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Towards Output-Based Regulation

A Regulatory Perspective based on KPIs for Fostering Innovation

Luca Lo SchiavoDeputy director, Regulation Department, Infrastructure [email protected]

DISCERN Project – Workshop – Bruxelles, 28 Jan. 2016

Staff of the Regulatory Authority have the duty to dis claim in public that only personal opinions are presented when speaking in public at confer ences, workshops and seminars.

Ethical code of AEEGSI,10(3)

Summary

Luca Lo Schiavo, AEEGSI (Italy) 2DISCERN workshop 28.01.16

• Theoretical framework

• Output-based (classic): quality of service

• Input-based: smart grid pilot projects

• Output-based (advanced): smart grid roll out

• Synthesis

European Regulators recommendations (2010)

Perform societal cost-benefit assessment

Introduce output regulation: value for money of users

Distinguish grid-related versus market-related activities

Improve consumer awareness for energy use and market opportunities

Learn from best regulatory practices

Ensure stable regulatory framework and long-term return on investments

Decouple profits and volume for grid operators

Incentivise innovative solutions (demonstration pilots)

Adopt open protocols and standards for interoperability

Disseminate the results and lessons learned from the demonstration projects


The regulatory framework for network investments


Output-based vs Input-based incentives: a primer frame

OUTPUT-BASED

• e.g. Quality of Supply (from 2000)

• KPI used to define key outcome indicators

• KPI ought to be: reliable, clear and fair, trackable and auditable

• Output valuation is needed (based on estimates of avoided external-cost and/or CBA)

• May be used as stable regulation, however needs periodic tuning

INPUT-BASED

• e.g. Innovation (up to 2015)

• KPI used to select pilot projects

• Demonstration projects are evaluated ex-ante

• Incentive has nothing or little to do with KPIs

• Intended to be a transitional regulation: expected evolution towards output-based incentives


Summary






• Synthesis

An example of output-based incentive: QoS regulation

INCENTIVE REGULATION ADJUSTMENT FROM 1ST TO 2ND REGULATORY PERIOD

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TARGETS ACTUAL LEVELS

1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

1° REGULATORY PERIOD


REFERENCE STANDARDS

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REFERENCE STANDARDS

Example: URBAN AREAS

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REFERENCE STANDARDS

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REFERENCE STANDARDS

Example: URBAN AREAS

ReferencestandardsReferencestandards

),],([ avgENSttt PVATfQ −=±

Tt: targets (ex-ante, per district)

At: actual levels(ex-post, per district)

VENS: avg value of 1 hour interrupt. avoided for 1 kW(based on market survey - WTP)

Pavg: avg power of each district

Incentives for quality (year t)

At

Tt


Which KPIs are used in output-based QoS incentive regula tion


Monitored KPIs: 1. SAIDI (System Average Interruption Duration Index)2. SAIFI (System Average Interruption Frequency Index) and 3. MAIFI (Momentary Average Interruption Frequency Index)

From 1999 each indicator is monitored separately for:- voltage quality levels (T, HV, MV, LV)- causes (force majeure, users/3rd parties, DSO responsib.- and separately for planned and unplanned (not notified) interruptions

Regulated indicators: - from 2000: SAIDI (net of exceptional events) only MV+LV- from 2008: SAIFI+MAIFI (net except.events) only MV+LV

Data collected separately per district (300+) in order to avoid averaging of better and worse local situations

How KPIs are used in output-based QoS incentives


Ex-ante for 4 years targets are set (baseline)

−= %2;1max

12

1

j

k

j LivPart

LivObα

k: territ. density

)1(1,, jtjtj TT α−×= −

t0 1 2 3 4 … … … 12

Stdj,t [SAIDInet]

LivPart

LivObk

Tj,4

0TLivPart =

MaxQMin tj ≤≤ ,0%5 ,,, =⇒<− tjtjtj QAT

+×−= ∑

∈ 8760)( ,,,,

, ,domtjdomndomtjndom

Districtsj

tjtEncEncATQ tj

Ex-post distrib.tariff is adjusted each year t Qt (reward/penalty)

Aj,t

Qt [€]

Tj,t

-Min

+Max

[SAIDInet]

Outcome of output-based QoS incentives: overall effect s


Output valuation for QoS incentives (2nd reg. period 20 04-07)


DOMESTIC CUSTOMERS

Parameter Cdom

BUSINESS CUSTOMERS

Parameter Cndom

(BEST DISTRICTS) Below national ref.

7.2 €/kWh-ENS 14.4 €/kWh-ENS

(MEDIAN) From 1x to 3x nat.ref.


(WORST DISTRICTS) Above 3x national ref.


ENS: Energy Not Supplied; National reference (SAIDI-net): urban 25 min/cust/year, rural 60 min/cust/year

For further details: Bertazzi, Fumagalli, Lo Schiavo,CIRED (2005) paper n. 300

BASED ON A CUSTOMER SURVEY ON WILLINGNESS TO PAY (2003)

Outcome of output-based QoS incentives: closing the gap s


Outcome of output-based QoS incentives: C/B evaluatio n


13

Summary






• Synthesis

The Italian Regulator’s approach to demonstrative pilot s

• Demonstration pilot: real operations in real grid (no lab)

• Regulatory attention to both effectiveness (performance) and efficiency (cost): pilots are paid by all customers….

• Transparency of the rules: procedures, evaluation methods and criteria, etc., known ex-ante. KPI approach for CBA

• Knowledge development with the involvement and the support of the best expertise (RSE and Universities like Politecnico MI)

• Continuous monitoring in the medium and long term: cost benefit analysis for the whole life-time of the new components

• Output disclosure: because demonstration pilots are paid by all customers > results must be public (no patents)

• Replicability and dissemination of the best-practices


SMART POWER

SYSTEMS

DISTR. NETWORKAUTOMATION

DISTRIBUTEDGENERATION

VOLTAGEREGULATION

MICROGENERATION

active grid

ELECTRICVEHICLES

RECHARGINGINFRASTRUCTURE E-mobility

ELECTRONICMETERS

smart metering

MULTIUTILITYINFRASTRUCT.

DEMANDAGGREGATION

SMARTAPPLIANCES

DR & EE

SMARTDISPLAYS

DEMANDRESPONSE

LARGE SCALEINTERMITT.GEN.

wind integr.

STORAGESYSTEMS

storageV-2-G

SERVICES

Focus of pilotdemonstration projects

AEEG DECISIONS

292/06393/13631/13

CONSULT.416/15

AEEG DECISION 96/11POSITION 5/15

AEEG DECISIONS 39/10 – 12/11CONSULTATION 255/15

AEEG DECISION

5/10

AEEGDECISION

66/13

AEEGCONSULTATIONS 232/14 – 186/15


KPI approach for smart grid pilot projects evaluati on

Synthetic indicator IP used to assess ex-ante the expected performance of the demonstration projects

C

AjP

IP

m

ij

smart ∑=

⋅=

8760EIEI

P prepostsmart

−=

IP: priority index

Aj: project benefits [point score]

C: project costs [€]

P-smart: increase in DG-produced electricity / hour [MW]

EI-post: DG-produced electricity that can be injected in the network after the project in safe conditions [GWh]

EI-pre: DG-produced electricity that can be injected in the network before the project without reverse flow [GWh]

Aj: score for size, innovation, feasibility, replicability

Quantitative cost and mainbenefitindicator

Further benefits qualitative scoring


P-smart concept: hosting capacity in safe conditions

MV

HV

MVMV

LVLV

REVERSE POWER-FLOW

TIME: 1% of year Vcontrol

Psmart is the increase in DG-production (PDG) that can be connected to the grid in safe conditions (voltage, currents, frequency) thanks to smart investments on the grid

Passive network: NO flow from MV to HV

Smart network – latency 10-20 s remote voltage regulation

Smart network – latency 200 msremote intertrip (no islanding)*

Smart network – latency 200 ms: + storage (regulatory issues)

Min. Load

PDG

PDG= 0

Psm

art

* Very critical in Italydue to fast reclosure (400ms) for network automation


«in safe conditions for voltage, currents and frequency»

• Power modulation: modulating active power

Related to Current (thermal) limits > latency: minutesCostly solution due to loss of revenue for generators (not implemented)

• Voltage regulation: modulating reactive power

Related to Slow Voltage Variations > latency: some tens of secondsVery low-cost solution for voltage network constraints

• Intertrip: combined dialogue between DSO and DG in order to avoid inslanding in case of network fault and secure the system

Related to both Frequency perturbation and fast Voltage Dips > latency hundreds of millisec (from 2012 a local solution has been implemented)

• Keep alive: in case ICT layer is not available, DG rolls back in old setting in order to avoid risks (check every 1 second)


Dissemination activity of pilot projects


Acknowledgements

L’Autorità esprime profondo apprezzamento per il lavoro svolto e l’impegno profuso da tutte le persone coinvolte dalla sperimentazione. Nell’impossibilità di ringraziare individualmente, si desidera in particolare segnalare

• il personale delle imprese di distribuzione che ha seguito i progetti pilota tenendo i contatti con l’Autorità (Fiori e Francucci di A.S.SE.M., Pisciotta e Tallei di ASSM, Fasciolo, Lucchini, Martinazzi e Pluda di A2A Reti Elettriche, Carta, Liotta e Zendri di ACEA Distribuzione, Loperfidoe Paulucci di ASM Terni, Bianchin e Perron di DEVAL, Alagna, Consiglio, Di Lembo, Di Napoli, Lombardi, Massimiano e Petroni di ENEL Distribuzione),

• i professori e ricercatori universitari che hanno fornito contributi tecnici e scientifici sia in fase di valutazione che di disseminazione (La Scala del Politecnico di Bari, Borghetti dell’Università di Bologna, Pilo dell’Università di Cagliari, Delfino dell’Università di Genova, Pelacchi dell’Università di Pisa, Turri e Fellin dell’Università di Padova, Ippolito dell’Università di Palermo, Capone, Delfanti, Falabretti, Merlo, Olivieri del Politecnico di Milano),

• nonché altri esperti (Timò del CEI, Sica di FederUtility, De Nigris e Celi di RSE, Carlini e Giannuzzi di Terna, e Denti, Graditi, Noia e Pigini coinvolti come esperti nella fase di predisposizione dei progetti)

• e tutte le altre persone, anche delle imprese fornitrici di apparati e servizi, che sono state a vario titolo coinvolte nella realizzazione dei progetti e di cui non è possibile indicare qui i nomi

Allegato 1, documento di consultazione 255/2015/R/eel, 29 maggio 2015


Summary






• Synthesis

Output-based vs Input-based incentives: a synthesis

OUTPUT-BASED

• e.g. Quality of Supply

• Reliable and fair metrics: key outcome indicators that must be cleansed from out-of-control effects; authoritative and enforceable guidance for data recording and auditing

• Baseline (natural improvement trend): output based incentive should be related only to additional improvements on top of natural improvement trend (historically observable)

• Output valuationvalue of outcome should be assessed taking into consideration both customers view and societal welfare (CEER 2011 report compares VoLL values; Italy in the range 15 to 40 €/kWh-ENS)

INPUT-BASED

• e.g. Innovation (so far)

• Metrics not yet fully available however, regulator needs simple cost/benefit ratios, KPI and filter tools, in order to avoid “lenghtyproceedings” (differently from US)

• Demonstration projects “real networks, real voltages, real currents, real bills”; selectivity indexes for identifying critical network areas

• Incentive as extra-WACC +2% for 12 years on top of ordinary WACC

• Learning process evaluation and selection process, monitoring performance and dissemination of results; evolution in output-based regulation


Evaluating costs and benefits on a project basis…

“Many technical and economic features of the Smart Grid, Distributed Generation and Demand Response providediffuse benefits to the customers that are hard to put a value on.

[US] regulators must engage in lenghty proceedings to set methods of measuring the value and then utilities must administer them under the critical eye of regulators…”

P. Fox-Penner, Smart Power, 2010

OUTPUT-BASED REGULATION is the key progress towards «smart regulation»: efficiency and effectiveness


Smart distribution system functionalities (tested i n pilots)

Luca Lo Schiavo, AEEGSI (Italy) 25

1. TSO-DSO integrationMeasurement collection, DG production forecasting and data transmission towards TSO systems - better observability

5. Fast MV fault IsolationDetection on isolation of MV fault sections without the tripping of the breaker at the line departure(requires extra-performant tlc )

6. Electricity storageUsage of electrochemical storage as a mean for improving QoSand managing RES intermittency – further evaluation needed

2. Voltage ControlParticipation of MV Distributed Generation to Voltage regulation on MV feeders – higher hosting capacity

3. Active power modulationParticipation of MV distributed generation to ancillary services market (not yet disciplined for units below 10 MVA)

4. Anti – IslandingDetection of possible islanding condition on MV Network – no longer needed after local solution implemented in 2012

DISCERN workshop 28.01.16

Each functionality may hase different «complexity levels»


Caso Base Programma P3 Programma P3 + IRE

Linea Limite termico [MW]

Limite tensione [MW]

Limite termico [MW]


Aumento rispetto caso

base (%)


Limite termico [MW]

Aumento rispetto

caso base (%)

Carpinone 7.402 - 7.402 - 0% - - 0%

Sessano 7.647 - 7.647 - 0% - - 0%

Colle Breccione 11.594 - 11.594 - 0% - - 0%

Pesche - 7.258 8.658 8.658 19% 8.658 8.658 19%

Pescolanciano - 7.624 8.233 8.233 8% 8.233 8.233 8%

Fontecurelli - 3.296 - 4.406 34% 4.623 4.623 40%

Polverone - 4.519 - 5.365 19% 5.431 5.431 20%

Pescorvara 4.386 - 4.386 - 0% - - 0%

S. Domenico - 4.164 - 5.023 21% 5.512 5.512 32%

Santa Maria - 5.049 - 5.232 4% 5.532 5.532 10%

TOTALE [MW] - 31.91 - 36.917 16% 37.989 - 19%

VOLTAGE REGULATION

«Caso Base»: withoutany smart functionality

«Programma P3»: first level of complexity (no communication with DG)

«Programma P3+IRE»:highest level of complexity(with communication with DG)

A relevant benefit can be extracted evenat less complex levels


Recent thoughts for output-based incentives (255/2015)


Learning from pilots

Bal.Marketrules for DG

not ready

DSO revenues stillRAB-based

Detailed analysis of smart functionalities

Valuable results from pilots for some functionalities even without fast M2M

Without specific balancing market rulesfor DG, network users are not interested

but first results may be achieved by DSOseven without involving network users yet

New TOTEX approach envisagedfor eliminating perverse incentives

Output-based regulatory incentivesfor a few smart functionalities

High RES penetration

Selectivity of smart investments: priority in areas with higher level of RES

Still to be defined: financial supportfor «early bird» network users


Detailed analysis of smart functionalities (255/2015)


Functionality Actors Even w/o communic.?

Class of M2M services

1. Observability(TSO-DSO data exchange)

DSO, TSO

Yes (up to a point)

Monitoring

2. Voltage control on MV networks

DSO, DG

Yes(up to a point)

Control

3. Active power modulationfor distributed generation

DSO, DG

No Control

4. Anti-islanding(fast inter-trip)

DSO No Protection

5. Adv. network operations(logical faults selection)

DSO, users

No Protection

6. Electricity storageoperated by DSO

DSO Yes Control


KPIs used for output based incentive of smart grid roll out


1. Observability(TSO-DSO data exchange)

2. Voltage control on MV networks

Benefits Less reserve due to betterforecast; less emergencyaction due to betterknowledge of system

Higher hostingcapacity: deferredinvestment due to existing capacity

Outputindicators

MW of observed DG (under «smartened» PS)

MW of HV/MV transformation power

Reward 20 €/MW 250 €/MVA

Priority Areas with huge RES(RPT > 1%)

Areas with huge RES(RPT > 1%)

Features Real-time data exchange(every 20 sec)

Real-time tap changerregulation


Further AEEGSI proposals: storage (255/2015/R/eel)


Are the rules enabling DG to take part to the ancillary service market defined

Is the storage applicationconnected to MV network?

no

yes

yes

Is the storage application belowthe minimum power threshold?

No (LV)

A simplified CBA methodologyis envisaged for LV applications no

NOT ALLOWEDyes

ALLOWED

Is the DSO able to demonstrate, through a CBA case (ex-ante approved methodology), the

cost-effectiveness of this storage application?

yes

no


Summary






• Synthesis

Output-based vs Input-based incentives: a synthesis

OUTPUT-BASED

• e.g. Quality of Supply

• Reliable and fair metrics

• Baseline

• Output valuation (customer WTP)

INPUT-BASED

• e.g. Innovation (so far)

• Metrics not yet fully available

• Demonstrative pilot projects

• Incentive as extra-WACC


• Learning process: evolution in output-based regulation


Important steps ahead in «smart regulation»…

1. Output-based Regulation is the key step towards«smart regulation» as it combines efficiency and effectiveness


2. Selective priorities are needed to ensure value-for-money deployment of smart infrastructures

3. Cost/benefit analysis provides ground for system-wide incentives that transfer part of positive externalities to DSOs

4. Learning process is the way to build robust regulation, due to the uncertainty and risks of new technology applications

5. Flexibility is still a target that requires new balancingmarket rules, standardisation and advanced TLC services


Conclusions: fully in line with ACER/CEER “Bridge t o 2025” conclusionsRegulatory framework must adapt to the new challenges:

• Enable DSOs to take on the role of a neutral market facilitator and avoid DSO foreclose competition

• Accompany the development of new flexibility markets (on both sides: demand as well as distributed generation)

• Review distribution network tariff structure in order to develop focused incentives for smarter networks

• Clearly define DSOs’ and TSOs’ respective roles, establishing coordination requirements (system security)

• Enable customer awareness on his/her own energy footprint through smart metering data on consumption

Towards a future-proof power system…


Thank you for your [email protected]

www.autorita.energia.it

www.energy-regulators.eu

Please visit:

Suggested reading on the Italian caseCHANGING THE REGULATION FOR REGULATING THE CHANGEInnovation-driven regulatory developments in ItalyICER Distinguished regulatory scholar Award 2012http://www.iern.net/portal/page/portal/IERN_HOME/ICER_HOME/ABOUT_ICER/Distinguished_Scholar_Award_2012


Back-up: EEGI KPI structure


• Level 1: “Overarching KPIs”

‐ A.1 Increased network capacity

‐ A.2 Increased system flexibility

• Level 2: “Specific KPIs”

‐ B.1 Increased RES & DER hosting capacity (DSO+TSO)

‐ B.2 Reduced energy curtailment of RES and DER (DSO+TSO)

‐ B.3 Power Quality and Quality of Supply (DSO+TSO)

‐ B.4 Extended asset lifetime (DSO+TSO)

‐ B.5 Increased flexibility from energy players (DSO+TSO)

‐ B.6 Improved competitiveness of the electricity market (DSO+TSO)

‐ B.7 Increased hosting capacity for Electric Vehicles and other new loads (DSO)

• Level 3: “Project KPIs”

Back-up


• M2M communication services for smart grid

Defining M2M services – overall issues

Communication Technologies

• Purpose: avoid the creation of specific niche technologies

Technologies open, interoperable, for general use

Communication Services• Purpose: ensure the maximum level of competition on prices

and the flexible management of communication infrastructure

Services, offered by different suppliers/operators, simple to switch even using different technologies

Experience gained during pilot schemes• standardising the TLC service needed in order to minimize

the cost – neutral regulation vs make/buy (Totex approach)


Defining M2M services – Focus on vertical applications

Analyze the development of

smart city, shared

multi-sector M2M telecom infrastructures

Support the large-scale

roll out of electricity

smart grid through

widespread adoption of

M2M services

Develop electricity

metering-related new, added-value

M2M services

M2M overall features


Source: AEEGSI submission No 457/2014 to AGCOM survey on M2M services


M2M services for electricity Smart Grids - Features

• Costs of M2M smart grid services have to become compatible with typical costs of distributors

• Solutions based on services provided by telecommunications operators on shared infrastructures are possible, even though standard IEC 61850 still requires customisations

• Focus on service performance : security reasons related to challenging time constants in the electricity sector

• Protection-driven applications are the most critical in terms of quality requirements and determine the technical solution to be adopted in most cases

Define a standard ‘no-frills’ service for smart grids that could suit most cases


M2M services for multi-sector smart metering (��Smart cities ) and Hybrid architectures • Radio frequency band around 169 MHz (point-to-multipoint)• Mobile network (point-to-point architecture)On-air SIM and new protocols: • Changing operator without physically replacing the SIM

(ensuring competition)• Cellular IoT: a low-cost, new protocol for fixed objects Sharing infrastructure • Encourage M2M solutions allowing the integration of several

end-use services, sharing the same TLC infrastructure

Coordination of the different competing services (e.g. priorities) and review of access conditions to 169 MHz new networks


Smart city: multi-utility smart metering pilots

• Wide range of public services involved: smart city concept

• Focus on sharing the telecom infrastructure fostering efficiency in smart metering costs: to this purpose, in each project a neutral third-party operator is requested

• Dissemination: reporting to the Regulatory Authority, full disclosure on the AEEGSI website

• Openness

• Communication standards: non-proprietary

• Full disclosure of architecture, results and costs

• Customer awareness

• at least web-based application for customer front-end

• some pilots with more advanced in-home devices


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