Power Deregulation Policy Evolution

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Power Deregulation Policy Evolution

Dr Loi Lei LAI

Head of Energy Systems GroupCity University London

UK

Plenary speech for IEE Seminar on Spatial IT for Electric Power Systems

Bangalore, India, 31 October 2003


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Overview

Power deregulation determines the rights andresponsibilities of utilities in competitive markets.

The global spread of power utility deregulation is

now in its second decade, there are good things andbad things. Power is essential for world economygrowth. Only a financially and commercially sound

power sector can attract new investments.

This speech is about the evolution of powerderegulation policies in various countries anddemonstrate factors needed to be considered to

produce full benefits from power utility deregulation.


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California Power Market

Californias capacity was in decline.

Difficult to build new facilities.

From 1988 to 1998, generating capacity decreased 5 %.

Reduced consumer rates by 10 % and then froze thoserates for 6 years.

No incentive to invest. Utilities were not allowed to enter into long-term

contracts.

The utilities could not hedge against price spikes.


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Texas Deregulation

The state streamlined the generating plant approval

process.

Since 1995, Texas had added 22 new plants, for a

capacity increase of 10 %.

Texas allowed long-term contracts between wholesalers

and retailers to hedge.

It kept rates at a high enough level to attract newsuppliers.

However, future rate adjustments are planned to reflect

market conditions.


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Energy Policy Aims

Encourage the development of well-designedcombined heat and power (CHP) units that are bothhighly efficient and have low emissions.

Continue supporting energy firms competing inmarkets abroad.

Implement a system of clear, open, and transparentrules and procedures governing foreign investment.

Level the playing field for companies overseas. Reduce barriers to trade and investment.


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Energy Policy Aims

Maintain reliability, support both load and resourcediversity and enable an efficient wholesale electricmarket.

Provide incentives for beneficial expansion and

system improvement. Enable access to more economical and less polluting

resources, thereby minimizing environmental

impacts. Streamline and coordinate siting review processes to

enable the timely construction of transmission.

Promote diversity of Fuels.


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Energy Policy Aims

Evaluate the market power mitigation and operational

flexibility benefits of either additional generation intransmission-constrained areas or the addition ofmore transmission;

Evaluate the use of additional emerging technology-based solutions in increasing transfer capacity in theexisting transmission system where applicable.

Implement end-use load management, energyefficiency and distributed generation resulting fromconsumers receiving closer to real-time signals on

electricity price.


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The Trend for Energy Policy

Base on a more market-oriented approach. Continue to critically assess the level of

state/public involvement.


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Wholesale sales and the interstate transmission

market are subject to regulation largely by the U.S.Federal Energy Regulatory Commission (FERC).

Retail sales and the distribution market are regulatedby the states.

The most important pieces of federal legislation

affecting the wholesale sales and interstatetransmission market are the Federal Power Act of1935, the Public Utility Regulatory Policies Act of

1978 (PURPA), and the Energy Policy Act of 1992(EPAct).

Market Structure


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Political Pressure

Political pressure mounted to expand competition in

generation. There were two primary factors limiting the increase

in competition in the wholesale market:

(1) Non-utility generators, found it difficult to enter themarket because they had no exemption from theownership restrictions of the Public Utility HoldingCompany Act (PUHCA).

(2) The second constraint on market expansion wasFERC's lack of authority to mandate wheeling overtransmission lines.

In 1992, Congress passed EPAct and eliminated boththese constraints.


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Changes in Wholesale Electricity Market

This transition from regulation to competition began in

1978 with enactment of the Public Utility RegulatoryPolicies Act, which promoted independent electricitygeneration.

Open-access transmission policies adopted by the Federal

Energy Regulatory Commission (FERC) in the late 1980sfurther promoted competition in wholesale powermarkets.

Congress ratified these policies with enactment of theEnergy Policy Act of 1992, which further promoted non-utility generation.

FERC promoted competition with its open-access rule in

1996, which provided greater access to the transmissiongrid, the high-way for interstate commerce in electricity.


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Changes in the Retail Electricity Market

Beginning in 1996, states began opening their retailmarkets to competition in order to lower electricity

prices. Twenty-five states have opted to open theirretail electricity markets to competition.

These dramatic changes affecting the industry led toimportant structural changes. Independent power

producers, which were once infant industries, now

dwarf many utilities. While utilities had service areas that were limited to a

single state or region, independent power producers

are international companies that can build powerplants across the globe.


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Energy Policy for Japan1) Reducing dependency on oil has been a top priority in

Japans energy policy since 1973. As a result, the amountof imported oil dropped from 78% in 1973 to 51% in2001.

2) According to the IEAs World Energy Outlook 2002, oil

imports for developing countries in Asia are expected toincrease from 42% in 2000 to 83% in 2030.

3) The Japanese energy policy aimed at maintaining energystability in the Asian region. The main points are

a)to promote cooperation in the development of naturalgas resources in the Asia region, and

b)to cooperate with Asian countries in price negotiations

with oil-producing nations.


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Energy Policy for Sweden

Energy policy has established the following main goals:

Nuclear power will be phased out. Bio-energy will be prioritized.

Competitive energy price must be made available.

Important measures for achieving these goals includeworking toward efficient consumption and a change inenergy production.

For large electric boilers/furnaces Use of electrical power for heating will be reduced andto a great degree replaced by district heat.

Incentives for new power production from alternativefuels will be provided.


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Energy Policy for Norway

Development of the off-shore petroleum sectordominates the energy agenda and indeed the economyas a whole, while environmental protection is givenhigh priority.

Since the last IEA in-depth review, the approach toenergy policy has evolved in a number of areas,

providing a clearer distinction between government

functions and those of commercial operatorsparticipating in a competitive market.


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Oil

Continue to ensure that regulations, practices and

revenue-taking policies do not present barriers tocompetition.

Ensure that adequate opportunity exists for a variety

of participants who may have valuable expertise andcan enhance competition.

Allow companies bidding in licensing rounds to form

their own partnerships. Continue efforts to increase transparency in thelicensing process while respecting commercialconfidentiality.


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Natural Gas

Review the current government regulatory model to

ensure market access on fair terms to all gasproducers.

Monitor and seek to influence the debate on

deregulation of the European gas market.


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Electricity

Continue to allow the market to function withoutgovernment interference and send appropriate pricesignals to suppliers and consumers.

Eliminate barriers to private investment in generation. Consider real-time pricing to accurately reflect thecosts of losses and constraints on the transmissionsystem.

Ensure full implementation of the regulatoryincentive regime and monitor its results.


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Energy and Environment Establish a system for monitoring any shift in the

economy toward those energy-intensive activitieswhich are exempt from the CO2 tax and evaluatewhether the alternative policy measures in use or

proposed for these activities are sufficient tocounteract such effects.

Consider making contracts or agreements on how toaccount for and share credit for reductions in CO2emissions

Quantify the impact of the CO2 tax on gasoline anddiesel consumption by private motorists.


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R&D

Set long term strategic priorities for R&D and strengthen

Research Councils capacity. Ensure that the financial returns offered to private oil

companies are sufficient to encourage them to maintainlevels of R&D.

Assess the need for greater expenditure on energyconservation R&D generally, in light of the saturation ofhydropower capacity and possible GHG reduction

commitments. Ensure that agreements with industry on energy

conservation take full account of the potentialcontribution of technology research, development anddemonstration.


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Chinese Energy Policy

Chinese industrial sector energy efficiency policy has

gone through a number of different phases. An initial period of energy growth in the 1950s,

1960s, and 1970s was followed by implementation of

significant energy efficiency programs in the 1980s. Many of these programs were dismantled in the

1990s during the continuing move towards a market-

based economy. The Chinese government passed the Energy

Conservation Law in 1997 to enhance energyconservation management.


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Transition to a Market-Based Economy

Energy price reforms included deregulation of coalprices, increases in oil prices, and partial deregulationof electricity prices.

A simplified tax code introduced in 1994 eliminated

tax rate reductions on energy efficiency technologydevelopment and investment projects.

Some banks also began to reduce low-interest lending

for efficiency projects. The Chinese government passed the Energy

Conservation Law which provides broad guidance for

the establishment of energy efficiency policies inChina.


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A Comprehensive Policy

In 1999, the China Energy Conservation Association (CECA)

began a project with the goals of Developing and implementing regulations and relevant

standards to promote industrial energy conservation andimprovement of energy efficiency.

Analyzing international industrial energy efficiencypolicies and programs and their adaptability to China.

Analyzing the status and opportunities for energy

conservation in key energy intensive industrial sectors. Reviewing existing energy conservation regulations and

policies and making recommendations for new regulations

and policies that work well under a market-basedeconomy.


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Current SituationIn 2001, there was a number of proposed energy efficiencypolicies include:

A renewed focus on energy end-user efficiency andproductivity improvement.

Development of supporting regulations for the Energy

Conservation Law, formulation of annual energyconservation plans to improve energy utilizationefficiency and productivity.

Formulation of preferential economic policies to supportenergy conservation projects.

Enhanced energy management of key energy usingenterprises.


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Energy Efficiency

Develop tools to assess the quantitative results andthe cost effectiveness.

Evaluate steps to promote cost effective energyefficiency measures.

Consider minimum energy performance standards forequipment and appliances.

Establish monitoring criteria to evaluate the

efficiency gains and emissions reductions.


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International Energy Efficiency Policies

There are many types of policies and programs thathave been used in countries worldwide to improveenergy efficiency in the industrial sector.

The most effective way to improve industrial energyefficiency is through an integrated approach.

Individual industrial sectors committed to specific

improvements in energy intensity over a given timeperiod in exchange for governmental support in theform of financial incentives.


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The Way to Evolve

The CECAs Policy Research Team is focusing on

the use of sector agreements as an integrating energyefficiency policy for the industrial sector in China.

China is at a crossroads between the past, in which

the central government controlled energy use anddirected energy conservation policy.

The future in which a deregulated market, reduced

government involvement, and internationalcompetitive pressure following admission to theWTO will all influence industrial sector policies,including those affecting energy efficiency.


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Changes in the UK

Long term scheduling has been replaced with a gate closure

strategy (NETA) defining the capacity that will be on the

system, leaving NGT one hour to balance the system for

maintenance of transmission security standards.

Single vertically integrated utility had a clear vision of the

future provision of generation capacity is now determined by

companies entirely separate from the network owner or

operator.

The owner and operator with increased uncertainty for long-

term transmission investments and short-term security of thenetwork.


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R&D Strategy

Forecasting and planning with uncertainties.

Integration of renewables.

Demand side management.

Asset management.

Data handling.


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Forecasting and Planning with Uncertainty

In traditional power system, input data are assumed topossess a high degree of certainty.

Over last ten years most new generating stations have

used CCGT sets which could be built andcommissioned as little as 18 months.

New planning tools are needed to account for theseuncertainties.


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Integration of Renewable

Assess the effect of different mixes of distributed

sources in terms of their spatial distribution,

aggregate penetration level, mode of operation and

expected output fluctuations. A special requirement is the development of

improved planning tools and techniques for

predicting wind farm output from 2 days up to realtime.


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Demand Side Management

The concept of demand-side control is not new.

Demand side participation will play an important role

in future network operation and reinforcement in

view of the many uncertainties in networkdevelopments.

Novel methods and uses of demand side control are

needed.


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Asset Management

Power system plant is installed at different times and

is produced by different manufacturers.

The same type of equipment from two manufacturers

may have different operational characteristics andthey may have installed at different points in the

network.

Novel techniques with respect to replacement,maintenance and use whether individually or

collectively are required.


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Conclusions

Politicians ignored economic realities and basic riskmanagement & engineering skill.

Short term benefits have resulted in significanteconomic damage.

Many years of investment required to correct theproblems.

Deregulation hard to manage when there is a lack of

capacity. Utilities and regulators need to adapt to constant

change, as equilibrium does not seem to be attainable.


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Conclusions

Unbundling works, but details need to reflect local

conditions. Deregulation does not remove politics from power.

Energy policies are evolving to lead to a transition

from the physical chain to the information chain. In the physical chain, we talk about generation,

transmission and distribution.

In the information chain, it is about asset companies,serviced companies, trading hubs and risk managers.


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Thank you

Power Deregulation Policy Evolution

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