The Future of Electricity Transmission and Distribution in ... - p.wnp.pl

The Future of Electricity Transmission
and Distribution in Europe
Katowice, 1 June 2010
1

Meeting agenda (duration in minutes)
Organizational matters / introduction of participants 5
Introduction presentation 15
Panel discussion – topic no. 1 – Regulatory systems 25
Conclusion – topic no. 1 5
Panel discussion – topic no. 2 – New technologies 25
Conclusion – topic no. 2 5
LitGrid presentation 10
Panel discussion – topic no. 3 – Business models 25
Conclusion – topic no. 3 5
Total 120
2

MACRO APPROACH
Transmission and Distribution of electricity play a major role in the
energy security chain
Energy system security chain
Responsible
entities
Element of
the security
chain
Key security
drivers
MINING OF ENERGY
RESOURCES
• Stable sources of
raw material
procurement
State administration (Regulator, Ministry of Economy)
GENERATION
•Stimulation of
generation in deficit
areas
TSO / DSO
Legislation (including market solutions driven by law)
Tools Tariff
Operating control
TRANSMISSION /
DISTRIBUTION
•Investments in the
transmission grid and
distribution network
COORDINATION AND
CONTROL OF THE
SYSTEM
•Efficient power grid
management
3

MICRO APPROACH
Transmission and Distribution have different value drivers than other
parts of the value chain and require different management skills
Talent:
1) B2B negotiation skills
2) finance and trade savvy
3) financial risk
management skills
Talent:
1) cost-cutting knowhow
2) knowledge of new
technologies
3) operational
management skills
Wholesale trade
• Sales volume in MWh
• Unit margin in EUR/MWh
• SG&A costs
Generation
• Unit variable cost
• Unit fixed cost
_____________________________
_____________________________ Value chain
Retail
• Number of retail customers
• Average profit margin per client
• Average acquisition and
retention cost per client
• SG&A costs
Transmission & Distribution
• Valuation of regulated assets
approved by the regulator
• Return on capital employed
approved by the regulator
• Level of savings towards
tariffs
Talent:
1) ability to build
retail sales channels
2) B2C marketing
skills
Talent:
1) ability to develop
and negotiate tariffs
with the regulator
2) operational
management skills to
bring in savings
towards tariffs
accepted by the
regulator
4

Main theses of the presentation
1. A new regulatory approach is needed for electric power Transmission
and Distribution businesses.
2. Within 10-30 years, new technologies will change the way Transmission
and Distribution is managed (depending on the country).
3. New business models will alter the way Transmission and Distribution
are perceived both on the operating side as well as on the investment side.
5

Main theses of the presentation
1. A new regulatory approach is needed for electric power Transmission
and Distribution businesses.
2. Within 10-30 years, new technologies will change the way Transmission
and Distribution is managed (depending on the country).
3. New business models will alter the way Transmission and Distribution
are perceived both on the operating side as well as on the investment side.
6

The long term tariff model is predominant in Europe whereas
regulators promote the financial stability of operators
Conclusions from the analysis of European TSOs and DSOs
Both national and regional operators develop the regulated value of assets in order to obtain
higher revenues from regulated transmission and distribution activity
The multi-year tariff model is predominant in Europe whereas regulators in some countries
increasingly favor the establishment of the operators’ financial stability
Issues that require solutions in the near future:
There are still countries in Europe that require a modification of the mechanism that defines the
regulatory value of assets in order to ensure that the tariff is based on the real value of assets
It is expected that the TSO and DSO compensation model based on a long term tariff will be
introduced globally so as to enable optimal business planning in the mid term perspective
In many countries, the legal barriers to operations and investing still need to be eliminated
7

The optimizing of power system operation will, in the future, also
require a modification of the tariff system
New tariff system
• Need to modify tariff systems and implement mechanisms that optimize power system operation,
inclusive of the following:
‒ introduction of a nodal point tariff (instead of a postage stamp tariff or zone tariff)
‒ split of the tariff between consumers and generation
‒ application of the connection fee mechanism as a tool for optimizing location decision within
generation
• In many countries it is necessary to prepare and implement reforms of the electricity market in
order to ensure effective, in relation to safety and cost, system operation in the short and long
term perspective, with particular emphasis on the following:
– architecture of market segments administered by TSO, therein, in particular, the real time
market
– conditions related to the performance of TSO and DSO operator functions
– conditions related to the settlement of costs of system maintenance
8

First thesis – topics for discussion
1. Have the major European states tackled the withdrawal from the cost+ tariff system? Which factors
can change the current evolution of regulatory systems?
2. Which elements are deemed crucial in a given regulatory system? (From the point of view of the
regulator / minister of economy, minister of state treasury, investor, etc.)
3. How is the topic of implementing the synergies between distribution and other segments of a
vertically integrated energy group handled in different countries?
4. How is the new regulatory system in Germany evaluated?
5. Do the tariff systems in Central Europe meet European standards?
6. Is it sensible to privatize network assets when there is no favorable regulatory model? (From the point
of view of the seller as well as the purchaser).
7. How important is the selection of tariff system (postage stamp, zone tariffs, nodal point tariffs)? To
what degree does system selection represent an act of social policy, a reputation-driver of the
government, a tool to stimulate investments, attract capital, etc.?
8. Can we expect a standardization of regulatory systems related to electricity transmission and
distribution in the European Union? If yes, in what time horizon?
9

Main theses of the presentation
1. A new regulatory approach is needed for electric power Transmission
and Distribution businesses.
2. Within 10-30 years, new technologies will change the way Transmission
and Distribution is managed (depending on the country).
3. New business models will alter the way Transmission and Distribution
are perceived both on the operating side as well as on the investment side.
10

New technological solutions will change the configuration of both the
electricity transmission and the electricity distribution
Technological innovations in the Transmission and Distribution of electricity
1. The most interesting innovations relevant to electricity transmission and distribution can be found in
the following three areas:
a. technological solutions that improve the quality of transmission and distribution
b. energy storage technologies
c. smart grid
2. The technological solutions that improve the quality of transmission and distribution focus on two
issues:
a. the reduction of losses during electricity transmission and distribution
b. the management of reactive power (definition of demand, optimum allocation of available
resources in real time, monitoring of voltage stability)
3. Three energy storage technologies that are interesting to the TSO and DSO are undergoing
revolutionary changes:
a. storage with compressed air
b. pumped-storage power plants
c. batteries
11

Smart Grid implementation programs that exist in different countries
consist of four stages
Implementation process of Smart Grid
1. Creation of an infrastructure that would facilitate customer enabling (CE)
2. Development of advanced distribution operations (ADO)
3. Activation of advanced transmission operations (ATO)
4. Development of advanced asset management mechanisms (AAM)
Caution:
Many countries that began implementing Smart Grid are now in stage 1-(Smart Metering)
Interesting ideas from the area of Smart Grid that are being implemented above the
aforementioned schedule include:
a. the integration of variable generation
b. network preparation to mass and efficient charging of electric vehicles
12

Second thesis – topics for discussion
1. How can the demand for new technologies be arranged in the segments of electricity Transmission
and Distribution?
2. When can we expect a breakthrough in energy storage technologies?
3. What is the future of direct current transmission systems?
4. What are the chances for a full and effective implementation of the concept of Smart Grid on our
continent?
5. Will the implementation process of Smart Grid be only a national-scale venture?
6. To what degree will new technologies affect the shape of the sub-segments of electricity Transmission
and Distribution in a time horizon of 20 years?
13

Main theses of the presentation
1. A new regulatory approach is needed for electric power Transmission
and Distribution businesses.
2. Within 10-30 years, new technologies will change the way Transmission
and Distribution is managed (depending on the country).
3. New business models will alter the way Transmission and Distribution
are perceived both on the operating side as well as on the investment side.
14

The business model i.e. the principal scope of everyday business, is
defined by three factors
Definition of business model
Business model components
Revenue
generation
model
Definition of
products
and markets
Value for
customers
Configuration
of value chain
Comment
• The definition of products and markets
specifies the products/services offered by
the company and the target markets of the
company in a functional, demographic or
geographic approach
• The value chain describes the added value
created by the company, the business
configuration (vertical integration,
specialization or coordination of the value
chain) as well as the scope and method of
the company’s implementation of its key
business functions
• The revenue generation model defines the
character/structure of the company’s
revenues and the relative importance of the
revenue sources
15

Three business models effective in the energy industry
Business models in the energy industry
ENERGY DELIVERY
COMPANY
• Transmission
• Distribution
A VERTICALLY
INTEGRATED ENERGY
GROUP
• Generation
• Trading
• Retail
INDEPENDENT POWER
PRODUCERS
• Generation
• Wholesale trade
INDEPENDENT ENERGY
TRADERS
• Trading
• Retail
The above business models have emerged according to their historical attractiveness on capital
markets generation is presently increasingly attractive whereas the two middle models are
gaining importance (it is important to properly define the second model).
16

The model that also assumes distribution handling is currently
predominant among vertically integrated energy groups
Historical model of a vertically integrated energy group
Commercial businesses
GENERATION
TRADING
RETAIL
A Vertically Integrated Energy Group
Network business (natural monopoly)
LOW VOLTAGE
MEDIUM VOLTAGE
HIGH VOLTAGE
17

A strategic analysis helps identify the key determinants of future
TSO and DSO business models
Determinants of future TSO and DSO business models
Conditions/possibilities
• Synergies with the gas industry
• Complementary character of electricity
Transmission and Distribution
• Development of regional energy markets
• Guaranteed access to the contingency
reserve
• Legal conditions and business experience
• Regulation of network business
Business model component
• Entry into gas Transmission and Distribution
• Electricity Transmission and Distribution within
one capital group
• Expansion onto the markets of neighboring
states
• Purchase / construction of contingency
reserve sources
• Value chain of network business
• Compensation model based on RAB
The conditions and possibilities created by the environment and position of the TSO and DSO may
help redefine their business models
18

Both the TSO and DSO will search for new business models based
on electricity and gas transmission and distribution activity
Revenue generation model:
• Tariff in RAB system
• Auctions for cross-border flows
• Revenues from generation in regulatory
reserves
Product-market:
• Electricity and gas transmission at the level of country
of origin + nearby foreign markets
• Electricity and gas distribution at the level of country of
origin + nearby foreign markets
• Electricity generation in regulatory reserves
Value chain:
• Management of network assets
• Operating management of the system
• Performance of market transactions
19

Third thesis – topics for discussion
1. Should a full withdrawal of vertically integrated companies from electricity distribution be expected in
Europe?
2. Will municipalities play a role in the reconfiguration of the European electricity distribution sector and,
if yes, what will that role be?
3. Do investors agree that transmission and distribution may become a class of assets that can be
invested in (availability of investment offer) and that are worth investing in (potential returns on the
investment)?
4. Can it be expected in continental Europe that electricity and distribution will be combined within one
capital group as is the case of the National Grid?
5. Will the EU aim towards a full ownership unbundling in the case of network assets?
6. Is Generation actually more attractive investment-wise than the Energy Delivery Company Model?
7. In view of the distribution privatization example of Central Europe, why do politicians avoid privatizing
attractive business models opting instead to sell individual energy assets at low prices on the market?
8. What are the scenarios for the German electricity transmission market in ten years? Which models
can be taken into account? Can the „National Grid of Germany” concept still make a comeback?
20