Pillar 3: Innovation in distribution and retail

Pillar 3: Innovation in distribution and retailBest practices based on international experiences

Tomás Gómez, Pablo Rodilla, Rafael Cossent, Paolo [email protected]

Modernization of the Peruvian Electricity System18 February 2021

Current situation

Innovation in distribution and retailImprove the regulatory framework in Peru

Scope of the study• Terms of Reference

• Technological innovation of distribution systems

• Economic regulation (building blocks)• Tariff structure for DER

• Incentives to improve quality of service• Design of compliance• Targets and monitoring

• Retail market adjustments• Energy purchases and price formation• Barriers to market participation

• Development of DER• Role of distribution companies• Access and remuneration• Tariffs and surplus sales

• Consumer empowerment• Advanced metering infrastructure• Demand response programs

• D1. Best practices & international experiences• Restructuring distribution activities

• Unbundling and ownership of DER• Role as system operator (flexibility, data)

• Advanced metering infrastructure• Cost/Benefit• Functionalities

• Distribution revenue setting• Remuneration formula (CAPEX, OPEX, TOTEX)• Incentives quality of service and innovation

• Tariff design• Cost allocation methodologies• Remuneration of DER behind the meter

• Local flexibility markets• Designing flexibility auctions• Flexibility platforms

• Retail market• Barriers to retail competition• Design of default tariffs• Allocation of legacy costs

1. Restructuring of distributionUnbundling

• In a context of digitalization and decentralization

• Three models with increasing regulatory oversight

• Separation between the owner and the operator of the distribution network (ideal similar to ISO in US)

• DSO model combines ownership and operation of the distribution network vertically unbundled from generation or retail (i.e. Netherlands)

• DSO as part of a holding with generation or retail companies (EU model with functional separation)

1. Restructuring of distributionOwnership of DER (DG, storage, EV charging)

• As general rule, DSOs should not be allowed to own, develop, manage or operate DER

• This rule applies in the EU• Exemptions

• In EU, if the facilities are fully integrated network components or they are needed and no private promotors are interested (regulatory oversight)

• In NY, if non-utility offers are inadequate to satisfy the system needs

• In UK, for small-scale applications or where a market-based solution cannot be procured

1. Restructuring of distributionDSO transparency and hosting capacity maps

Southern California Edison

Minnesota grid

1. Restructuring of distributionData services and management

• Data produced by smart meters may foster innovative services specially in retailing

• A sound regulatory framework for data management is needed

• Data should be provided in standard format to competitive actors

• Customers maintain full control and ownership over their data (privacy and security)

• EU experiences in data hubs and decentralized data management

1. Restructuring of distributionPreliminary recommendations for Peru

• Unbundling between distribution and DER (DG, storage, EV charging and flexible loads)

• Exemptions should be clearly defined in line with EU regulation

• Define roles for distribution as system operator and market facilitator

• Access and connection rules for DER (types of access: firm and flexible) (publication of hosting capacity maps)

• Data management from smart meters (standardized format, supplier switching standard, exchange platform with retailers, authorization by consumers)

• Procurement of flexibility from DER for network management (local flexibility markets)

2. Advanced metering infrastructureHigh level of deployment in US and EU

2. Advanced metering infrastructureCosts / Benefits in UK

2. Advanced metering infrastructureRoadmap for Peru

• AMI as part of the global reform with market and tariff design modifications

• Cost/benefit analysis (including customer categories)

• Standard functionalities (see European recommendation)

• Define a plan• entities in charge of installation• data management• resilience to cyber attacks

• Regulatory supervision of the deployment plan

3. Distribution revenue settingDesign elements

• Revenue cap • Place efficiency incentives on CAPEX, OPEX, TOTEX• Set DSO allowances formula (including RAB,

treatment of new investment and operational costs) from the begining of the regulatory period

• Consolidate the RAB at the end of the regulatory period

• Evaluate and incentivize performance indicators (output-based regulation)

3. Distribution revenue settingCAPEX & OPEX vs TOTEX

• Traditionally, separate treatment and incentives for CAPEX and OPEX

• Clear barrier for reducing grid reinforcement through non-wire alternatives NWA (i.e. flexibility)

• TOTEX-oriented: efficiency incentives are neutral to CAPEX or OPEX (DSO exploit the potential trade-offs)

• Still limited experience: UK (Ofgem), Portugal and Austria

3. Distribution revenue settingDSO annual allowances formula

3. Distribution revenue settingLegacy RAB (key issue in Peru)

• For migrating from current VAD calculation to RAB accounting methods an initial opening RAB (legacy RAB) corresponding to actual assets should be determined

• Different assumptions should be assessed• Implicit RAB• Valuation of actual assets (book value, new

replacement cost, reproduction cost)• Remaining regulatory life (gradual termination

avoiding “cliff-edge” effect)

3. Distribution revenue settingIncorporating expenditures into revenue allowances (ex-ante vs ex-post)

• Profit-sharing mechanism as a tool for mitigating forecast errors under a context of higher uncertainty

3. Distribution revenue settingMenu of contracts in UK (profit-sharing + incentive to ensure accuracy in business plans)

3. Distribution revenue settingForward looking estimations

• The menu of contracts implemented in UK is a practical profit-sharing method that also incentivize DSOs to accurately estimate future expenditures

• The Reference Network Model is an engineering-based forward-looking tool to estimate future network requirements due to demand growth and new DER deployment

• Long regulatory periods (more than 5 years) are recommended (with intermediate adjustment) to incentivize actions that bring benefits in the long-term

3. Distribution revenue settingBonus-malus schemes for quality of service

Wide experience in EU and US with this type of incentives

3. Distribution revenue settingInput incentives for innovation

• Experiences in UK, Italy, Netherlands, Finland• Applied to innovative projects under approval

of the regulator• Partial or total pass-through of certain costs (added

to the RAB)• Higher return on certain investments

3. Distribution revenue settingPreliminary recommendations for Peru

• Migrate from VNR with historical data to forward-looking TOTEX (CAPEX+OPEX)

• Calculation of initial RAB keeping revenue neutrality

• Forward-looking estimation of CAPEX and OPEX: distribution and regulator benchmark

• Profit-sharing mechanism• Input incentives for innovation projects

directly included in the RAB• Output incentives for quality of service

indicators

4. Tariff designIntroduction

• Tariffs are supposed to define the equilibrium between centralised and distributed services

• Tariff is conditioned by technology (meters)• The report identifies some well-known best

practices not-so-well implemented

vs

4. Tariff designIntroduction

• Tariffs are supposed to define the equilibrium between centralised and distributed services

• Tariff should be non-discriminatory, symmetrical for generation and consumption and technology-neutral

vs

4. Tariff designComponents

• Electric energy• Energy-related services

• operating reserves, firm capacity, etc.

• Network• Policy costs, as taxes or costs related to RES

Efficient allocation methodologies

Electricityprice

=Electricenergy +

Energy-relatedservices

+Network-related

services+

Policycosts

Residual costs

4. Tariff designEnergy

• Increase granularity• The price of electricity should be calculated for

shorter time intervals• Geographical granularity is relevant but

• Policy decision (no international experience)• Comes at a cost, there is a trade-off (DLMP highly arguable)

• Signals must be communicated with a sufficient anticipation (at least 1 day)

4. Tariff designEnergy related services

• Long term adequacy mechanism• Firm capacity / firm energy: consumption during

the scarcity periods

• Ancillary services• Capacity: based on the definition of the quantity

requirement• Energy: based on imbalances

4. Tariff designNetwork

• Peak coincident network charges should be used to recover network costs

• Price signal should be based on LRMC• This signal can be unstable (very high / zero)• Demand charge is a second best

Demand charge (or fixed charge)0-25% 25-50% 50-75% 75-100% 100%

ResidentialAT, CY, CZ, FR,

DE, GB, GR, HU, LU, RO

IE, IT, PL, PT, SK, SI

NO ES, SE NL

IndustrialCY, DE, GB, GR,

RO, SKCZ, FI, FR, HU, SE AT, PL, SI IT, LU, ES NL

Table i. Percentage of network costs recovered using a demand charge in different European countries; Data of EURELECTRIC (2016)

4. Tariff designNetwork

4. Tariff designPolicy costs

• The way the policy objective is expressedgives the information on how to efficientlyallocate the (LRMC) cost

• 20% of electricity demand• 20% of energy consumption supplied by RES

Components of the electricity tariff in the UE. Source: (ACER, 2020)

4. Tariff designResidual costs

• Residual costs would be better recovered through a fixed charge

• this fixed charge can be consumer-dependent, but it should not convey any price signal (that could trigger an inefficient response) to the consumer

• In order to avoid inefficient grid defections there are thresholds to residual cost allocation

Efficient allocation methodologies

Electricityprice

=Electricenergy +

Energy-relatedservices

+Network-related

services+

Policycosts

Residual costs

4. Tariff designPreliminary recommendations for Perú

• Remove residual costs from the volumetric component of the tariff

• (conditioned to smart meters deployment)• Expose customers to ToU or hourly energy prices• Coincidental peak capacity charges for firm capacity

and for responsibility in network investment• Demand charge as a second-best

• Increase geographical granularity to demandsignals

5. Local flexibility marketsWhy markets at the distribution level?

• DERs connected to distribution networks may become an important source of flexibility, supporting

• an efficient short-term operation and• long-term planning (NWA or inv. deferral services)

• Specific local markets are required to fully exploit these potential benefits

• Short-term markets• Long-term markets

5. Local flexibility marketsLong-term local flexibility markets

• Even efficient tariffs do not provide long-term signal or long-term commitments needed

• end-users require long-term signals to invest in DER • DSO needs long-term commitments of flexibility

• This is the role of long-term local flexibility auctions

5. Local flexibility marketsInternational experience

• Include NWA in the planning analyses (TOTEX naturally gives the incentive)

• Develop a Cost-Benefit analysis guide• Compare storage, DR, wires investments• The value of optionality

• Use a competitive procurement process

5. Local flexibility marketsThe US experience

New York State Electric and Gas Corporation

Rochester Gas and Electric Corporation

5. Local flexibility marketsThe US experience

5. Local flexibility marketsThe EU experience

• Very few examples of market platforms for the trade of distributed services can be found yet

• NODES (Norway)• ShortFlex: solves immediate flexibility needs• LongFlex: in advance for long time periods.

• Cornwall LEM (UK) - Pilot project• Short-term flexibility

• GOPACS (Netherlands)• Connected to wholesale market platform, any flex. trade is

readjusted in a short-term wholesale market

• Enera (Germany) - similar to GOPACS


• PICLO FLEX (UK)• Piclo is an independent software company• Tenders to deliver flexibility needs for with different

lead times and contract durations


• PICLO FLEX (UK)

5. Local flexibility marketsPreliminary recommendations for Perú

• Focus on the long-term local flexibility markets• Include NWA in the planning analyses

• Develop a Cost-Benefit analysis guide

• Use a competitive procurement process• Define the products as technology-neutral• Supervised to avoid entry barriers

6. Efficiency of retail processesLiberalization of retail: Europe, Australia & Texas

• It is the final step of power sector liberalization and has been taken only in some jurisdictions

6. Efficiency of retail processesLiberalization of retail: Europe, Australia & Texas

• Barriers and necessary actions• Current situation in Europe• Regulated tariffs (default tariffs)• Legacy costs

6. Efficiency of retail processesRecommended practices for liberalizing

• Barriers to retail and actions (CEER, 2016 & 18)• Inefficient unbundling

• Share an identical or similar branding

• Access to data and data standardization• Set up a data hub (role of data privacy) / Opt in vs opt out

• Regulated end-user prices• Unfair competition with the retail market

• Smart meters• Obligations on suppliers (obligations and guarantees)• Switching process

• Complicated switching processes • Objective to improve up to next-day switching (smart meters)

6. Efficiency of retail processesIs it worth all the effort?

• Mark-up in the retail sector (ACER, 2020)



2019, Rahmatallah Poudineh, Liberalized retail electricity markets: What we have learned after two decades of experience?


Electricity household consumers with price intervention compared to the total number of households in the country in 2019. Source: (ACER, 2020)


• In Europe, after all:• The margin is usually high• There is not enough competition• The consumer is not actively participating

6. Efficiency of retail processesRegulated tariffs

• The liberalized electricity retail business can co-exist with some form of regulated tariffs

• These regulated tariffs usually pursue two objectives:

• Ensure the supply for a short period of time to consumers who do not have a contract with a retail company Last resort (or back up)

• Determining a tariff that competes with the liberalized market, and that usually only applies to certain consumers segments (to be protected from market risk) default tariff

6. Efficiency of retail processesDefault tariff

• Default tariffs must be cost-reflective and introduce the least-possible regulatory intervention

• subsidized tariffs represent unfair competition and eventually would end with the retail market

• Default tariffs need also to avoid, as much as possible, being the sole regulator’s tool to allocate some system costs (policy costs and legacy costs)


• One major decision to be taken by the regulator: whether or not to hedge consumers

• Two extremes, each with advantages and disadvantages:

• Make a pass-through of the short-term market price with no hedge for the consumer

• Contract the energy in advance in the so-called default energy auctions




• What level of hedging is good enough?• Contracting a certain percentage in advance• Try to convey the short-term market signal as much

as possible

6. Efficiency of retail processesLegacy costs

• The allocation has to be designed in a way that there is no room for inefficient opportunistic switching to the free market

• Alternatives to deal with this issue:• Including them as an extra item in the national

budget, ultimately defrayed by taxpayers. • Consider them as residual costs, and allocate them

via the regulated access component in the tariff. • Design an exit fee to be charged on those end-

users that would decide to leave the regulated rates

6. Efficiency of retail processesPreliminary recommendations for Perú

• Consider the pros/cons of liberalizing retail. • In the international experience:

• Mark-up, competition and consumer participation

• If there is the will to liberalize• Start with the creation of a regulated retailer• Keep a cost-reflective default tariff• Remove the reviewed barriers• Liberalize

• Avoid that legacy costs allocation leads toopportunistic switching to the free market

Instituto de Investigación TecnológicaSanta Cruz de Marcenado, 2628015 MadridTel +34 91 542 28 00Fax + 34 91 542 31 [email protected]

www.comillas.edu

Thank you for your attention !!!

4. Tariff designUS

Matisoff, 2020, A review of barriers in implementing dynamic electricity pricing to achieve cost-causality

EIA Database 2019

5. Local flexibility marketsThe US approach

Advanced practices in distribution network planning in the USA Source: (Cooke, 2018)


• PICLO FLEX (UK)


• The need for hedging depends probability of scarcities


• Ontario


Spanish default tariffEnergy component (there is also a capacity component): Make a pass-through of the short-term market price with no hedge for the consumer

Documents

Pillar 3: Innovation in distribution and retail