Distributed generation Incentivising the distribution network operators

1
Distributed generation -Incentivising the
distribution network operators

• Presentation at REEEP Regulatory Forum, 28
  September 2004
• Min Zhu, Technical Advisor
• Ofgem GB Gas and Electricity Regulatory
  Authority

2
Overview

• Context
• Challenges for regulation
• An integrated approach
• Way forward

3
GB electricity sector and role of Ofgem

• Electricity sector privatised and unbundled since
  1989
• Generation competitive market
• Transmission regulated
• Distribution regulated
• Supply competitive market

Ofgems principle objective Protect the
interests of present and future customers where
appropriate by promoting effective competition
4
Growth in distributed generation
GB government targets 10 renewable energy 10GW
of CHP
DG capacity
1990
20 GW
?
10 GW

• Uncertainty
• Challenges
• Risks
• Opportunities

1 GW
Year
1993
2004
2010
5
Challenges for regulation

• DG growth likely to necessitate significant
  network investment
• Current regulatory arrangements
• deep connection charges ? potentially inefficient
  cost barriers
• obligations for distribution companies to connect
  ? no incentives for proactive and efficient
  network reinforcement
• Changes required to deliver
• efficient effective locational signal to
  network users
• positive incentive for distribution companies to
  respond

6
An integrated approach

• Structure of distribution charges
• moving from deep to shallower connection charges
• introducing generator use of system charges
• Distribution price control review (2005-2010)
• incentives for connecting DG
• incentives for innovation

7
Developing the incentive mechanism

• Objectives of incentives for distribution
  companies
• to encourage proactive and positive response
• to incentivise efficient and economical
  investment
• to achieve flexibility in dealing with
  uncertainty
• Criteria for incentive parameters
• moderately attractive returns on overall
  DG-related investment
• higher returns for more efficient connection
• a safety net covering interest costs for
  expensive projects

8
The main DG incentive mechanism

• Hybrid incentive for DG-related distribution
  investment
• pass-through 80 of distribution investment
  cost
• supplementary incentive /kW/yr for DG capacity
  connected
• cap (2 times cost of capital) and floor (cost of
  debt) for overall returns on distribution
  investment
• Further incentive for the provision of ongoing
  network access

9
Beyond the usual connection practice

• The future will not be Business as Usual for
  network operators
• Analysis early experience confirms technical
  challenges
• voltage control
• fault levels
• generator stability
• Incentive should promote innovation to find the
  best value solutions for the development and
  operation of DG

10
From the network today
Boundary flow
Load
Load
MWs
11
to the network of tomorrow
Potentially, two-way boundary flows
Islanding control with auto sync
Voltage load Control
SVC
Store
Fault current limiter
Load
Load
MWs
.
DSM
12
Drivers for change

• Fit Forget DG connection will soon become
  impractical and a very inefficient use of
  investment
• Continuing a passive system control philosophy
  will constrain generation connection
• Need for networks to become progressively more
  active and intelligent

• Research shows that more generation can be
  connected to a given network if it is converted
  to active operation
• More efficient use of networks will result in
  better value for money, reduced need for new
  lines and new substations, and quicker connections

13
Innovation and regulation

• RPIX has worked well on core low risk
  distribution business
• but has not provided incentives to innovate
• Innovation is acknowledged to carry a different
  risk profile the regulatory framework should
  adapt to recognise this

Need now to develop the regulatory framework to
allow DNOs to operate in different risk/reward
business environments
14
The innovation process
Risk
Research
Development
Demonstration
Adoption
Time
Multi-stage process to convert ideas to
products/solutions
15
The innovation process
Risk
Research
Development
Demonstration
Adoption
Time
RPIX Capex Treatment effective
16
The innovation process
Risk
Research
Development
Demonstration
Adoption
Time
Manufacturers and research community lead
17
The innovation process
Risk
Research
Development
Demonstration
Adoption
Time
distribution involvement necessary here a
distinguishing feature is the requirement for
field testing and the inadequacy of laboratory
simulations alone
18
The innovation process
Risk
Innovation Funding Incentive
Research
Registered Power Zones
Development
Demonstration
Adoption
Time
IFI RPZ Ofgems proposed new incentives for
GB distribution companies
19
Innovation Funding Incentive
A mechanism to encourage investment in
appropriate RD activities that focus on the
technical aspects of network design, operation
and maintenance. The principal objective of the
IFI is to deliver benefits to consumers by
enhancing efficiency in operating costs and
capital expenditure.

• A of turnover allowance for innovation
• Expenditure allowed on a partial pass-through
  and use it or lose it basis
• Annual, open, reporting of activities to promote
  best practices

20
Registered Power Zones
A mechanism to encourage development and
demonstration of new, more cost effective ways of
connecting and operating DG that will deliver
specific benefits to new DGs and broader benefits
to consumers generally.

• Ofgem registers, but does not approve projects
• Enhanced financial incentive (3x DG incentive
  rate), to provide balance to the innovation risks
• Open reporting of RPZ projects to promote best
  practices

21
Example of a Registered Power Zone

• Special regulatory treatment
• Nursery for innovation, suited to demonstrator
  projects
• Enhanced Quality of Supply
• Benefits of badging as a form of endorsement
• May attract external grant funding
• May foster Regional Development joint projects
• Signals a generation-friendly network to
  developers
• Club Rules protect customers and ensure
  information sharing

Favourable regulatory treatment offers higher
returns to strengthen the risk/reward balance
22
Way forward

• Consulting on proposals since 2003
• Currently developing further details
• Finalising proposals in November 2004
• Implementation from April 2005
• Ongoing review thereafter

23
Promoting choice and value for all gas and
electricity customers