1 Session 23 Module M Electricity markets & public policy A necessary coexistence Prof. Ignacio J. Pérez-Arriaga Engineering, Economics & Regulation of the Electric Power Sector ESD.934, 6.974 2 Our energy model is unsustainable  The current energy model cannot provide energy services that  are compatible with the expected growth in population & welfare in the medium & long-term,  with a reasonably equitable universal access  and with a tolerable environmental impact  The problems  non equitable access  tight coupling of economic development & energy demand growth  very high dependence of fossil fuels  key energy resources are limited & geographically concentrated2 Consider climate change…  There is widespread agreement that a transition to a future economy with a drastic reduction in GHG emissions is needed to stabilize GHG concentration at levels such that the implications of climate change could be kept under “reasonable” limits 3 Compared with NO POLICY What would we buy with STABILIZATION of CO2 at 550 ppm? http://web.mit.edu/globalchange Courtesy of the MIT Joint Program on the Science and Policy of Global Change. Used with permission.3 But this is an arduous task & it will not happen by itself  An emission path with good chances of meeting the <2ºC target: “in order to achieve a stabilization level of 450 ppmv CO2 eq, emissions from Annex I Parties would need to be between 25 per cent and 40 per cent below 1990 levels in 2020, and between 80 per cent to 95 per cent below 1990 levels in 2050.” Source: IPCC (2007) 5 Energy policy in a low-carbon economy  A sustainable economy has to be based on a sustainable energy model, where the power sector is a key component  The current regulatory paradigm of the power sector has to be reconsidered in this new context, where public energy policy will play a major role 64 7 Limitations of energy markets (1 of 2)  Advantages of markets are well known  Energy markets are successful if structure is right & there are no interferences  although they are complex & may go wrong in many ways  But there are limitations  Network activities are natural monopolies  (perhaps) Adequate margin of installed generation supply may require some regulatory intervention 8  … and more limitations (of interest here)  Energy markets may ignore sustainability concerns  long-term availability of present energy sources  energy dependence / diversification of fuels  need to promote technologies that are suitable for long-term sustainability objectives since energy prices fail to fully internalize these concerns. Why?  Technical /practical difficulties in implementation  high energy prices are not politically acceptable  lack of long-term regulatory commitment Need to provide energy markets with some long-term vision Limitations of energy markets (2 of 2)5 9 What could (but maybe should not) be regulated?  Support schemes for renewable energy penetration & cleaner fossil technologies  Targets for energy efficiency & savings & how to achieve them  Support schemes to improve the security of electricity & gas supply  Development of gas & electricity network infrastructures  Priorities & resources for energy R&D  Targets for carbon allowance emissions  Implementation guidelines resulting from the debate on future nuclear investments The questions to be addressed  In the context that can be anticipated of strong sustainability & security oriented policy measures 1. How to improve / redesign market regulation to facilitate that these policies reach their objectives efficiently? 2. How to make these policy measures compatible with the functioning of electricity markets? 10 See the special issue of The Energy Journal “The future of electricity: Papers in honor of David Newbery”, 2008, for a detailed elaboration on these issues6 Some premises (1 of 3)  Creating well functioning competitive wholesale & retail markets for electricity is very challenging, both technically & politically, & cannot be applied anywhere  Where properly implemented, wholesale markets have led to improved performance & have mobilized significant investments  Sound incentive-based regulation of distribution companies has reduced costs without impairing quality of service  Despite some failures & implementation difficulties, the general trend in most liberalized power sectors is to proceed with the process of reforms 11 Some premises (2 of 3)  There is a serious (& justified) global concern about climate change & this will affect energy policy & power sector investments profoundly  intense political oversight & interference is anticipated  Security & sustainability will have at least the same priority as efficiency in the regulatory design  New & emerging clean technologies will be crucial in attaining a sustainable power system model, but their development & commercial deployment will typically need regulatory support 127 Some premises (3 of 3)  It is anticipated a large penetration of renewable &/or intermittent &/or distributed generation in many power systems  The availability of communication & control technologies plus current trends in regulation & consumer behavior signal a strong future active demand response  Political developments, economic rationality & network reinforcements lead to an integration of existing power systems & markets into larger entities 13 The regulatory context for clean energy8 Advancing the conclusion “A compelling vision, backed up by precise, simple, clear policy, needs to be implemented if larger institutions and investors are to create the argument internally that a greater proportion of the balance sheet needs to be available for sustainable energy” Source: Chatham House, “Unlocking finance for clean energy”, 2009, www.chathamhouse.org.uk An adequate regulatory context for clean energy  For the most part the market for clean energy is policy-driven (for a good reason)  In a policy-driven market regulation itself is a risk  Therefore, to unlock finance for clean energy there is a need for “investment grade” policy 169 Policy needs to be “loud, long & legal”  Loud  Policy instruments make a difference, so that investments in clean energy become commercially