Transcript IEA Workshop 18-19 November 2004 Transmission Network

“Investment in Transmission”
Economics of Electricity Markets –
IDEI Toulouse, 2-3 June 2005
Jon Carlton – Director of Network Strategy
Agenda

National Grid Transco
 Who we are and what is our experience?

Drivers of Investment
 Role of competitive markets and congestion
 Technical rules vs Economic Assessment
 Incentives for Investment and the Role of Independent Transmission
– Consideration of some of the practical challenges

Summary and Conclusions
Who are National Grid Transco?



Formed in late 2002 through merger of Lattice Group and National Grid
Group
International energy delivery business with market capitalisation of
~€20billion
Focused on ownership, operation, development of energy networks
 Electricity and Gas

Principal Electricity Investments
 TSO for England and Wales; SO for GB
 Significant Transmission and Distribution Businesses in the Northeast
United States
National Grid Electricity Transmission System



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Operating voltages 400kV and 275kV
13,786 km of overhead line; 627 km
of underground cable
Approx 330 substations
Maximum demand 54,400 MW
Units transmitted 308.5 TWh
Major power plants connected 84
Investment challenges for National Grid in the
UK
DRIVERS OF TRANSMISSION
INVESTMENT
1600
Ageing coal-fired generation
1400
2000
1995
1990
0
1985
 Driven by asset age and
condition
200
1980
Asset replacement
400
1975

600
1970
 Especially wind power
800
1965
Renewables
1000
1960
New gas-fired generation
1200
1955


Current Cost (£m)
 And tighter emissions limits
1950

ASSET AGE PROFILE
Are competitive electricity markets conducive to
network investment?




There is no automatic linkage between competitive markets and
network security – some of the most secure networks are where
unbundling and competition have been introduced.
Some transmission systems may have been designed to get output of
a company’s own generation to its native load, rather than for trade in
electricity – this is where investment may be most needed.
In some cases trade facilitated by excess capacity already inherent in
transmission systems
In any event, effective investment incentives required looking forward
Does congestion provide the answer to where
investment is required?



Can be a valuable signal to where investment is required and provide
an economic justification
But patterns of congestion can change according to the disposition and
operation of generation and be influenced by outage programmes
In practice there may be legitimate reasons why congestion revenues
alone may be insufficient to fully remunerate required investment
Technical rules; do we need them and if so what
is their place?


Need to ensure we understand what is actually required versus what
engineers would ideally like to have!!
Market can largely ensure demands for energy are met, but there may
be questions as to the temporal or geographical balance
 Supply and demand have to be matched in real time
 Reactive power for voltage control must be provided locally

Supply quality and reliability are important considerations
 But market mechanisms can often be used eg to ensure economic
provision of ancillary services (eg reactive power, response and reserve)
Transmission Investment requires….


Companies whose prime focus is transmission
New ways of:





Planning
Managing capital investment
Understanding asset performance and health
Effectively managing risk
Examples
 Planning against a background of uncertainty
 Advanced asset management techniques
 “Just in time” asset investment, complemented by SO contracting options
Planning investment against an uncertain
background



Location and timing of new projects which will actually proceed are
uncertain
Need to avoid prospect of failure to provide capacity or be left with
stranded assets
Hence need to adopt “just in time” investment; complemented by use
of System Operator incentive schemes
Uncertainty in future generation pattern
1200
Generation
Demand
2200
2171
Background A
3667
6719
9815
7716
12027
5941
1196
Background B
1988
1483
3611
1988
Effective regulatory incentives

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Forward looking rather than based on historic view
Drivers to provide capacity when required
Combination of sound economics and pragmatism
Avoidance of undue complexity and cost
Need to consider how asset replacement is effectively incentivised, not
just provision of new capacity
Some attributes of appropriate incentives

Investments which are customer driven
 The role of capacity auctions
 Recognition that Unit Cost Allowances will only approximate the cost of a
specific project
 Thus may need transportation charges to cater for under- or over-funding
from auctions

Asset replacement
 Sufficient returns to make this attractive to shareholders
 But regulator must have assurance on outputs (ie that investments are
efficient and timely)
Other Practical Challenges for Investment

Environmental challenges
 Not just visual amenity
– Flora
– Fauna
– Health concerns (eg EMFs)

Planning processes
 Important that due process is seen to be followed
 Objectors and interveners must be allowed a voice
 Governments have a role in streamlining planning processes

Companies also need to be innovative
 Getting more capacity out of existing assets obviates need for new build
TSO, SO, TO – Does the industry structure
matter?


Transmission companies must be independent from market
participation and possess financial strength
A real focus on transmission as a core activity
 Cost efficiency
 Innovation
 Ability to respond to incentives

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Strong incentivisation of system operator may require it to be backed
by asset ownership
Efficiency of operation is facilitated by tight integration of SO and TO
functions
ISOs and separate TOs may be dictated by inherited structures and
property rights
Summary and Conclusions
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
Investment occurs where companies have transmission as a prime
focus, not a subsidiary activity
Investment in an unbundled competitive market needs investment in
new processes, new tools and good people
But this will only occur if the right financial (and hence regulatory)
incentives are present
Market mechanisms have a key role in incentivising efficient operation
and investment, complemented by sensible technical guidance
The debate on industry structures will continue, but incentivised and
integrated TO and SO functions have demonstrable benefits