared with the business-as-usual scenario, an increase of renewable energy supply by at least 27% of total demand, and a reduction in greenhouse gas emissions of 40% compared to 1990 levels. Due to the transition towards a competitive low carbon economy the share of decentralized and intermittent generation feeding into networks has steadily increased over the last decade. At the transmission level, large-scale wind and solar farms are becoming a common sight in rural and windy areas in Europe. At the distribution level, large shares of distributed generation (DG) systems, with capacities of some tens of MW are connected to the MV network while the electrification of mobility is steadily growing. The move towards sustainable electricity production, poses a number of technical challenges, thus electricity networks are currently undergoing a major transformation towards smarter, expanded, and upgraded grids. This transformation will require considerable investments and since network industry is a regulated sector, a number of policy and regulatory challenges will arise. Taking into consideration the recent developments on both the transmission and distribution electricity networks, this thesis examines the following issues: a) the impact of self-consumption policies and smart grid technologies on distribution networks, b) the influence of various market and regulatory factors on smart-grid (SG) investment in Europe, c) the impact of regulation, ownership and market structure factors on the adoption of ownership unbundling models in European power transmission networks. First, to explore and understand the complex technical issues arising from the increasing DG penetration several factors need to be taken into consideration such as the applied incentive policy schemes for DG integration. The adoption of different incentive policy design for self-consumption will influence DG adoption rates as well as different siting and sizing decisions from prosumers. Broadly speaking, incentive policy designs which enable larger reductions in the electricity bill, such as net-metering or net-billing, will result in higher penetration of DG as well as larger DG plants’ unit size. Most importantly, these decisions by prosumers will have an impact on the maximum instantaneous power demand of prosumers and will potentially lead to different levels of network constraints. In this context, a redesign of self-consumption policies may induce changes in the site and sizing of DG units which in turn will affect the self-consumption patterns, mitigating the network constraint problems. The impact on network constraints could be different, depending on the characteristics of the distribution network itself. In rural network, it is only with a low incentive policy that voltage spread remains within the ±10% limit (0.2p.u.). On the contrary, urban networks, are less vulnerable to voltage problems but more prone to overloads, even when very low incentive policies are adopted. While the last few years, many European countries have revised their self-consumption policies, more drastic measures should be adopted. To this end, a redesign of self consumption policies should aim at creating incentives for instantaneous self-consumption rather than remunerating prosumers for the injection of net excess energy back into the grid within a metering interval. The issue of network constraints, calls for a coordinated redesign of DG promotion policies with network regulation, acknowledging the need for SG investments. SG technologies may provide concrete solutions towards a mitigation of network constraints issue. Second, the increasing loads from DGs and the associated technical issues will call for SG investments. SG pilot initiatives can be beneficial in many ways; allowing the evaluation of innovative technologies in a real environment (e.g. viability and interoperability) and potential behavior patterns of consumers as well as the broad range of diverse energy players' interactions. European distribution system operators (DSOs) will have an important role to play, as they are the ones expected to carry the main investment burden. Since DSOs are regulated entities that have to cover their costs through regulated revenues only, the unenviable job of balancing the expected benefits from SG investments with their capital costs will fall to national regulators. In this respect, regulation can have an important role in setting up a framework that fosters investment in SG development. Based on a review of the European regulatory status and using a dataset of 459 innovative SG projects, this thesis focuses on market and regulatory factors and performs a series of statistical tests to investigate how the different factor levels affecting SG investments in Europe. The results show that (1) lower market concentration in the electricity distribution sector (2) the use of incentive-based regulatory schemes; and (3) the adoption of innovation-stimulus mechanisms are key enablers of SG investments. Third, electricity transmission is an enabling technology that can be used to alleviate, to a certain extent, the challenges that variable renewable energy sources (RES) pose to the security of electricity supply in Europe. The European Commission (EC) in its sector inquiry of 2007 took the view that the European transmission networks were experiencing underinvestment due to the conflict of interest in vertically integrated incumbents. EC proposed ownership unbundling measures as a “remedy” to the underinvestment issue. In this context, the full ownership unbundling (FOU) requirement for transmission system operators (TSOs), may be a relevant aspect for the accommodation of the growing penetration of large scale RES in the transmission network. While the FOU model is by itself a ‘’drastic’’ unbundling measure, implying a strict ownership separation of the TSO from the commercial business, the alternative unbundling models have frequently been criticized for their inability to provide a sufficient degree of structural separation and investment incentives. In this context, both independent system operator (ISO) and independent transmission operator (ITO) models have been have been described as stricter forms of legal unbundling rather than as pure ownership unbundling models. At the moment, there is relatively little empirical analysis regarding the determinants of ownership unbundling model preference. Using a dataset of the 35 utilities, this study carries out an econometric analysis, to understand the individual effect of institutional, market and technical factors on the decision to adopt an ownership unbundling model. In particular, regulation and ownership structure can have significant impact on the adoption of FOU model. The overall results show that (1) the use of hybrid and/or incentive-based regulatory schemes; (2) the presence of state ownership; and (3) the length of electricity transmission network can be associated with higher probability of a country to opt for a FOU regime.