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POWER SYSTEMS
O N L I N E G R A D U AT E E D U C AT I O N
CO MP LI MENTARY WEBI NA R SER I ES

Learn about energy policy, future delivery, and best practices from our subject matter experts.
Register to gain access to all three webinars.
CLICK HERE TO REGISTER

POWER SYSTEMS SERIES | ON-DEMAND WEBINAR
US Energy Policy: Trends and Results
Presenter: Mike Ahern, Direct of Power Systems, WPI
HVDC and FACTS Devices: Future of Power Systems
Presenter: Dr. Edvina Uzunovic,
Associate Director of Power Systems and Adjunct Professor, WPI
Energy Management Best Practices and Career Opportunities
Presenter: Will OBrien, Consultant, WPI Center for Sustainability in Business
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LIGHTBULB IMAGE LICENSED BY INGRAM PUBLISHING
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cover
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www.ieee.org/power
18
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The Green Impact

By Jos Pablo Chaves-vila, Klaas Wrzburg, Toms Gmez, and Pedro Linares
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Nicolai Schlag, Gabriel Kwok, Nancy Ryan, Ren Orans, and Rod Frowd
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Digital Object Identifier 10.1109/MPE.2015.2416115
july/august 2015
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IEEE power & energy magazine
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President, Olken Group, Inc
IEEE Periodicals/Magazines Department
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245 East 19th Street #20K
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IEEE prohibits discrimination, harassment, and bullying. For more information,
visit http://www.ieee.org/web/aboutus/whatis/policies/p9-26.html.
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IEEE Power & Energy Magazine

IEEE Power & Energy Magazine (ISSN 1540-7977) (IPEMCF) is published bimonthly by the Institute of Electrical and
Electronics Engineers, Inc. Headquarters: 3 Park Avenue, 17th Floor, New York, NY 10016-5997 USA. Responsibility forthe
contents rests upon the authors and not upon the IEEE, the Society, or its members. IEEE Operations Center (for orders, subscriptions, address changes): 445 Hoes Lane, Piscataway, NJ 08854 USA. Telephone: +1 732 981 0060, +1 800 678 4333.
Individual copies: IEEE members US$20.00 (first copy only), nonmembers US$80.00 per copy. Subscription Rates:
Society members included with membership dues. Subscription rates available upon request. Copyright and reprint permissions: Abstracting is permitted with credit to the source. Libraries are permitted to photocopy beyond the limits of U.S.
Copyright law for the private use of patrons 1) those post-1977 articles that carry a code at the bottom of the first page,
provided the per-copy fee indicated in the code is paid through the Copyright Clearance Center, 222 Rosewood Drive,
Danvers, MA 01923 USA; 2) pre-1978 articles without fee. For other copying, reprint, or republication permission, write
Copyrights and Permissions Department, IEEE Operations Center, 445 Hoes Lane, Piscataway, NJ 08854 USA. Copyright
2015 by the Institute of Electrical and Electronics Engineers, Inc. All rights reserved. Periodicals postage paid at New
York, NY, and at additional mailing offices. Postmaster: Send address changes to IEEE Power & Energy Magazine, IEEE
Operations Center, 445 Hoes Lane, Piscataway, NJ 08854 USA. Canadian GST #125634188
Printed in U.S.A.
IEEE POWER & ENERGY SOCIETY (PES)
The IEEE Power & Energy Society is an organization of IEEE members whose principal interest is the advancement of the science and practice of electric power generation, transmission, distribution, and utilization. All members of the IEEE are eligible for membership in the Society.
Mission Statement: To be the leading provider of scientific and engineering information on electric power and energy for the betterment of society, and
the preferred professional development source for our members.
Officers
Standing Committee Chairs
M.M. Begovic, President

D. Novosel, President-Elect
F. Lambert, Vice President, Chapters
K.S. Edwards, Vice President, Technical Activities
P.W. Sauer, Vice President, Education
M. Crow, Vice President, Publications
T. Mayne, Vice President, Meetings
H. Louie, Vice President,
Membership & Image
R. Podmore, Vice President, New Initiatives/
Outreach
C. Root, Treasurer
L. Bertling-Tjernberg, Secretary
N.N. Schulz, Past-President
D. Morrow, Awards & Recognition

N. Nair, Constitution & Bylaws
C. Root, Finance & Audit
N. Schulz, Nominations & Appointments
K. Butler-Purry, Power Engineering Education
W.K. Reder, Scholarship Plus
IEEE Division VII Director

W.K. Reder
IEEE Division VII Director Elect

A. Rotz
Region Representatives
M. Chaganti, D. Diaz, T. Hiemer,
N. Logic, J. Skillman, E. Uzunovic,
United States
M. Armstrong, Canada
J. Milanovic, Europe, Middle East, & Africa
N. Segoshi, Latin America
L. Goel, Asia & Pacific
Governing Board
Members-at-Large
T. Burse, C.Y. Chung, J. Giri, L. Ochoa
PES Executive Director

Patrick Ryan, +1 732 465 6618,
fax +1 732 562 3881, e-mail p.ryan@ieee.org
________
magazine
Chapter Representatives
B. Allaf, W. Almuhtadi, A. Bakirtzis,
R. Cespiedes, C.Y. Chung, C. Diamond,
D. Drumtra, B. Gwyn, J. Khan,
I. Kuzle, J.C. Montero, J. Morelos,
R. Nagaraja, P. Naidoo, N. Nair,
P. Pabst, G.N. Taranto,
D. van Hertem, Z. Zakaria
Chapter Committee Chairs

S. Chakravorti, Chapter Secretary
N. Mariun, Chapter/Section Relations
C. Diamond, Electronic Communications
E. Carlsen, Awards & Resources
Y. Chen, Distinguished Lecturer Program
C. Diamond, Chapters Web site
Membership & Image

Committee Chairs
A. St. Leger, Young Professionals
A. Bonthron, Platinum
J.C. Montero, Social Media
H. Louie, Web Site Development
S. Bahramirad, Women in Power
W. Bishop, Marketing
Technical Council
K.S. Edwards, Chair
M.P. Sanders, Vice-Chair
F. Rahmatian, Secretary
J.H. Nelson, Past-Chair
M. Maytum, Web Master
Technical Committee Chairs

K. Mayor, Electric Machinery
M. Basler, Energy Development & Power
Generation
T.C. Champion III, Insulated Conductors
G. Ballassi, Nuclear Power Engineering
D. Niebur, Power System Analysis,
Computing, & Economics
D. Nordell, Power System Communications
P. Pourbeik, Power System
Dynamic Performance
F. Rahmatian, Power System Instrumentation
& Measurements
A. Conejo, Power System Operations
M.L. Chan, Power System Planning
& Implementation
M. McDonald, Power System Relaying
R. Tressler, Stationary Battery
M. Etter, Substations
R. Hotchkiss, Surge Protective Devices
T.W. Olsen, Switchgear
D. Platts, Transformers
W.A. Chisholm, Transmission & Distribution
Technical Council
Coordinating Committees
N. Hadjsaid, Emerging Technologies
S. Pullins, Intelligent Grid
D. Alexander, Marine Systems
R.J. Piwko, Wind & Solar Power
Technical Council
Standing Committees
J.H. Nelson, Awards
M.P. Sanders, Technical Sessions
F. Rahmatian, Organization & Procedures
T. Burse, Standards Coordination
july/august 2015
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New Features and Capabilities

Significantly improved dynamic simulation performance
Generic C-Interface for controller models with automatic DSL to C converter
General improvement of calculation speed (new enhanced solvers
and improved data structures)
New and flexible Heatmap background colouring scheme
Background Maps representation automated via mapping server interface
(e.g. Open Street Map)
Navigation pane facility
Improved Python scripting module
New Transmission Network Tools, featuring:
PV Curves Calculation tool for contingency constrained voltage stability analysis
Calculation of Power Transfer Distribution Factors
Transfer Capacity Analysis tool
Enhanced Distribution Network Tools, including improved

Voltage Profile Optimisation
Various improvements in Power Quality and Harmonic Analysis
(e.g. K-Factor calculation of transformers)
Enhancements in Reliability Analysis, now supporting further failure models
New and enhanced modelling capabilities
OpenStreetMap contributors
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New Study Case Overview
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Mel Olken
facing new paradigms

changes abound in the worldwide power sector
OUR GUEST EDITOR HUGH

Rudnick, who proposed the issues
theme to the IEEE Power & Energy
Magazines Editorial Board at its 2014
meeting, begins his introductory column by pointing out that we are facing new paradigms in the worldwide
power sector. These paradigms affect
every aspect of the system, including the technologies that exist today
coupled with environmental factors,
renewables, demand response, and
regulatory concerns, among others. The
challenges are global, but the responses
from around the globe reflect conditions
that are presentas well as anticipated
in different parts of the world. As a result,
there is a crying need for innovation to
create logical, workable electricity markets directed toward specific needs and
requirements.
A Critical Global Subject

The issues six feature articles focus
both on overall surveys of the landscape and on specific areas. We offer
views of what is ongoing and planned
in the European Union, Australia,
Great Britain, and California, in addition to an overview of challenges faced
and an article focused on issues related
to distribution pricing and smart grid
applications. The feature articles are
introduced in detail in the Guest Editorial column.
Hugh, who has been a stalwart contributor and supporter of our publication, has produced an informative issue with global coverage of a critical
Date of publication: 25 June 2015
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of president-elect (Erich Gunther,

Bruno Meyer, and Saifur Rahman)
DQG WZR TXDOLHG FDQGLGDWHV IRU
each of the positions of secretary
(Jessica Bian and Henry Louie) and
treasurer (Juan Carlos Miguez and
&KULVWRSKHU5RRW7KHFROXPQZLOO
introduce each of the candidates
with photos, biographies, and candidate statements. Given the importance of these elections, this colDIGITAL STOCK
umn is also required reading for all
subject. Hugh, thank you once again PES members.
for this contribution.
Required Reading
for Members
Our issues Leaders Corner column,
authored by Society and technical council leaders, is of great importance to the
future of the IEEE Power & Energy
Society (PES). It represents the second
part of the reorganization plans directed
at realigning the PES technical committee structure to reflect todays electric power industry and the emerging
technologies that have arisen and are
foreseen. These subjects will be a point
of discussion at the upcoming General
Meeting, where member input will be
sought and talked about. Also included in the column is a timetable with
deadlines to help us reach these goals.
This column is required reading for
all PES members.
Society News focuses on the
forthcoming PES elections where we
will be selecting our 20162017 PES
RIFHUV 7KH HOHFWLRQV FRPPHQFLQJ
in August, will be contested by three
TXDOLHG FDQGLGDWHV IRU WKH SRVLWLRQ
Surveying the Past,

Looking to the Future
An unusual (for IEEE Power & Energy
Magazine) History column is offered
this issue. The subject is the evolution of
the loss of load probability (LOLP) index that has been a industry standard for
the past 50 years, beginning with a bibliography presented by Roy Billinton at
the 1966 Winter Power Meeting in New
York City. The column, written by Billington and Kelvin Chu and edited and
introduced by History Editor Carl Sulzberger, offers multiple references and
concludes with pertinent supplementary
commentary as background.
In his guest editorial, Hugh Rudnick has introduced the closing In My
View column. But allow me to also
offer some brief commentary about a
piece that offers cogent arguments for
the imposition of market-driven emission taxes. I hope that you make certain
to read this column, and I look forward
to reader commentary.
p&e
july/august 2015
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leaders corner
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Miriam Sanders, Ken Edwards, Damir Novosel, and Miroslav Begovic
member feedback wanted

a continuation of PES technical committee updates
ONCE AGAIN THIS COLUMN IS

coming to you, the reader and IEEE
Power & Energy Society (PES) member, from the PES president, presidentelect, vice president of Technical Activities, and Technical Council vice-chair
to update you on the restructuring of the
PES technical committees (TCs) and
technical activities.
As noted in our previous column
Our Technical Committees: How
They Can Best Serve Our Membership, in the May/June 2015 issue,
groundwork has been laid for realigning the TCs to the changes that are
happening in the power and energy industry with new technologies and their
applications and impact. The Technical Council has formed the Committee Structure Task Force, led by Doug
Houseman, to make restructuring recommendations. Based on those recommendations, the Technical Council
formed the Committee Structure Task
Groups (CSTGs), currently in the proFHVVRIUHYLHZLQJVSHFLFDUHDVRIWKH
proposed structure changes with feedback from TC members. Our goal is to
have a transparent review process of
the proposed structure and to include
membership comments in the process.
This is an important and far-reaching
endeavor, and it behooves every PES
member involved in technical activities to
provide his or her views on the changes
being proposed or discussed. The end
goal is to eliminate the shortcomings of
the system we have had in the past and to
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prepare for the changes brought about by

new technologies and the way we will all
do business. Some of the salient features
of the structural changes being evaluated
are outlined in the following text.
,Q WKH SUHVHQW FRQJXUDWLRQ WKHUH
are 21 TCs encompassing traditional
subjects such as transmission and distribution, transformers, switchgear, relaying, communications, substations, operations and planning, battery storage,
and energy development, as well as coordinating committees addressing wind
and solar power, intelligent grid, marine
systems, and emerging technologies.
But through technical council review (as described in the previous
Leaders Corner) and three surveys
conducted with the TCs, several areas
of no coverage or weak coverage were
exposed. Some of those areas are cyber and physical security, microgrid
systems and operations, direct current
systems (although related components
have been covered), customer premise
(such as home area networks), markets,
and environmental aspects. In addition, several subjects, such as communications, are covered across several
committees but require improved coordination.
So the proposal by the task force
was to combine several coordinating
committees, redistribute subject matters among them, and create new committees where needed. Two coordinating committees (Intelligent Grid and
Emerging Technology) were combined,
and the Wind and Solar Coordinating Committee was folded into a new
Energy Development Committee. Furthermore, several TCs were merged

with existing or new TCs, and several
were renamed. This resulted in 18 coordinating and TCs as shown below. (Note
that those marked with an asterisk indicate no change.)
Proposed Coordinating
and TCs
Intelligent Grid and Emerg-
ing Technologies Coordinating

Committee
Marine Systems Coordinating
Committee*
Conductors
Electric Machinery*
Energy Development
Energy Storage and Stationary
Battery
Grid Communications and Cyber Security
Nuclear Power Engineering*
Power System Analysis Methods
Power System Dynamic Performance*
Power System Planning and Operations
Smart Buildings, Loads, and
Customer Systems
System Protection
Substations
Surge Protective Devices*
Switchgear*
Transformers
Transmission and Distribution.
These changes to the names and total number of committees will require
updating the scope of existing committees and restructuring the subcommittees
july/august 2015
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and working groups to accommodate

WKHFKDQJHVDQGUHHFWWKHVFRSHVRIWKH
merged committees as well as anticipated
changes in technology.
Smart Buildings, Loads, and Customer Systems is a new committee focusing
on an evolving area of end uses, load
control, and demand response, as well as
home and building energy management
networks. PES is excited to bring this
new area into focus for our members.
We should emphasize that these
changes are not being arbitrarily introduced: they are the result of many
meetings and deliberations of the leadership of PES Technical Activities, and
WKH\ UHHFW WKH SUHYDLOLQJ RSLQLRQV RI
those experts who are currently shaping the activities and their many consequences. However, that is not a guarantee of the best outcome, and we would
like to use this opportunity to attract
our members attention to the complete
set of changes (which will be discussed
at the General Meeting in Denver in

July 2015 and will appear on the Web
site). Your comments and opinions will
help us formulate the end result, which
ZRXOGWUXO\UHHFWWKHQHHGVDQGZLVKes of the majority of PES members.
Another area of interest is the formation of the Grid Communications and
Cyber Security Committee, which takes
the existing Power Systems Communications Committee and adds physical and
cyber security to its scope, while bringing in several subcommittees from the
Substations and Power Systems Relaying Committees that address communication technologies. This group is being
led by Roger Hedding with assistance
from Dan Nordell and Craig Preuss.
Power Systems Planning and Implementation is proposed to be combined
with Power Systems Operations to create
one area of focus for the overall operations of the power systems, including economics from the Power Systems Analysis,
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Computing, and Economics Committee.

The Power Systems Analysis, Computing, and Economics Committee will be
renamed the Power System Analysis
Methods Committee. This effort is being
led by Hong Chen and M.L. Chan.
While much work has been put in by
our volunteers such as yourself, it is still
QRWQDOL]HG:HQHHG\RXULQSXW$3(6
Web site, which has more details on the
recommended changes, has been established for your input. We will then take
that input and include it in our further restructuring process.
Furthermore, during the 2015 PES
General Meeting in Denver, we will be
holding town hall meetings to personally hear your feedback. Please look for
this in the schedule.
Our process to include your input and
QDOL]HUHVWUXFWXULQJLVGHVFULEHGEHORZ
Inform the PES membership about
the status and ask for feedback using PES media.
_________________
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july/august 2015
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rThe Committee Structure Web

site will be set to provide information and collect feedback
(by end of June 2015).
rTown hall meetings will be
held at the PES General Meeting to inform the membership
in person and collect feedback
(July 2015).
rThe PES Membership provides
feedback on the PES Web site
(by 28 August 2015).
rThe PES staff collects and
summarizes the feedback for
input to the CSTGs (by midSeptember 2015).
Based on membership feedback,
the CSTGs will update the proposal and submit it to the PES
Technical Council/TCs, the LongRange Planning Committee, and
the Governing Board for review.
rThe restructuring proposal
will be updated (by the end of
October 2015).
rThe updated proposal will be

reviewed by the PES Technical
Council/TCs, the PES LongRange Planning Committee,
and the Executive Committee
(by the end of November 2015).
The Committee Structure Task
Force will incorporate these
comments (by the end of 2015).
Implement the issue resolution
process in cooperation among
the PES Technical Council, the
Long-Range Planning Committee, and the Governing Board
to review and vote on the document. All approvals will be with
a 2/3 majority affirmation.
rThe proposal will be voted
on during the Joint Technical Council and Long-Range
Planning Committee meeting
(January 2016, in conjunction
with the Joint TC Meeting).
rThe PES Governing Board will
meet to vote on the proposal in
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January 2016 (in conjunction

with the Joint TC Meeting).
Update PES membership about
the status using the PES media
and ask for the membership to
approve the changes (by the end
of March 2016).
If approved, start implementing
this new structure (April 2016).
Hold a town hall meeting in
conjunction with the 2016 PES
General Meeting to further inform the membership about the
changes (July 2016).
The proposed time line and process
is tentative and, just like everything
HOVH VXEMHFW WR FKDQJHV DQG PRGLFDtions, including incorporating your
feedback. We would like to offer our
assurances that every effort will be extended to evaluate and incorporate all
constructive comments and suggestions
received during the process of updating
the TC restructuring proposal.
p&e
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guest editorial
magazine
Hugh Rudnick
economics of electricity
the market impacts of developments in supply
AS THE FIRST ARTICLE IN THIS

issue indicates, electric power sectors
worldwide have entered a new era and
face many unprecedented options that
transcend generation, transmission,
distribution, and demand, creating
conditions that threaten the traditional
foundations of those sectors. Increasing environmental emission restrictions on fossil fuels, the massive arrival
of intermittent renewables, low-cost
natural gas and combined cycle generation revolutionizing energy prices,
distributed generation transforming
consumers into prosumers, demand
response and smart grid and metering
extending, innovations already being
explored in regulatory approaches to
drive electricity marketsthese are
just a few of new developments impacting the power sector.
With that framework in mind, we
contacted authors from all over the
ZRUOGWRUHHFWRQWKHVHGHYHORSPHQWV
DQGVKDUHVSHFLFH[SHULHQFHVLOOXVWUDWing how different countries and states
are reacting to them. Preferably, we
wanted to answer questions such as:
How will these changes affect
electricity prices to final consumers in the long term?
How will they influence the remuneration of the current conventional generation and networks?
What changes may take place in
the way businesses develop?
Which are the primary challenges to market design?
12
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The In My View column, by the

Raymond Plank Professor of Global
Energy Policy at Harvard University,
William HoganTXHVWLRQVWKHSROLF\DSSURDFKWKDWKDVEHHQFKRsen around the globe to
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that solar levelized costs
for 2019 entry would be
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advanced gas combined
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out-of-market subsidies. He looks at
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and environmental regulations. He argues that it will take future generations
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to achieve a 50% renewable grid in
Electric
power sectors
worldwide
have entered
a new era and
face many
unprecedented
options.
july/august 2015
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California by 2030, with high wind and

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risk of stranded assets than under invest

and considerably constrain the available
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by Furong Li, Jose
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GLOBALLY, POWER SECTORS HAVE ENTERED AN ERA

of unprecedented optionality that transcends supply, transport, and
demand. Renewables are increasingly penetrating power systems;
greater efficiency in lighting has been achieved; manufacturing
capability for energy storage technologies is expanding, smart
grid technologies have evolved, and emissions technology has
advanced; energy efficiency and demand response adoption rates
are rising; and distributed resources are increasingly competing
with central station supply even as central station technologies
have themselves become more efficient and diverse. Today, the
savvy prosumer has a choice between utility supply and self-supply or can opt for a combination of both. Just as important, innovative supply, transport, and demand options have led to an emerging array of complementary policy and regulatory approaches.
Thus, traditional utility business models face the threat of revenue erosion from both reduced wheeling of energy through utility
assets and overall lowering of energy demand. Traditional central
station power generation also faces greater revenue risk as increasing renewables penetration having no, or only minimal, marginal
costs deflate spot prices. Competitive power market structures have
led to greater transparency in price formation for various products:
day-ahead energy prices, real-time prices, reserves and regulation
prices and shortages, congestion and basis risk differentials, marginal-loss prices, and capacity prices. Because wholesale markets
alone as currently structured are unable to factor in revenues for
renewables and energy efficiency to project profitablility and economic feasibility, many out-of-market financing optionssubsidies, tax credits, in-feed tariffs, and othershave been introduced
to make doing so more feasible.
The challenge is adapting exising utility business models and
wholesale market structures for future technology innovations
as well as a vast array of policy and regulatory movements.
An Era of
Many Options
By Randell Johnson
18
magazine
1540-7977/152015 IEEE
july/august 2015
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Future energy
planning must
take into account
unprecedented
numbers of options.
This article looks at
how the creative destruction engendered by
great innovation has historically impacted electricity rates and pricing models
how new options for the grid are influencing
electricity prices today
why innovations in energy transportation will
affect future pricing models.
Also discussed are macroeconomic power sector futures,
evolution in planning processes, wholesale power market structures, shifts in the fossil fuel markets, and the
effects of environmental regulations on energy pricing.
Creative Destruction Engendered

by Great Innovation
Creative destruction is a term in economics describing
the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new
one, according to J.A. Schumpeter.
For example, humans have a basic need and desire to
control lighting beyond the illumination from the sun.
So we marvel at the innovation that Pearl Street Station
IMAGE LICENSED BY GRAPHIC STOCK, LIGHTBULBIMAGE LICENSED BY INGRAM PUBLISHING
represented in 1882a power facility fi red by coal to
supply electricity to incandescent lamps for lighting,
shown in Figure 1. Incandescent lamps were superior to the kerosene lamps then in common use because the
power generation and the transmission and distribution required for electric lighting are more cost effective
and cleaner than the former alternative: producing oil to be refined as kerosene, which then had to be transported via rail or pipeline for distributing, packaging, and burning in lamps.
Todays lighting technologies are superior to the incandescent lamps; they have a greater life span, consume
much less than incandescent bulbs for a similar light output, and provide short-term marginal cost benefits in
that, for example, less peak demand of electricity supply is required to power a city. While purchase costs for
modern lighting technologies may be more than incandescent lamps, manufacturing learning rates still reduce
the overall cost, and greater lighting efficiency also has broad benefits, reducing requirements for supply,
transport, and distribution as as a fraction of total peak megawatt (mW) and annual lighting energy requirements. This means fewer assets financed via utility rate cases, reduced emissions of burning fossil fuels for
lighting, and concurrent benefits of reduced operational costs.
In fact, however, transformation to more efficient lighting was fairly slow in the years after the Pearl
Street Station went into operation. Over the last century or so, we have witnessed many gradual changes in
the various power sectors:
the monopolization of utility franchises (John D. Rockefeller of Standard Oil pioneered unregulated
july/august 2015
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19
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ideas for power grids as well as

for energy production and consumption, many of which are
available today or will be in the
near future.
Solar and Wind Power

First, the largest available energy
source is the sun, but until
recently we were unable to transform the suns energy via solar
power generation to useful quantities of power at reasonable costs.
We have seen the first large-scale
adoption of solar generation in
Germany, and, based on current
trends in terms of costs and policy, many forecasts suggest widescale global adoption of solar genfigure 1. An 800-kW generator at South Pearl Street Station circa 1880. [Source: The
eration in the coming years.
Street Railway Journal, 1884; https://www.flickr.com/commons, Creative Commons
The advantage of solar is that
(CC) License.]
it has no fuel cost and can come
in utility-size projects or widely
capitalist monopolies in the early 20th century), fol- distributed implementations. This advantage, however,
comes at a cost and currently requires subsidies, credits, and
lowed by regulation for just and fair returns
multiple reforms or liberalizations in production, out-of-market financing to be economically sound or profitable. Further, distributed solar upsets utility business modtransport, and distribution
an era of an emphasis on rural electrification that con- els and wholesale market marginal pricing (although there
are examples now where solar is comparable on a per kWh
tinues in some nations today
the advent of nonutility generators, self-supply mecha- generation cost to traditional technologies such as gas-fired
generation).
nisms, and cogeneration
In addition to solar, wind power generation is increas more recently, deregulation of supply and the growth
ingly improving yield and reliability, controlling costs, and
of power markets.
In addition, numerous other innovations have occurred contributing to market share globally. Many projections 20
since the Pearl Street Station went into operation: a plethora years or so ago only began to recognize wind power proof prime mover technologies, electric generator types, and duction technologys growth potential. Now, that worldwide
efficiency improvements; more efficient electromechanical experience with wind development and as learning rates in
conversion, topology control, and automation; transmission manufacturing processes improve, wind power is becoming
and transformation developments; and advances in sanita- more a part of the landscape, as shown in Figure 3, as well
as more competitive.
tion systems and pumping, to name just a few.
Both wind and solar have a tendency to lower short-run
Today, the world is evolving away from coal and incandescent lighting technologies toward renewables and even power prices with no marginal costs of production such
more efficient lighting technologies. Prospects and oppor- as the fuel purchases fossil plants require. Although solar
tunities for further creative destruction are vibrant from and wind projects require subsidies such as in-feed and
supply, transport, and demand impacting revenues affecting production tax credits, they rely on energy market revenue
utility business models and structures of wholesale markets. from production as well. Wind power development often
leads to transmission development signals more so than
solar futures.
Many Options for the Grid
What is different today compared to the past (when technologies like the example in Figure 2 were the norm) is the New Storage Technologies
sheer number of options available simultaneously for future With increasing numbers of storage technologies lowering
grids. These options span policy, regulation, technology, storage costs, a solar and wind revolution is within reach
markets, the environment, manufacturing, and other dimen- within the next few decades. Storage in the electrical grid is
sions. The oil crisis of the 1970s inspired numerous new seeing new entrants and start-up manufacturers angling for
20
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july/august 2015
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energy supply and delivery systems for millions of people.

As pricing structures change
for distributed resources, the
conventional wisdom of central
station economics is being challenged and so are traditional
business models of the franchise
area utility that have regulated
supply. As distributed resources
increase, the traditional utility
business model has simultaneous multiple revenue stream
devaluations in terms of supply
revenue and retail sales, so utilities may need to reinvent themselves to survive.
A slippery slope for regulated
utility businesses has emerged
of prosumers opting for partial
self-supply arbitraging against
utility rates with net metering
where utilities get left with vanishing market sales for regulated
returns on asset investments yet
Distributed Networks
figure 2. Transmission lines circa 1920s. (Source:
the prosumer expects the utility
More and more emphasis is
Chilectra.)
to maintain its obligation to serve
being given to distributed resilient networks to account for natural weather events as well during self-supply shortages. Many utilities have regulated and
as for security against extremists, and also because of these unregulated businesses where in some situations the regulated
technologies decreasing costs. The retirement of coal plants businesses are being assessed as more risky than the unreguis indirectly the retirement of a traditional form of energy stor- lated businesses.
Power-flow control technologies are emerging that have
age as a backup for system security; coal plants have days,
weeks, even months of coal on site that can be relied on in the the ability to optimize the operations and the utilization of
case of extreme events such as a polar vortex, which can stress the existing transmission and distribution grids.
future market position outside
the traditional large manufacturers. Various storage technologies have raised the cycle life
and reduced costs, and these
are being developed for distributed networks as well as utility
scale installations.
Storage has potential for price
setting in terms of energy prices,
ancillary prices, and capacity
prices and can provide other
value streams. Charging energy
storage at off-peak prices as
available to offset peak demand
provides value to energy prices
and capacity offset. In addition, energy storage can provide
multiple reserve and regulation
products while charging and
discharging, thus competing
directly with fossil plants for providing flexibility and peaking.
figure 3. Sheep and windmills on the Sacramento delta, California. [Source: Franco Folini, __________________
https://www.flickr.com/phoCreative Commons (CC) License.]
tos/livenature/11618997244,
__________________
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21
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Energy Efficiency and Demand Response

Another set of options that have increasingly emerged in
the past ten years is adoption rates of energy efficiency and
demand response. Energy efficiency and demand response
are having a profound impact on planning processes that
have those inputs for transmission planning; for example,
transmission development signals are eroding with demand
response and energy efficiency assumptions in many situations. Also demand response is price sensitive and impacts
short-run marginal electricity costs where energy efficiency
impacts long-run costs of electricity.
New Fossil Fuel Sources

In addition, a new world of fossil fuels has emerged over
the past ten years in terms of merit order and resource
potential. North American shale oil and shale gas finds
have led the United Statestraditionally, a large consumertoward greater domestic production than off-shore
production. Shale has led to forecasts of larger dependence
on natural gas in the power sector, as well as fuel switching from coal to natural gas, and has opened up options
for further environmental compliance of stricter emissions
standards.
Nuclear Power
Innovative design and development on small modular nuclear
reactors have provided hope of a nuclear energy renaissance.
The small modular reactors can generate tens of megawatts,
which will be sufficient to supply power to a small region
like a city without requiring much maintenance or operational workforce and without the bulky capital investment
that large nuclear plants require.
However, the perception of the general public about nuclear
power after major incidents at Three Mile Island, Chernobyl,
and Fukushima, as well as perceived proliferation risks, can
influence the adoption of such technology in the future.
With a high number of choices like these available for
the future grid, it is a more difficult decision process to plot
a path forward. Consequently, we see trends of operations
research helping us to economically assess winners and losers subject to public policy and regulatory and reliability
requirements.
22
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innovation in energy transport, reducing costs while increasing reliability and certainty in transport.
Regulating Transport Separate from Production

It is common that the transport systems are largely regulated
or separated from production or supply for many commodities. Power market deregulation has left transmission regulated with supply being separated or unregulated. Are we
getting enough innovation in transmission if transmission is
regulated, and are the planning processes for transmission
efficient? Moreover, do current planning practices lead to
least-cost electricity prices and a level playing field of open
access outcomes?
Regulators in states that have competitive markets insist
that the market provides incentive signals for resource
development. However, transmission planning and development are separated from resource development or separated from market signals for resource developments.
Transmission planners often use heuristic assumptions
about resource developments, removed from resource competition economics, for purposes of assessing reliability
of future networks. This is the state-of-the-art approach,
although trends are emerging that resource solutions can
compete with transmission solutions such as demand
response, energy efficiency, distributed generation, energy
storage and others.
Transport and Demand

In vertical systems and competitive markets, transmission is
planned outside of resource planning or market signals for
resources. This has partly been due to the lack of computational ability to cooptimize transport with demand and with
supply to place all solutions on a level playing field economically and allow economic optimization to lead the indicators of likely winners and losers, which can then be used as
assumptions for technical network planning.
In the past decade, optimization algorithms have emerged
that, when applied to power grids, can cooptimize the transmission with other resources. While many planning processes
have not adopted this approach, we do see an increasing interest in this area. The need to do so will grow as open-access
principles advance deeper into the planning process.
Energy Transport
Increased Interdependence
With most commodities, supply and demand are separated

geographically so transport is required. Often, transport
constraints can cause price signal impacts. This is particularly true in energy transport systems including power.
Over time, there can be innovations to transport such as,
for example, when Rockefeller began using the railroads to
move kerosene from his refineries to consumer demand centers for lamp oil; the railroads used market power of transport to increase returns. However, Rockefeller also developed the first pipeline systems for his products to circumvent
the rail transport charges, and this was another successful
The power of economic optimization algorithms combined

with physical models of transport have increased in combination with low cost computing resources. Increased interdependency of commodity transport systems has emerged
where regulators, development banks, independent service
operators, utilities, and others have become interested in
understanding the coordination between commodity markets and transport.
An example of this is the rapid growth of shale gas with
the increased reliance on gas-fired generation in the power
sector. For example, the basis risk of transport constraints
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Scenario Demand
Pool of Generation
Projects
Scenario Drivers
Printable PDF
Pool of Transmission
Projects
GPG Demand
Projections
Generation and
Interregional Upgrades
Generation and
Transmission Built
Refine Generation
Connection Costs
Refine Gas Supply

Capability and Costs
Least Cost Expansion
Power Flow
Studies
Gas
Modeling
Intraregional
Transmission
GPG Demand
Projections
Time
Sequential
figure 4. Cooptimization in generation and transmission planning in Australia prices. (Source: Australian Energy Market
Operator.)
in the natural gas network inflate electricity prices and can

also impact reliability. Also tradeoffs may be necessary
depending on whether it is better to use transmission and
distribute energy electrically or to use a combination of
pipelines and distributed generation. Additional examples
include cooptimization of transport and other resources of
power; water, gas, and coal transport; liquid natural gas
(LNG); and fuel oil.
The retirement of coal plants may lead to transport shortages and electricity price impacts for dual fuel units. In the
arid desert environments of Africa or the Middle East, cooptimization of water production, renewables, power, sanitation, and so forth with transport is becoming a greater concern, given that renewables may be intermittent; the idea is
to optimize all options for flexibility at the lowest cost within
resource scarcity constraints.
Future Directions
Current state-of-the-art transport planning methods, such as
those for transmission, plan for some distant year via a snapshot analysis; policy makers, regulators, investors, and developers must understand the evolution of time sequencing in
transport and resource investments to meet demand forecasts.
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Cooptimizations of transport with resources can also be

applied at distribution level as the options and penetrations of
distributed resources increase, as Figure 4 suggests.
Research and development in the areas of transmission
switching and smart grids will lead to cheaper and more
efficient ways to operate the bulk electric power system.
Transmission switching and power flow control, in conjuncton with dynamic line ratings, allow better utilization of
transmission during stress conditions to maximize economic
efficiency in terms of generation dispatch, which can lead
to production cost savings that impact wholesale electricity
prices. It is likely we will see many further innovations in
energy transport.
Macroeconomic Futures
in Power Sectors
In an era of many options, with multiple technology innovations and an array of new policy guidelines and regulatory
instruments, macroeconomic futures are an effective methodology to bound and bookend various potential impacts:
for example, on utility rates; energy, capacity, and ancillary prices; transport costs; technology adoption rates; and
other matters.
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Traditional utility business models face the threat of

revenue erosion from both reduced wheeling of energy through
utility assets and overall lowering of energy demand.
Macroeconomic futures can define paths of power sector development where each future may have an internal
consistency of assumptions. For example, a macroeconomic future with high LNG prices might lead a country
to develop alternatives to generating with LNG. Alternatively, an island nation dependent on fuel-oil burning
and thus having risk in electricity rates tied to world oil
market volatility may assume a renewables future, trading
high short-run marginal costs or financing capital costs for
renewables.
Macroeconomic futures can be based on the status quo,
where it is business as usual: burning fuel oil or burning
coal for relatively significant electricity production. On the
other hand, macroeconomic futures can be help construct
scenarios based on a high penetration of renewables, nuclear
renaissance, global war, fossil fuel persistence, and other
variables.
In addition, macroeconomic futures may take into
account particular sensitivities such as high/low fuel prices,
high/low demand, high/low capital costs for renewables, and
others. State-of-the-art approaches used today to forecast
tomorrows electricity costs and prices combine the macroeconomic frameworks with advanced least-cost resource
optimization methods that can reflect energy, transportation,
and reliability constraints.
Evolution of Planning Processes

For decades, state-of-the-art accepted practice among power
engineers has been to design the networks around peak load.
The rationale of designing the grid to peak load was that
this was often the point of highest stress in terms of thermal
capability of transmission, angular stability, voltage stability, and so forth. Many major transmission projects have
been justified for reliability concerns of transferring power,
maintaining voltages within a threshold, and maintaining
angular stability, as well as for other reasons such as security
of supply under contingency.
New Algorithms and Computing Power

Innovations in computing algorithms and computing power
have enabled power engineers to develop complex models
of the physics of network power flows and test many conditions around an instantaneous condition. These power flow
algorithms have been largely based on a snapshot in time
such as a moment of peak demand or a moment of minimum demand.
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Longer Chronologies
More recently, concern has arisen over long-term chronological
reliability. In the past, chronological concerns in the planning
process focused primarily on short-duration transients. An
example of a longer duration chronological concern is the intermittency of renewables and the constraints of maneuvering a
thermal plant on a subhourly basis while regulating reserves
and spinning reserves in subhourly intervals, taking into
account the previous state of the system and future potential
system states where grid stress can emerge in off-peak hours.
While snapshot and transient analysis at peak conditions is still
necessary in macroeconomic futures, these methods may no
longer be sufficient in grid design for adoption of technologies
in supply, transport, and demand. There can be scarcity and
abundance of quantities of energy, reserves and regulation, and
capacity at peak or off peak, which can drive electricity price
processes both in the short and long run that snapshot load
flow/transient analysis cannot explain or forecast.
Heuristic Versus Economic Considerations

Often we see power engineers highly focused on thermal transfer
capability of transmission, maintaining voltage thresholds, angular stability, and security of supply under contingency for what
are called base cases. These base cases are a set of assumptions
of demands, generation, network developments, and others of the
future that then the power engineer subjects to a cadre of tests for
reliability measures and assessment of the robustness of the future
systems to such assumptions.
It is the process of deriving these assumptions that is
challenged by the economics of technology options and
macroeconomic futures. Given that we have many options
for future developments of power sectors globally, in the
past we have seen all kinds of heuristic assumptions as
inputs to the power flow programs such as demand forecasts, dispatch assumptions, generation assumptions, and
assumptions about future policy and regulatory constructs.
Heuristic assumptions might be deterministic or manual,
and the absence of economic competition of assumptions
might be, for example, the power engineer assuming locations and amounts of deactivated generation units, locations,
and capacities of new generators, levels of penetration of distributed generation, energy efficiency, and other impacts of
regulatory and public policy.
In the era of many options, a heuristic assumption process can only bias the planning of future systems where it is
necessary to economically test options in optimizations that
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discern between likely winners and losers in demand, transport, and production rather than using manual engineer-inthe-loop assumptions. In other words economic optimizations can provide guidance of plausible capacity additions
and retirements to better inform network design.
resources. Some countries are exploring cooptimizations and

are becoming educated on the advantages of cooptimizations
as this places all options on a level playing field i.e. transmission solutions compete with resource solutions leading to system
development that is consistent with open access outcomes.
Integrated Computational Tools
Power Market Structures
Integrated computational tools have been developed that

embody facets of power engineering technical analysis
along with economic optimizations to justify the assumptions that go into the technical analysis. The trend of low
cost multicore CPUs has facilitated advancement in parallel
computing such that it is feasible to perform calculations in
a relatively cheap server cluster.
Thus, today it is possible not only to assess snapshot power
flows at peak loads but to run hourly and subhourly production cost with inputs from capacity expansion algorithms
that can be populated with a universe of expansion options to
choose from based on least-cost economics. In summary, the
objective of the power engineer can no longer be least-cost
innovative network designs to obtain reliability but least-cost
network designs that minimize costs across energy prices,
ancillary services prices, capacity prices, and the cost of reliability. This is better stated as the minimization of the nexus
of short-run production costs and capital costs subject to reliability constraints, as shown in Figure 5.
Over the past decade or so, the world has observed many
deregulations of supply via wholesale power markets around
the globe. Many products have been developed alongside the
electricity energy day ahead markets such as real time market,
reserves, and regulation products, congestion products, derivatives, forwards and futures, capacity markets, and others. We
see many permutations in terms of vertical markets and liberalized markets and a diversity of regulations and market rules.
Considering All Options
Competition Pricing
Largely, power markets have been successful in making
short-run electricity prices transparent and bringing competition to supply. Some competitive power markets have
attempted to address pricing of and securing capacity; however, these capacity markets tend to be designed similar to
spot markets that do not match the time frame of capacity
technical and economic life.
When designing capacity market key parameters for
cost of new entry and shortage price-setting, economists
approach the problem in terms of what it will take to incentivize reference technologies to enter markets to maintain
minimum grid reliability standards. Should we meet a reliability standard at an incentive capacity price for a reference technology? Or should we take the viewpoint of the
In an era of many options, superior planning processes will

place all options both economically and technically on a level
playing field in terms of capital and production costs during the assessment of future
grids, including transmission options competing with
resource options. We see an
Cost $
interesting trend in dereguTotal Cost C(x)+P(x)
lated or liberalized markets
that have adapted and have
adopted many of the emergInvestment Cost/
ing trends in the planning
Capital Cost C(x)
process including advancing
market structures to provide
incentive signals to options
of demand response and
energy efficiency.
However, most planning
Production Cost P(x)
processes still sequentially
optimize transmission in more
of a reactive manner. Given
the advancements of computing power and optimization
Minimum
Investment x
algorithms, only a few of the
Cost Plan x
worlds planning processes
have adopted cooptimization figure 5. Ideal nexus of production costs and capital costs. (Source: Energy Exemplar.
of transmission with other PLEXOS Ingegrated Energy mode.)
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In addition to solar, wind power generation is increasingly

improving yield and reliability, controlling costs, and contributing
to market share globally.
prosumer and minimize the cost of energy, ancillary, and

capacity payments to meet a minimum level of reliability
using energy efficiency, demand response, energy storage,
and other resource options if it is more economic than central station generation reference technologies? What is the
value of the reliability to the prosumer?
Demand and Response

The western world, motivated by vertical utility cost plus
regulatory structures, could be unbundled with supply competing in wholesale power markets. Now the trend is to overlay public policy and regulatory of adoption of renewables
in resource developments where many renewables choices
cannot be profitable via wholesale market revenues only and
instead require out-of-market incentives such as in-feed tariffs and/or production tax credits and investment incentives.
Yet the renewable technologies then deflate spot prices
in wholesale markets, increasing revenue risk for traditional supply mix that is needed for reliability when the
renewables are intermittent. Should power market structures be adapted to provide price signals and financing for
public policy resource developments alongside providing
the necessary pricing signals for reliability and energy supply, or should the world continue with out-of-market incentives for renewables?
For certain options, we see trends of this taking place in
advanced power markets with demand response and energy
efficiency gaining access as products in capacity markets
and competing against central station generation. Also, there
are must-take feed-in tariffs that get renewables dispatched
ahead of other resources and evolving market rules for dispatch of renewables and locational marginal pricing.
Competitive power markets have fallen short of leveling
the economic playing field of cooptimizing transmission
investments and other resources. Transmission can provide
resource options to serve demand, and resource options and
demand options can reduce transmission development signals. Most power markets have yet to accomplish placing all
options on a level playing field and producing market signals
for different types of options such as transmission instead of
local resources or vice versa.
Fossil Fuels
There has been a fundamental shift in the underlying fossil
fuel markets, influencing changes in the electric sector. In
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general, fuel diversity encourages new generation entrants

when the new unit is more efficient or has cheaper fuel costs
than the system marginal unit. During peak periods, if oilfired generation is setting price, then other more efficient or
cheaper fuel units are normally profitable.
There has been a recent change in the generation fleet
in many markets with the retirement of older coal- and oilfired generators in favor of natural gas, typically the more
efficient combined-cycle generator. With a decrease in fuel
diversity, electric prices in both deregulated spot markets
and vertically integrated or regulated electric markets have
trended toward the short-run marginal costs of the combined
cycle plant fired with natural gas. This has made it more difficult for new entrants to justify the cost of building additional resources in an environment of low market prices and
how to pay for the continuing fixed costs.
As the penetration of intermittent renewable generation
increases, short-term production costs for electricity will
gradually fall below the production cost of natural gas combined-cycle plants as well. This change will require additional incentives in macroeconomic futures of renewables
plus natural-gas-fired fleets, either through the wholesale
market or utility rates for vertically integrated utilities, to
compensate future generation for the shortfalls in shortterm production costs as well as fixed charges to cover debt,
equity, and return on capital.
Fuel diversity also encourages security of generation supply in the event of a particular disruption event in another
competing fuel source. An example is the overreliance of generation on natural gas and the operating risks that then places
on the natural gas pipelines; potential outages from the natural gas pipelines impacts generation supply where dual fuel
may be relied on. With the retirement of coal and phenomena
such as polar vortex, the natural gas systems may be leaned on
more for energy security of large population centers.
Some electric systems have limited fuel supplies for their
generation fleet. For example, small island economies or
isolated grids must often rely on oil as the primary source
of fuel due to a lack of natural gas or other fuel infrastructure. In this case, these systems tend to operate relatively
inexpensive combustion turbines from an initial capital cost
or fixed cost perspective. The tradeoff however is the high
operating costs associated with fuel oil. Replacing these units
with wind or solar units becomes a economic proposal due
to the relative high capital costs for renewable technologies
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figure 6. London Air pollution Level 9Very High: 3 April 2014. [Source: David Holt, https://www.flickr.com/photos/
zongo/13599753564,
_____________ Creative Commons (CC) License.]
(although learning rates are rapidly reducing capital costs

of renewables). But the system overall would gain from the
substantially cheaper operating costs. Again, this shift creates a natural tension; however, as high cost fuel oil units
are replaced with generation with zero or near-zero operating costs; in the case of wind and solar, the system short-run
marginal costs will erode the profitability many of the fossil
based generators on the system.
In addition, there has been a decoupling of natural gas
prices in some world markets, primarily the North American natural gas market, from the rest of the world. Many
regions rely on the additional supply of LNG for their natural
gas supplies, including parts of Europe and Asia. Due to the
limited supplies of LNG in the world market and the high
development costs for new LNG, the cost of LNG is reflected
in both cost of natural gas supplies in these regions. In North
America, however, with the large scale of shale natural gas
development, natural gas supplies have created an overhang
of supply and driving down natural gas prices.
This natural gas price decoupling has created economic
opportunity in North America to build export LNG facilities to increase the supply of LNG to the rest of the world
markets. While there has been some political opposition
locally to LNG export facilities in North America, this
development may have tendency to increase the price of natural gas in domestic markets in the United States and Canada
and decrease price pressures on those countries receiving the
additional LNG supplies.
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Environmental Regulations
Environmental regulations have had both an indirect and
direct impact on electricity supplies and the cost of supply and utility rates. The most common form of environmental regulations is typically the control of air emissions
from fossil fuel generating plants, for conditions like those
shown in Figure 6.
For example, air quality environmental regulations are
currently changing the landscape of generation in North
America, with coal-fired power plants subject to the Mercury
and Air Toxics Standards, requiring significant reductions in
emissions of mercury, acid gases, and toxic metals with plant
upgrade requirements of expensive emission clean up technologies. A coal plant operator with high coal prices or located in
a market with lower wholesale electricity prices (often tied to
natural gas prices as noted previously) could make the additional investment in equipment like scrubbers uneconomical
to the plant. Plant operators also have to weigh whether they
can seek to pass on these additional costs to rate payers. In
spot markets for electricity, the additional capital costs could
only be recouped from higher spot prices for electricity. In the
regulated markets, the installation of additional environmental equipment would have to be approved by the regulator for
inclusion in the rates passed on to consumers.
The U.S. Energy Information Agency estimates that 60
gigawatts (GW) of coal fired generation capacity will retire
by 2020, or nearly one third of the total coal fleet of 310 GW
in the United States. How much of this fleet is replaced with
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As pricing structures change for distributed resources, the

conventional wisdom of central station economics is being
challenged and so are traditional business models.
new generation technologieslikely in the form of natural
gas combined cycle units or renewable generation including
wind and solar, or other resources such as demand response
or battery storagewill have a substantial impact on overall
prices of electricity to consumers.
As noted above, the direct costs of the environmental
regulation is the imposition of additional equipment on coal
fired generators. The indirect impact is the cost of retiring the large fleet of coal generation in the United States
between 2012 and 2020. These retirements will likely drive
up short-run marginal costs in both the deregulated and
regulated markets in the United States. Capacity prices
will also likely increase with the retirement of a large number of base load units. To the extent that these retirements
are replaced with additional new generation, additional
new costs to the end consumer will also be created.
Additional environmental concerns that will have an
increasing effect on the power sector are the production of
greenhouse gases and their global impact along with water
availability, use, treatment, and consumption. Various carbon markets have formed, although none of these to date
have been effective in accelerating reduction of emissions;
instead, renewables mandates have been more effective.
Water is typically not priced as input into the power sector and therefore was treated historically as an unlimited
resource, particularly with fossil fuelpowered generation.
For example, many older power plants were originally developed with simple and cost effective once through cooling
systems. However, this required a large volume of water as
well as discharges of heated water back into the originating water source, with detrimental effects to fish and other
aquatic species. New environmental regulations are requiring power plant operators and new generation entrants to
minimize the impact on water consumption in their operations. Some power plants are facing possible curtailment
of their annual operating hours due to their current water
cooling and discharge practices. Some plant operators have
maintained that current low electric market prices are not
sufficient for the upgrades plants require to meet these new
water requirements and that, alternatively, they would retire
the units. In the future, particularly in regions with limited
water resources, the cost of water should become an integral
part of generation and electric pricing.
innovation of the incandescent lamp supplied by central station generation that led to power sectors globally. In the late
1800s the option of electric lamps versus kerosene lamps
was economic where the cost of kerosene production, transport, and distribution was higher than electricity production,
transport, and distribution. That was a simple case of doing
one or the other.
Today, looking into the future the multiplicity of paths
forward presents a large number of choices that transcend
electricity production, transport, and distribution and
are confounded with complexities of policy, regulation,
markets, and technology innovations. Will the two key
structures of the modern power sector of the wholesale
market and the utility business model-continue to exist
as they are today, or will mutations be required to those
structures?
The great innovation of electricity production and electric lighting for the masses led to a broad set of transformational developments over generations from that single
great innovation. With the era of optionality, we have many
innovations in energy production, transport, and distribution
commercializing over a relatively short span of time; it will
take future generations to further exploit the broad implications of these innovations.
For Further Reading

Energy Exemplar, LLC. (2015, Jan.). Cooptimization of
transmission and other resources, White Paper, Funded by
the U.S. Department of Energy. [Online]. Available: ____
http://
tinyurl.com/prdvyto
J. D. Jenkins. (2014). Economic regulation of electricity distribution utilities under high penetration of distributed energy resources: Applying an incentive compatible
menu of contracts, reference network model and uncertainty
mechanisms. Masters Thesis. Massachusetts Institute of
Technology. [Online]. Available: http://dspace.mit.edu/
handle/1721.1/90052#files-area
____________________
MIT. (2011). The future of the electric grid. [Online].
Available: http://mitei.mit.edu/system/files/Electric_Grid_
_______________________________
Full_Report.pdf
__________
J. A. Schumpeter, Capitalism, Socialism, and Democracy.
Floyd, VA: Impact Books, 2014 (orig. ed. 1943).
Biography
Conclusions
The article described a coming era of many options that
are very different to the options offered by the initial great
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Randell Johnson is with Energy Exemplar, Hartford, Connecticut.

p&e
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The Green
Impact
By Jos Pablo
Chaves-vila,
Klaas Wrzburg,
Toms Gmez,
and Pedro Linares
IMAGE LICENSED BY GRAPHIC STOCK
How Renewable Sources Are

Changing EU Electricity Prices
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1540-7977/152015 IEEE
THE EUROPEAN UNION (EU)

energy policy focuses on achieving a
balance between three main pillars:
increase the security of supply, reduce
the impact of climate change, and
improve economic competitiveness.
To accomplish these objectives, the
EU has been creating competitive conditions that internalize environmental
externalities, and it has also actively
promoted renewable energy.
Renewable energy promotion has
long been a driving factor of the EU
energy policy. For the 2020 horizon, European legislation established
mandatory national targets of 20% of
final energy consumption from renewable energy resources (RESs), a 20%
reduction of greenhouse gas emissions
from 1990 levels, and a 20% headline
target on energy efficiency. For the
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55%
50%
2012 RES Share
2020 RES Targets
2012 Interim Target
45%
40%
35%
30%
25%
20%
15%
10%
5%
EU
-28
BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
HR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
0%
figure 1. EU-28 RES 2020 targets and 2012 RES share (% of energy consumption).
(Source: European Commission.)
0.8
Hydro
Wind
Biomass
Solar
RES-E
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additional costs from support

schemes need to be allocated
to market parties. EU member states (EU-28) use many
different alternatives to allocate those costs (see CEER in
For Further Reading), which
include public funding (general tax and nontax levies), a
pass-through of RES-E costs
to consumers, or a mix of both,
such as in Belgium and Italy.
Spain and Germany have
been pioneers in the integration of RES-E. In both countries, RES-E has reached significant shares, and comparing
these case studies can help
understand us if the impact of
RES-E on market prices has
been different. In addition, lessons learned from both countries are useful for an efficient
integration of RES-E in electricity markets.
0.7
Renewable
Penetration
in the EU and
Associated Costs
0.6
0.5
The EU 2020 targets were set

differently for each country.
Figure 1 shows the 2020 RES
0.3
targets and 2012 interim targets for each of the 28 coun0.2
tries. All countries fulfilled the
2012 interim targets, except for
0.1
The Netherlands and Malta,
which were close to meeting
0
the targets. On the other hand,
Sweden had already reached its
figure 2. EU-28 RES-E generation in 2012 (percent of gross electricity generation).
2020 target in 2012.
(Source: European Commission.)
The 2012 RES-E production
for each EU country and by tech2030 horizon, the EU has agreed on more ambitious targets nology is presented in Figure 2. It is clearly shown that hydro
that include a 40% reduction of greenhouse gas emissions, is the generation technology with the highest share, accounting
27% of energy consumption to come from RESs, and a 27% for 45.9% of all RES-E. Wind and biomass represent the second
increase in energy efficiency, with a possibility of increasing and third positions with 25.8% and 18.7%, respectively.
This large penetration of RES-E in Europe may be
it to 30%.
To achieve EU targets, support schemes for RESs for explained by the significant economic support provided to
electricity (RES-E) have been implemented at the national these technologies. Table 1 shows the average premium paid
level. However, these schemes have affected energy markets. for installed RES-E technologies above the average market
The integration of RES-E can impact electricity prices in price for most of the EU countries. Solar is the technology
the wholesale market and ancillary services markets, such that has received a significantly higher support across all
as network congestions or system balancing. Furthermore, the countries.
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SI
SK
FI
SE
UK
R
IT
C
Y
LV
LT
LU
H
U
M
T
NL
AT
PL
PT
RO
DE
EE
IE
EL
ES
FR
BE
BG
C
Z
DK
0.4
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table 1. Weighted average support for RES-E in some EU-28 countries (/MWh). Source: CEER.
Bioenergy
Geothermal
Hydro
Other
Solar
Wind: Onshore
Wind: Offshore
Austria
96.56
3.50
251.87
30.85
Belgium
96.66
38.14
375.89
86.29
107.00
Croatia
109.62
35.73
379.99
44.53
Czech Republic
98.66
52.45
462.13
66.31
Denmark
26.29
47.96
24.98
37.21
Estonia
14.50
14.50
14.50
14.50
Finland
18.00
68.65
France
61.00
15.45
4.64
451.69
36.63
Germany
138.06
175.65
50.26
319.69
62.04
127.20
Greece
20.77
5.67
361.13
7.03
Hungary
57.25
16.05
54.28
58.43
Ireland
26.40
28.91
103.65
11.44
Italy
126.05
76.72
87.64
335.55
78.98
Lithuania
88.90
29.45
367.82
52.62
The Netherlands
67.47
7.95
96.43
245.40
65.68
99.45
Poland
68.52
68.52
68.52
68.52
68.52
Portugal
60.54
47.97
53.77
300.37
50.67
123.74
Romania
56.06
56.06
56.06
56.06
Spain
75.01
40.31
349.08
42.48
Sweden
23.00
23.00
23.00
23.00
United Kingdom
65.67
64.70
110.59
291.72
59.31
94.57
100
35.0%
Platts PEP ( /MWh)
Coal CIF ARA ( /t)
DE Border Imp. ( /MWh)
RES Share (% - rhs)
90
30.0%
80
25.0%
70
60
20.0%
50
15.0%
40
10.0%
30
5.0%
10
January 2011
February
March
April
May
June
July
August
September
October
November
December
January 2012
February
March
April
May
June
July
August
September
October
November
December
January 2013
February
March
April
May
June
July
August
September
October
November
December
January 2014
February
March
April
May
June
20
0.0%
figure 3. The evolution of the average wholesale prices compared to coal and gas prices and share of
RES. (Source: CEER.)
july/august 2015
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31
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To achievpport schemes
for RESs for electricity have been implemented
at the national level.
electricity prices for the EU-28.

Figure 3 also shows the evolution of prices for German import
0.25
gas and north-west import coal
contracts, which are proxies for
the fuel prices for thermal units.
0.20
The right-hand scale in the figure shows the share of RES-E
0.15
generation as a percentage of
the generation mix in the EU-28.
The relative decrease of elec0.10
tricity prices can be explained
by a mix of factors, such as
0.05
the decrease of coal prices,
EU-28 Residential
DE Residential
ES Industrial
later decrease of gas prices at
ES Residential
DE Industrial
EU-28 Industrial
the beginning of 2014, and the
0.00
increase of RES-E (mainly wind
and solar). Additionally, hydro
units substantially contributed
figure 4. The average retail electricity prices for residential and industrial consumers
to lowering electricity prices,
in the EU-28, Germany, and Spain (/kWh). (Source: Eurostat.)
mainly in rainy periods.
In addition to the meritorder effect, there are other regulations that contribute to
Impact of RES-E on EU Market Prices
In addition to direct subsidies, RES-E have impacted the reduce electricity prices due to RES-E generation. The sowholesale market prices as these units modify the dispatch called priority of dispatch rule included in the EU legorder of existing generation units. In addition, the management islation (under Directive 2009/28/EC) implies that RES-E
of energy imbalances from intermittent RES-E is another im- can only be limited because of security reasons even if a
unit commitment algorithm indicates that it is cheaper to
portant challenge for the market integration.
curtail RES-E. The rationale followed by this rule is to
meet the renewable targets and to incentivize flexibility in
Wholesale Market
As RES-E units have low marginal costs (due to free fuel the electricity system.
costs, such as wind, solar, or hydro), they may replace part
of thermal units shifting the supply curve to the right. As Network Costs
a consequence, short-term market prices tend to decrease; RES-E may require the expansion or reinforcement of existthis is known as the merit-order effect. However, with the ing networks. Fras et al. quantified the network costs for
increase of RES-E generation, there is a need for backup 2030 RES-E scenarios in the southwestern Europe region
units to handle the intermittency of RES-E. In addition, and concluded that network costs strongly depend on whether
lower prices decrease incentives to invest. These last two the promotion of RES-E considers only the abundance of
effects are long or medium term, and they eventually would natural resources or also the associated network costs.
increase electricity prices. Wrzburg et al. found that, among
different studies, the merit-order effect prevails, and, as a System Services
consequence, electricity prices generally decrease due to an RES-E not only have an impact on wholesale markets but also
increase in renewable generation. The final effect depends, on other parallel markets used to solve congestions and balamong other aspects, on the market size.
ance the system. While wholesale prices can decrease because
Figure 3 shows the evolution of the Platts European Power of the merit-order effect and the priority dispatch rule, the need
Index as a reference for the monthly average wholesale of ancillary services and associated costs can increase.
32
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20
13
s2
20
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Spain and Germany have been pioneers in the integration

of RES-E in their systems with approaches that share some features
but differ in others.
Congestion
Management
In the European context, with national and

regional prices, internal
power line congestions in
most cases are solved by
system operators redispatching generation units.
The redispatching costs
are not directly reflected
in wholesale prices, but
they are allocated to
consumers through grid
fees or surcharges in the
retail prices.
With limited network
capacity, new RES-E units
may increase congestion.
This is the case in Germany,
where an increase in redispatching actions happened
as a result of the nuclear
phase-out and the installation of wind power plants in
the north part of the country
with limited interconnection
capacity with consumption
centers in the south.
45,000
CHP
Solar PV
Solar Thermal
Wind
Hydro
Biomass
Waste
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
98 999 000 001 002 003 004 005 006 007 008 009 010 011 012 013
2
2
2
2
2
2
1
2
2
19
2
2
2
2
2
2
(a)
120,000
CHP
Solar PV
Solar Thermal
Wind
Hydro
Biomass
Waste
100,000
80,000
60,000
System Balancing
Intermittent generation adds

additional uncertainty to the
electricity system operation, which require different sources of flexibility
to manage it. For instance,
Fras et al. reported, for
2020 and 2030 scenarios
for the Spanish system, an
increasing need for reserves
(mainly downward regulation) when intermittent
RES-E increase.
july/august 2015
magazine
40,000
20,000
98 999 000 001 002 003 004 005 006 007 008 009 010 011 012 013
2
2
2
2
2
2
2
2
2
1
19
2
2
2
2
2
(b)
figure 5. The yearly RES-E installed capacity in Spain from 1998 to 2013 in (a) MW and
RES-E generation in (b) GWh. [Source: Comisin Nacional de los Mercados y la
Competencia (CNMC).]
33
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magazine
70
2009
2011
2010
2012
2013
60
50
40
30
20
10
0
Day-Ahead
Market
Price
Intraday
Costs
Grid
Constraint
Costs
Ancillary
Services
Costs
Capacity
Payments
Total
Market
Price
figure 6. Spanish market prices for 20092013 (/MWh). (Source: OMIE.)
Solar PV
Cogeneration
Wind
Small Hydro
Biomass
Waste
450
400
350
300
250
200
150
100
50
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
RES-E support schemes is usually recovered through additional surcharges in the

retail prices.
The costs of support schemes, in most
of the EU-28, are passed through partially
or totally to end-consumers either directly
by a surcharge in the electricity bills or
indirectly through suppliers costs. Only
Finland entirely finances RES-E support
through the state budget. The Czech Republic and Luxembourg partially finance the
RES-E surcharge through general taxes.
The decrease in wholesale electricity
prices in the EU-28 has not been reflected in
retail prices. Figure 4 shows an increase in the
average retail electricity prices for the EU-28,
Spain, and Germany from the second semester of 2007 to the first semester of 2014. One
of the major driving factors of this increase is
the surcharge to recover RES-E costs.
The surcharge used to finance RES-E
is not homogenous for all categories of
electricity consumers. Only nine EU countries do not have exemptions for certain
type of consumers to finance RES-E costs,
whereas 13 reported one or more exemptions (see CEER in For Further Reading).
Six countries benefit energy-intensive
industries through reduced payments, e.g.,
Germany. Another eight countries benefit
consumers with self-generation, in comparison to consumers without such generation units. There are countries with other
exemptions, such as partial exemptions for
vulnerable consumers (Austria and Hungary), pump hydro units (Czech Republic),
or discrimination by consumers connected
at certain voltage levels (Portugal).
2013
figure 7. The yearly average remuneration above the market price for RES-E
and cogeneration in Spain (/MWh). (Source: CNMC.)
In general, balancing costs are allocated to those market

parties that have energy imbalances. In some EU countries,
RES-E can face full-balancing costs associated with energy
imbalances as any other market party, but in others, RES-E
can be exempt partially or totally (see CEER in For Further
Reading) . The allocation of these costs to RES-E incentivizes
these units to improve their forecasts and reduce imbalances.
Printable PDF
Looking Closer at the

Spanish and German
Markets
Spain and Germany are two countries with high energy consumption and are leaders in the integration of RES-E. These
two countries follow different approaches in the way RES-E
are remunerated and their participation in the markets, and a
comparison between the two can provide useful information
for RES-E integration elsewhere.
The Spanish Market

Retail Prices
Retail electricity prices are made of different components that
include wholesale electricity prices, system services costs,
network costs, and taxes. As previously discussed, RES-E
may impact most of these components. In addition, the cost of
34
magazine
Since the 1990s, Spain has been actively supporting RES-E and
cogeneration (known as special regime), which has led to an
increasing expansion of these units, as shown in Figure 5. The
growth of wind power capacity is particularly significant in relation to other technologies.
july/august 2015
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magazine
As a percentage of final demand,

RES-E (without including large hydro)
and cogeneration have increased from
11% in 1998 to around 43% in 2013. In
terms of final generation, wind power
is the first source among RES-E, as
shown in Figure 5.
Printable PDF
10,000
CHP
Solar
Wind
Hydro
Biomass
Waste
9,000
8,000
7,000
6,000
Effect on Wholesale Market Prices
5,000
Gelabert et al. found that, during the

period 20042009, a marginal increase
4,000
of 1 GW of RES-E (and cogeneration)
3,000
reduced wholesale electricity prices by
2/MWh (around 4% of the average
2,000
price). In later years, this effect is not
1,000
clear as changes on hydro generation
and market regulations have signifi0
cantly impacted the wholesale prices.
2008
2009
2010
2011
2012
2013
Figure 6 represents the total market
figure 8. The annual remuneration (in addition to the market revenues) for
price for Spain disaggregated in difRES-E in Spain 20052013 (million Euros). (Source: CNMC.)
ferent components. The increase of
were established for the premium option for wind, concenday-ahead prices from 2010 to 2011 is
mainly because of low hydro generation that decreased by trated solar power, biomass, biogas, and small hydro.
Figure 7 shows the average remuneration above the market
almost 30% due to a dry year. In addition, in 2011, a national
policy was introduced that established minimum genera- prices for RES-E and cogeneration units from 2004 to 2013.
tion quotas by national coal power plants with higher costs In that period, it is remarkable the FiT set in 2007 for solar
than imported coal or gas units. The costs of ancillary ser- PVs. This FiT led to a significant increase in PV installations
vices have increased mainly due to RES-E generation, but in in 2008, around ten times higher than the target set for 2010.
comparison with the total market price, this effect is limited. Despite the fact that there was a quantity limit for new installaFinally, changes in the capacity mechanism in 2011 have tions, to avoid overinvestment, local governments gave licenses
to installations that were not controlled in a timely manner by
increased that cost component.
july/august 2015
magazine
0.18
3.5
0.16
0.12
2.5
0.1
2
0.08
1.5
0.06
1
Energy Charge (/kWh)
0.14
0.04
0.5
0.02
Capacity Charge
Energy Charge
01
/2
01
2
04
/2
01
2
06
/2
01
2
07
/2
01
2
10
/2
01
2
01
/2
01
3
04
/2
01
3
07
/2
01
3
08
/2
01
3
10
/2
01
3
02
/2
01
4
Spain has changed in different ways

the design of support schemes and
the amount paid to RES-E and
cogeneration units. For instance,
in 1994 Spain put in place a feedin-tariff (FiT) scheme with the
requirement for distribution companies to buy all the generation
from these units with the priority
dispatch requirement. In 1998, the
feed-in-premium (FiP) option was
introduced. Later in 2004, some
modifications were included, e.g.,
a guaranteed support for the whole
lifetime of the installations (with a
decreasing factor), the introduction
of balance responsibility for some
units, and a limit to the maximum
size of photovoltaic (PV) units that
were able to receive support (510
MW). In 2007, price caps and floors
Capacity Charge (/kW/month)
Changes in the Spanish

Support Schemes
figure 9. Changes in the Spanish electricity tariffs for residential consumers in

20122014. [Source: Spanish Institute for Energy Diversification and Energy Saving
(IDAE).]
35
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The market premium system is an attempt to

incentivize renewable generators to operate their installations
in a market-oriented manner.
the central government. As a result, the quantity limits failed to

prevent overinvestment due to the generous FiT.
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
In response to the PV boom of 2008, the Spanish government

approved the Royal Decree (RD) 1578/2008, which established
a mixed price- and quota-based
mechanism to promote a sustainable growth of solar PV systems.
Hydro Wind Onshore Wind Offshore PV
At the beginning of each quarter,
Biomass, Biogas, Waste Geothermal
a quota was set for the capacity
allowed to be registered in each
call. Separate quotas were set
for rooftop PV systems and for
utility PV systems located on
the ground far from consumption connections. Rooftop PV
systems received a higher FiT
to encourage locations closer
to demand and hence minimize
the impacts on distribution networks. The quota system was
extended to other technologies
(RD 6/2009).
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
(a)
160,000
Hydro
140,000
Wind Onshore
Biomass, Biogas, Waste
Wind Offshore
Geothermal
PV
120,000
100,000
80,000
60,000
40,000
20,000
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
(b)
figure 10. The yearly RES-E installed capacity in (a) GWh and RES-E generation in (b)
MWh in Germany from 1990 to 2013. (Source: German Federal Ministry for Economic
Affairs and Energy.)
36
magazine
The Spanish Electricity

Deficit
The cost of RES-E support

has increased significantly in
the last few years, as shown in
Figure 8. The increase of solar
costs is remarkable, which has
increased from less than 1% of
total RES-E costs in 2005 to
34% in 2013. For 2013, solar
support has even been higher
than for wind. Wind generation represents around 30% of
final demand whereas solar only
around 5%.
The increase in the remuneration of support schemes, and the
large reduction in demand, without a corresponding increase
in revenues together with other
factors have created a significant deficit in the electricity sector, which in 2013 accounted
for around 30 billion. This has
motivated a series of reforms to
decrease the deficit, for instance,
july/august 2015
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2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
/kWh
a decrease in the level of FiTs (RD 1565/2010). This

0.35
reduction ranged from 45% for utility PV installaP Industry /kWh
P EEX /kWh
P HH /kWh
tions to 5% for small rooftop installations. Further0.3
more, RD 1565/2010 limited the period over which
installed PV units can receive a FiT to 26 years. A
0.25
further limit to the number of equivalent hours per
year for PV support payments was introduced, with
0.2
differentiation depending on the location and tracking system.
0.15
In January 2012, the Spanish government
stopped the registration and support schemes for
0.1
new RES-E (RD-Law 1/2012). Later in July 2013,
through the RD 9/2013, the FiT for existing instal0.05
lations was substituted by a new remuneration
scheme for RES-E based on a fixed remuneration
0
per capacity installed that complements the revenues obtained from energy sales in the electricity
market. The supplemental fixed remuneration is
calculated to guarantee a rate of return of around figure 11. German electricity prices (/kWh). The market price at
the electricity exchange (P EEX) 20002014, retail electricity prices
7.5% during the whole lifetime of the installation.
for households (P HH), and industry (P industry) 19992014. (Source:
The reforms to decrease the electricity deficit
EEX, EUROSTAT, _________
de.statista.com.)
were criticized because some units are facing a
reduction of the payments with respect to initial agreements. at the system level, reducing the overall system welfare and
Different developers have sued the Spanish state because of increasing cross-subsidies between consumers.
these reforms.
The German Market

Changes on the Retail Electricity Prices
july/august 2015
magazine
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Germany started to implement support schemes for renewable

The cost of RES-E support schemes and the need to reduce generation in 1991. German renewable capacity and generation
the deficit have led to important increases in retail prices. As have grown ever since, making the country Europes largest
shown in Figure 4, retail prices have increased by more than producer of renewable energy. Figure 10 illustrates this growth.
By 2013, Germany had installed roughly 85 GW of renew30% from 2007 to 2014 for residential consumers and by a
lower percentage to industrial consumers, who are partially able capacity, with the largest part being solar PVs and onshore
wind capacity. Due to Germanys topology, there are fewer
exempt from RES-E costs.
The Spanish retail electricity prices have the
following components: energy (/kWh) and capac16
ity (/kW), plus metering costs and taxes (a valueElectricity Tax
EEG-Surcharge
Concessions
added tax of 21% and electricity taxes of around
14
Generation, Transport, and Distribution
Other
5%). The energy charge has a component corresponding to pass-through of electricity wholesale
12
prices (with reference to the day-ahead, intraday
market prices and also incorporating balancing and
10
generation adequacy charges), plus an additional
energy component that is used to recover regulated
8
costs. As shown in Figure 9, the electricity tariffs
have changed repeatedly from 2012 to 2014, mostly
6
through increments in the capacity component
whereas the energy component has been reduced.
4
The design of retail prices is especially relevant
in the context of elastic demand due to cheaper dis2
tributed energy resources (DERs), such as distributed
generation (e.g., solar PVs, microcogeneration, and
0
fuel cells), demand-side management, and electric
vehicles, among others. An inefficient allocation of
the system costs can distort price signals and incen- figure 12. The composition of German retail electricity prices for industivize consumers to install DERs that are not efficient trial consumers in 19982013 (ct/kWh). (Source: de.statista.com.)
_________
37
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magazine
opportunities to generate hydroelectricity. The governments

plan to decarbonize the energy system has had to rely mainly
on wind, biomass, and solar PV systems. Since 2009, Germany also has started to connect offshore wind parks in the
Baltic and North Seas. Nevertheless, offshore wind still plays
a minor role in the current electricity mix. In 2014, renewable
energy sources generated 25.8% of the countrys electricity.
Effect on Market Prices
Figure 11 depicts the wholesale prices at the European Electricity Exchange (EEX) from 2000 to 2014. Wrzburg et al.
provide an extensive overview of studies undertaken to identify the relationships between renewable generation and the
EEX day-ahead price for Germany. They conclude that the
merit-order effect decreases the day-ahead price at the EEX
by approximately 1/MWh per additional gigawatt of renewable generation during 20102012. The day-ahead electricity
price at the EEX for Germany has increased somewhat from
1998 to 2014 (roughly 0.020.03/kWh).
Retail electricity prices have also increased since 1999 by
roughly 75% and 100% for households and industry, respectively. The increase in retail prices is higher than that for
wholesale prices at the EEX during the same period. It is particularly striking that wholesale and retail electricity prices
moved more or less parallel up to 2011. Since 2011, wholesale
prices actually fell from year to year, while retail electricity
prices increased. The main cause for retail prices not following the downward trend of wholesale prices has been the
German renewable support scheme itself, which is financed
through a surcharge on retail electricity prices (called EEGUmlage). Figure 12 illustrates this effect.
In 1998 the share of EEG surcharge, taxes, and other levies hardly played a role for industrial retail electricity prices.
Since 2013, the share of the EEG surcharge has grown significantly, representing in 2013 almost one-third of the retail
electricity price for industrial consumers. In Germany, all the
different components of the retail electricity charges are set
per kilowatthour.
It is remarkable that the German government has maintained generous exemptions from the EEG surcharge for
Printable PDF
energy-intensive industry throughout its various amendments.

For example, industries with annual electricity demands of at
least 1 GWh/year and with at least 14% of their gross value
added related to electricity cost have their EEG surcharge
heavily cut; depending on the size of the business and electricity demand, these industries pay either a fixed surcharge
of only 0.05 ct/kWh or a percentage amount of the total
surcharge of either 1% or 10%. The German government
has always been keen that the EEG, a key tool to trigger the
energy transition, does not harm the competitiveness of its
export-oriented heavy industry, as it is one of the cornerstones
of German economic welfare and employment.
Changes in the German Support Schemes
The German regulation regarding renewable electricity generation started in 1991 with the feed-in-law and has been based
since then on a FiT system. Grid operators are forced to integrate renewable electricity into the system (granting priority
dispatch and access), pay renewable generators based on the
predefined tariffs, and sell the electricity to distributors and end
consumers. As the tariffs for renewable generation exceed market prices, a deficit evolves for the grid operators. This deficit
is covered by a surcharge on electricity prices of consumers,
called Umlage.
For Germany, the big change came along with the conversion of the feed-in-law into the renewable energy act (Erneuerbare Energien GesetzEEG) in 2000. The 2000 EEG included
several renewable technologies (wind, PVs, hydro, biomass, and
geothermal) and provided sufficient incentives to trigger a substantial growth of installed renewable capacity (see Figure 10).
The EEG also set predefined annual regression rates for FiTs to
represent cost reductions due to technological advances. It also
featured detailed staggering of rates according to installation
size and other characteristics (such as a distinction for rooftop
and nonrooftop PV installations).
The EEG has been amended repeatedly (in 2004, 2009,
twice in 2012, and 2014). The changes were mostly related
to the following:
Tariff adjustments. All amendments altered remunerations, most notably in 2012 when PV tariffs were
table 2. Estimations of EEG feed-in-tariffs 19992014 by technology (ct / kWh).

1999 20022003
20042008 20092011
2012 Q1
2012 Q22013
Since 2014 Staggering
7.23
7.67
3.509.67
3.512.67
3.412.67
3.412.67
3.412.52
Size, new/retrofit
Biogas (waste) 7.23
n.a.
6.167.11
4.169.00
3.986.84
3.986.84
3.88.42
Size, source of gas
8.7010.23
8.4011.50
7.7911.67
6.0014.3
6.00 14.3
5.8513.66
Size, type
Geothermal
7.168.95
7.1615
14.5020.00
25
25
25.2
Size
Wind onshore 8.23
6.199.10
5.507.87
5.029.20
4.878.93
4.878.93
4.558.50
Nonlinear*
5.958.74
3.515.00
3.519.00
3.519.00
3.519.40
Nonlinear*
35.4957.4
21.1143.01
17.9424.43
8.9219.50
8.6513.15
Size, roof/other
Hydro
5.95
Biomass
Wind offshore
8.23 48.1050.60
PV
*Wind tariffs are nonlinear. For the first five years a higher tariff is applied, and it is thereafter reduced.
38
magazine
july/august 2015
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table 3. Renewable EEG generation and remuneration 20012013 by technology.

Hydro
Biogas (Waste) Biomass
Geothermal Wind Onshore Wind Offshore Solar
Gen.
Regime gWh
Rem.
M-
Gen.
gWh
Rem.
M-
Gen.
gWh
Rem. Gen. Rem. Gen.

M- gWh M- gWh
Rem. Gen.
M- gWh
Rem.
M-
Gen.
gWh
Rem.
M-
2001
FiT
6,088
n.a.
1,472
n.a.
10,509
n.a.
76
n.a.
2002
FiT
6,579
477
2,442
232
15,786
1,435 0
162
82
2003
FIT
5,908
327
3,484
327
18,713
1,696 0
313
154
2004
FiT
4,616 338
2,559
182
5,241
508
25,509
2,300 0
557
283
2005
FiT
4,953 364
3,136
219
7,367
795
27,229
2,441 0
1,282
679
2006
FiT
4,924 367
2,789
196
10,902 1,337 0
30,710
2,734 0
2,220
1,177
2007
FiT
5,547 418
2,751
193
15,924 2,162 0
39,713
3,508 0
3,075
1,597
2008
FiT
4,982 379
2,208
156
18,947 1,699 18
40,574
3,561 0
4,420
2,219
2009
FiT
4,877 382
2,020
143
22,980 3,700 19
38,542
3,389 38
6,578
3,157
2010
FiT
5,049 421
1,160
83
25,146 4,240 28
37,460
3,316 174
26
11,683 5,090
FiP
616
n.a.
803
n.a.
n.a.
159
n.a.
n.a.
FiT
2,397 231
487
36
23,374 4,476 19
45,043
4,165 568
85
19,339 7,766
FiP
2,446 n.a.
1,328
n.a.
4,603
n.a.
3,272
n.a.
n.a.
FiT
2,724 270
578
42
24,353 4,872 25
14,302
1,310 82
12
24,369 8,904
FiP
2,693 77
1,191
9,967
35,647
2,315 640
83
1,025
FiT
3,007 303
529
38
19,551 4,059 68
16
7,514
688
25,259 8,587
FiP
3,817 118
1,247
10
16,707 2,096 12
43,289
2,836 905
123
3,526
2011
2012
2013
n.a.
n.a.
970
n.a.
n.a.
252
759
*Hydro and biogas are reported jointly for 20012003 (for 20012003, hydro is added to the biogas column). (Source: www.
____
netztransparenz.de.)
____________
reduced twice to counter cost increases. Tariff adjustments generally concerned new installations only, except for the 2009 amendment that partially affected
existing installations as well.
The introduction of targets for capacity expansion per
technology and tariff adjustments based on whether the
targets are met or not (first for solar PVs in 2012 and then
for other technologies in 2014, also referred to as the
breathing-cap atmender Deckel). Table 2 shows estimations for the bandwidths of EEG remunerations from 2000
to 2014; Note that the values are approximations to represent the evolution of tariffs over the years. It is possible
that tariffs exist(ed) outside the provided bandwidths due
to exemptions and special conditions. In addition, biogas
(waste) includes landfill, sewage treatment, and mine gas.
july/august 2015
magazine
The inclusion of new technologies (for example, an ex-
pansion of included hydro units in 2004).

Regulation improvements to guarantee the correct
functioning of the system (clearer definitions regarding the obligation of grid operators to integrate renewable generation in 2004).
Adjustments to minimize undesired effects of increased renewable participation within the electricity
system (since 2009, grid operators can ramp down renewable generators if grid stability is threatened, and
since 2014 payment of FiTs is generally suspended
when negative electricity prices persist at the electricity exchange).
Attempts to incentivize direct marketing of renewable production (most notably the market premium system in 2012).
39
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The Market Premium System
The market premium system is an attempt to incentivize renewable generators to operate their installations in a market-oriented
manner. Renewable generators can choose not to receive the
FiT and instead sell their electricity at the electricity exchange
directly (hence the term direct marketing). They thus receive
the wholesale market price, and on top of that, an EEG-financed
FiP, which depends on the type of renewable generator and the
average market price at the electricity exchange for the month in
question (see Gawel and Parkus in For Further Reading for a
comprehensive overview on the exact calculus). The purpose of
the market premium system is to provide renewable generators
with a financially superior alternative to the FiT if they are able
to produce when the market requires more generation production. Table 3 illustrates renewable generation within the EEG
and associated remuneration since 2001.
Nonintermittent generators (e.g., hydro, biomass, and biogas)
were quick in adopting the FiP since they have the best capabilities to adjust their generation to market conditions. For these
technologies, the switch into the FiP also relieved overall EEG
cost, mostly because off-peak production is desincentivized and
the EEG system does not have to finance the gap between EEG
tariffs and low market prices during off peaks. Under FiT, nonintermittent generators would just receive a fixed remuneration,
unrelated to market price. This is a major inefficiency of the FiT
relative to the FiP.
Grid operators and the regulator alike were surprised by
the heavy adaptation of wind generators to the FiP system. The
adaptation to the FiP did not bring along similar reductions of
remuneration for wind as it did for nonintermittent generators.
This is because of the quasi-zero marginal cost of wind generators who still have incentives to produce even at negative market
prices, as long as the market price plus the FiP yield positive
marginal revenue. Hence, the FiP did not fulfill its purpose of
aligning production with market parameters for wind generators. This also led Gawel and Parkus to hypothesize that there
are still high windfall gains in Germany, and the regulator is left
in a dilemma to find the right equilibrium between FiP effectiveness and efficiency. The FiP must be high enough to trigger
adaptation of it, and at the same time it must be low enough so
that generators indeed adjust production to market conditions.
After years of heavy turmoil and discussion on how to control EEG cost, the German regulator seems to put its bets on the
market premium system as a main tool to control EEG costs
and bring renewable generators closer to the market. The last
2014 amendment foresees future regulation in this direction.
Already today, new installations above 500-MW capacity must
use the market premium system (FiT is no longer available). For
2016, the plan is to be reduce this limit to new installations over
100 MW capacity.
Concluding Remarks
RES-E have considerably increased in the EU, thus helping to
achieve the EU energy objectives. However, this increase has
resulted in different impacts on electricity markets, affecting
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the wholesale markets, markets for ancillary services, network

costs, and finally retail prices. In general terms, wholesale market prices are reduced, and other costs increase, when RES-E
increase their share.
Spain and Germany have been pioneers in the integration
of RES-E in their systems with approaches that share some
features but differ in others. Both countries have moved from
a FiT to FiP system where RES-E gradually participate in different markets, improving the efficiency of the system. Specific
characteristics of the technologies have been considered in the
remuneration scheme, such as the effect on distribution networks costs. Finally, while Germany has passed through full
RES-E costs to final consumers (with higher proportion to residential consumers), Spain has not allocated full RES-E costs to
consumers, creating a tariff deficit. Spain has applied a series of
modifications to RES-E remuneration as a means to reduce the
tariff deficit that may increase the regulatory risk of the country.
For Further Reading

CEER. (2015). Status review of renewable and energy efficiency support schemes in Europe in 2012 and 2013.
[Online]. Available: http://www.ceer.eu/portal/page/portal/
EER_HOME/EER_PUBLICATIONS/CEER_PAPERS/
______________________________________
Electricity/Tab4/C14-SDE-44-03_Status%20Review%20
______________________________________
on%20RES%20
Support%20Schemes_15-Jan-2015.pdf
___________________________________
K. Wrzburg, X. Labandeira, and P. Linares, Renewable
generation and electricity prices: Taking stock and new evidence
for Germany and Austria, Energy Economics, vol. 40, supp. 1,
pp. S159S171, Dec. 2013.
European Commission. (2014). Quarterly report on European electricity markets. [Online]. Available: http:// ec.europa.
eu/energy/sites/ener/files/documents/201410_q3-4_quaterly_re______________________________________
port_electricity_market.pdf
________________
P. Fras, P. Linares, L. Olmos, M. Rivier, F. Banez-Chicharro, C. Fernandes, M. Klobasa, J. Winkler, A. Ortner, and G.
Papaefthymiou. (2015, Mar.) Assessment report on the impacts
of RES policy design options on future electricity markets. [Online]. Available: www.res-policy-beyond2020.eu
L. Gelabert, X. Labandeira, and P. Linares, An ex-post
analysis of the effect of renewables and cogeneration on Spanish electricity prices, Energy Economics, vol. 33, supp. 1, pp.
S59S65, Dec. 2011.
E. Gawel and A. Purkus, Promoting the market and system
integration of renewable energies through premium schemes
A case study of the German market premium, Energy Policy,
vol. 61, pp. 599609, Oct. 2013.
Biographies
Jos Pablo Chaves-vila is with Comillas Pontifical University, Madrid, Spain.
Klaas Wrzburg is withEconomics for Energy, Vigo, Spain.
Toms Gmez is with Comillas Pontifical University,
Madrid, Spain.
Pedro Linares is with Comillas Pontifical University and
p&e
Economics for Energy, Madrid, Spain.
july/august 2015
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Halfway There
Can California Achieve
a 50% Renewable Grid?
CALIFORNIA IS FAMOUS
for the sun, wind, and waves that
draw millions of visitors and
thousands of new residents each
year. But can Californias most
famous natural resources power
half of its electric grid? The state
may soon find out. In the inaugural address for his record fourth
term in office, California Governor Jerry Brown set a goal of
deriving 50% of electricity from
renewable resources by 2030, as
part of a continuation of Californias efforts to reduce greenhouse gas (GHG) emissions.
California is not alone in its
consideration of high-renewable
futures. Numerous studies have
pointed to the need to decarbonize the electric sector as a key
strategy for achieving deep,
economy-wide reductions in
GHG emissions. To that end,
many jurisdictions have set
goals for deriving a high percentage of energy supplies from
renewable resources. The European Union Renewables Directive mandates that at least 20%
of total energy consumption
SEALIMAGES LICENSED BY INGRAM PUBLISHING,
SOLAR PANELSIMAGES LICENSED BY GRAPHIC STOCK
By Arne Olson, Amber Mahone, Elaine Hart,

Jeremy Hargreaves, Ryan Jones, Nicolai Schlag,
Gabriel Kwok, Nancy Ryan, Ren Orans, and Rod Frowd
july/august 2015
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1540-7977/152015 IEEE
41
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under 50% renewables coming

from those with a high penetration of both wind and solar
120
energy. The study addresses the
50% Solar PV Rooftop
following questions:
120
Solar PV Small
What are the operational
100
40% Solar PV Large
challenges of integrating
Solar Thermal
sufficient renewable re33% Wind (Out of State)
80
sources to achieve a 50%
Wind (In State)
renewable grid by 2030?
60
Hydro
What potential solutions
Common Resources
Geothermal
40
are available to facilitate
Biomass
the integration of variable
20
Biogas
renewable resources under a 50% renewable grid?
0
What
are the costs and
33%
40%
Large
Rooftop
Diverse Small
RPS
RPS
Solar
Solar
Solar
GHG impacts of achieving a 50% renewable grid
figure 1. 2030 Renewable generation scenarios by resource type and scenario (in GWh).
in 2030?
(including transportation, industrial, and other nonelectric
Would a renewable portfolio with significant quantifuel uses) come from renewable energy sources by 2020.
ties of distributed renewable generation cost less than
By 2030, Germany plans to generate 50% of its electricity
a portfolio of large-scale generation that requires subsupply with renewable resources (including large hydro).
stantial investments in new transmission capacity?
Finland aims to achieve 38% of its final energy consump What are some least regrets steps that should be taken
tion (including transportation and other end uses) from
prior toor in tandem withadopting a higher goal?
renewable energy sources by 2020, in part by relying on
What remaining key issues must be better understood
biomass resources.
to facilitate the integration of a high penetration of reWind and solar are the primary renewable resources
newable energy?
available for future development in California, and achievThe study considers four alternative scenarios that
ing a 50% renewable grid would likely require that these achieve 50% renewables and one that achieves 40% renewresources serve at least 40% of Californias electric load ables, distinguished by the mix of renewable resources in the
(geothermal, biomass, and small hydro play an important portfolio. All scenarios start from the same mix of resources
role today, but the supply for future expansion is lim- that are assumed to be online in 2030 to meet Californias curited). Although many jurisdictions have established high rent 33% renewables portfolio standard (RPS). The four 50%
renewable goals, no large power system in the world has scenarios are as follows:
achieved anywhere close to this level of wind and solar
The large solar scenario relies mostly on large, utility-scale
penetration. Among the current world leaders, we have the
solar photovoltaic (PV) resources, in keeping with current
following:
trends in California renewable energy procurement.
In Germany, in 2012, 21.9% of electricity generation
The small solar scenario relies mostly on larger,
was renewable, including 7.4% wind and 4.5% solar.
distributed (120 MW) ground-mounted solar PV
systems located close to load centers. This scenario
In Spain, renewable energy represented 24% of totests whether the economies of scale associated with
tal generation in 2012, including 18% wind and 4%
large-scale solar installations in high-insolation locasolar.
tions outweigh the cost of the transmission required to
In Denmark, wind served 30% of the domestic load
bring these resources to load.
in 2012; however, Denmark is a very small system
with strong interconnections to the large European
The rooftop solar scenario relies mostly on distributed
grid, and it frequently sells excess wind energy to its
residential and commercial rooftop solar PV installaneighbors.
tions to meet a 50% goal. Rooftop systems may bring
Is a 50% renewable grid achievable with wind and solar as
additional benefits due to reduced losses and deferred
the primary resources? This was the topic of a recent study
transmission and distribution system investment. This
commissioned by Californias five largest utilities and led by
scenario tests whether these additional values are sufEnergy and Environmental Economics, Inc. (E3). The study,
ficient to make up for the higher installed cost and
Investigating a Higher Renewables Portfolio Standard in
lower production of rooftop systems.
California, is the first comprehensive effort to assess the
The diverse scenario meets the 50% goal in 2030 by
technical challenges of operating the California system with
relying on a diverse portfolio of large, utility-scale
Total Renewable Generation (TWh)
160
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Operational
Challenges
of Achieving 50%
Renewables
Megawatts
resources. It includes some solar thermal resources

with energy storage, in-state wind, and out-of-state
wind, in addition to some in-state solar. This scenario
tests whether a more diverse portfolio can cost less
than the large solar scenario due to reduced integration challenges, despite the higher initial cost.
All resources, including rooftop solar, are assumed to be
compensated at the cost of installing and maintaining the systems (including a market-based equity return). In addition to
these four 50% scenarios, the study analyzes two scenarios
that serve as reference points against which to compare the
costs and operational challenges of the 50% scenarios:
The 33% scenario meets a 33% goal in 2030, representing an extension of the resource portfolio that is
already expected to be operational to meet the states
current 33% RPS in 2020.
The 40% scenario meets a 40% goal in 2030 by relying mostly on large, utility-scale solar PV resources.
The geographic scope of the analysis is a combination
of Californias three largest balancing authority areas [the
California Independent Service Operator (CAISO), Los
Angeles Department of Water and Power, and the Balancing
Area of Northern California], serving over 95% of the states
electric load.
Figure 1 shows the mix of renewable resources considered
for each of the described scenarios. All high-renewable scenarios include the resources expected to be online to meet
Californias current 33% renewable target by 2030. Moving
from 33% to 50% renewables, the large solar, small solar,
and rooftop solar scenarios add a resource mix that consists
of 80% solar PV resources and 20% wind (with the type
and location of the solar resources varying by scenario).
The diverse scenario includes a broad mix of technologies.
In addition to the resources added to meet the renewable
target (defined as utility-procured production divided by
retail sales), the study assumes
27,000
that 7,000 MW of customerowned solar PV resources
25,000
are installed by 2030 under
Californias net energy meter23,000
ing policies, enough to meet
21,000
approximately 5% of total load.
Net Load
2013
Increased
Ramp
17,000
2015
15,000
13,000
Wind and solar energy create a

number of challenges for electric system operators, which
are magnified at the level of
penetration needed to achieve
11,000
magazine
a 50% renewable grid. In particular, wind and solar generation have three key limitations in electric system operations:
variability: their output varies from moment to moment, creating a need for balancing services on various time scales
uncertainty: their output cannot be predicted with any
certainty in advance
concentration: their output is concentrated during a
limited number of hours of the year when the solar or
wind resources are abundant.
These limitations create challenges in designing power
systems to rely on wind and solar for a large proportion
of energy supply. The variability and uncertainty of wind
and solar energy have been the subject of numerous studies. Electric system operators address these challenges
through the procurement of additional operating reserves,
such as regulation or frequency responsive reserve for very
short time frames, or load following reserves for 560min time periods.
Concentration is an even larger challenge for energy
system design at a higher penetration. Serving half of the
electric load with wind and solar requires these resources
to provide well above half of the total supply during many
hours. Indeed, the study finds that overgeneration, which
occurs when total energy supply exceeds the systems ability
to ability to absorb it, is the single largest operational challenge under 50% renewables.
Californias renewable integration challenges have been
illustrated in the CAISOs widely circulated duck chart
(see Figure 2). So named because of its superficial resemblance to a water fowl, the chart highlights the changes that
occur to Californias daily net load profile (hourly electric
load minus must-run resources) over successive years as
more solar is added. Whereas in 2013 the net load shape is
19,000
Overview
july/august 2015
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Significant Change
Starting in 2015
Potential
Overgeneration
2020
0 1 2
3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
figure 2. CAISOs duck chart has been used to illustrate the need for increased upward
ramping capability under a higher-solar future (CAISO, www.caiso.com).
__________
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The study considers four alternative

scenarios that achieve 50% renewables and one
that achieves 40% renewables.
relatively flat and predictable during daylight hours, by 2020

the net load drops by several thousand megawatts during
peak solar production hours. The combination of increased
electric load in the evening hours (the chart represents a cool
spring day with significant residential heating load) and the
reduction in solar output around sundown creates a very significant upward ramp between 17:00 and 20:00. CAISO has
used this chart to argue that California utilities should be
required to procure sufficient upward ramping capability to
meet the projected need. CAISO and the California Public
Utilities Commission jointly developed the flexible resource
adequacy capacitymust-offer obligation (FRAC-MOO)
proposal that a 3-h upward ramping obligation be added to

Californias existing resource adequacy standard.
Analytical Approach
Megawatts
Megawatts
The study utilized a novel approach to simulating power system dispatch. E3s Renewable Energy Flexibility (REFLEX)
Model, implemented on ECCOs ProMaxLT platform, has a
number of unique features designed to investigate renewable integration issues under high penetration. These include
economic parameters that reflect the cost of dispatch inflexibility and random draws of stochastic variables such as load,
wind, solar, and hydro conditions taken from a very large
sample to ensure that the economic
results represent a true expected
27,000
Unserved
value. The model uses mixed-inteEnergy
25,000
ger programming techniques to capLimited
ture unit commitment requirements
23,000
Ramping
as well as the capability of each
Capability
21,000
resource to provide reserve products.
2013
The CAISO duck chart illustrates
19,000
Increased
the
potential for a lack of upward
Ramp
17,000
ramping
capability to prevent the
2015
Significant
Change
system
from
being able to serve the
15,000
Potential
Starting in 2015
Overgeneration
high loads that occur after sundown.
13,000
However, it does not take into con2020
sideration the potential for the cur11,000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
tailment of renewable energy output
(a)
to be used as a flexibility resource.
27,000
Renewable curtailment could allow
dispatchable resources to continue
25,000
to operate at their minimum generat23,000
ing levels rather than shutting down,
better positioning the system to meet
21,000
upward ramps.
2013
19,000
This point is demonstrated in
Increased
Ramp
Limited
Figure
3, which uses the duck chart
17,000
Ramping
2015
to
illustrate
the effects of limited
Capability
Significant Change
Potential
15,000
ramping
capability.
In (a), the renewStarting in 2015
Overgeneration
able
generation
is
treated
as must
13,000
run.
Because
a
limited
quantity
of
2020
11,000
upward
ramping
capability
is
avail0 1 2 3 4 5 6
17 18 19 20 21 22 23
Renewable
able, the system operator is unable
Curtailment
(b)
to meet the load during the evening
hours, resulting in unserved energy.
figure 3. Prospective curtailment of renewable energy output can be used to avoid
In (b), the renewable generation
firm load curtailment when upward ramping capability is limited. (a) The strategy to
is curtailed during the afternoon,
minimize downward violations and (b) the strategy to minimize upward violations.
44
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Wind and solar are the primary

renewable resources available for future development
in California.
allowing additional conventional generation to stay online

and reducing the required ramp to the available capability.
As a result, firm load curtailment is avoided.
Note that the renewable curtailment must be done prospectively. In this example, the renewables must be curtailed from 13:00 to 17:00 to avoid loss of load at 20:00.
This type of curtailment is different in character and in
implementation from curtailment driven simply by oversupply conditions.
The presence of a dispatch flexibility constraint on this
day means that the system operator must choose between
curtailing firm load in the evening or curtailing renewable
generation during the daytime. In such a situation, the system operator must consider the consequences of load and
renewable curtailment.
Load curtailment: Studies have placed the economic value of lost load at between US$5,000 and
US$50,000/MWh.
Renewable curtailment: Curtailed output must be
replaced with additional renewable energy generation to ensure compliance with the target. The value
of the curtailed renewable output might range from
US$50 to US$250/MWh, depending on the cost of replacement resources.
Given this vast disparity in value, renewable curtailment can be thought of as a default renewable integration
strategy in the presence of dispatch flexibility constraints.
Renewable integration solutions can then be assessed for
their effectiveness at reducing curtailment by increasing dispatch flexibility. This is the approach taken in this study.
Results
REFLEX model runs were conducted for four scenarios:
1) the 33% scenario, 2) the 40% scenario, 3) the 50% large
solar scenario, and 4) the 50% diverse scenario, as well as
for variations of the 50% large solar scenario that include the
implementation of several potential renewable integration
solutions. Due to time and resource constraints, the study did
not attempt to find an optimal generation mix or set of renewable integration solutions under the 50% renewable scenarios. Rather, it explored the operational challenges of a 50%
renewable grid, providing directional information about the
potential benefits and cost savings of integration solutions.
The largest integration challenge is overgeneration.
Overgeneration occurs when must-run generationnondispatchable renewables, combined heat and power, nuclear
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generation, run-of-river hydro, and thermal generation

that is needed for grid stabilityis greater than loads plus
exports. The study finds that overgeneration is pervasive at
penetration levels above 33%, particularly when the renewable portfolio is dominated by solar resources. This occurs
even after thermal generation is reduced to the minimum
levels necessary to maintain reliable operations.
Figure 4 shows an April day in 2030 under the 33, 40, and
50% large solar scenarios on which the system experiences
both low load conditions and high solar output. A very small
amount of overgeneration is observed at 33% penetration.
The 40% scenario experiences over 5,000 MW of overgeneration, while the 50% large solar scenario experiences over
20,000 MW of overgeneration.
Table 1 shows overgeneration statistics for the 33, 40,
and 50% large solar scenarios. In the 33% scenario, overgeneration occurs during 1.6% of all hours, amounting to
0.2% of available renewable energy. In the 50% large solar
case, overgeneration must be mitigated in 23% of hours,
amounting to 9% of available renewable energy, and reaches
25,000 MW in the highest hour. Potential solutions must
therefore be available during large portions of the year and
comprise a large total capacity.
To ensure reliable operations, REFLEX utilizes prospective curtailment, in which the system operator looks
ahead one or more hours, subject to uncertainty and
table 1. 2030 overgeneration statistics for
the 33, 40, and 50% large solar scenarios.
33%
RPS
40%
RPS
50% RPS
Large
Solar
GWh/year
190
2,000
12,000
Percentage of available
RPS energy
0.2%
1.8%
8.9%
Hours per year
140
750
2,000
Percent of hours
1.6%
8.6%
23%
99th percentile (MW)
610
5,600
15,000
Maximum observed (MW)
6,300
14,000
25,000
Overgeneration Statistics
Total overgeneration
Overgeneration frequency
Extreme overgeneration
events
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70,000
33% RPS
Generation (MWh)
60,000
50,000
40,000
30,000
20,000
10,000
0
1
11
13
(a)
15
17
19
21
23
Overgeneration
70,000
40% RPS
Imports/Exports
60,000
Pumped Storage
Generation (MWh)
50,000
Renewables
BTM Rooftop PV
40,000
DR
30,000
CCGTs
CTs, STs, ICs
20,000
Hydro
10,000
Cogen
Nuclear
0
1
11
13
15
17
19
21
23
15
17
19
21
23
Load
(b)
70,000
50% RPS
60,000
Large Solar
Generation (MWh)
50,000
40,000
30,000
20,000
10,000
0
1
11
13
(c)
figure 4. Overgeneration becomes significant on an April day in 2030 with under the 50% large solar scenario.
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Increasing the diversity of resources in Californias

renewable energy portfolio has the potential to reduce the
need for managed curtailment.
forecast error, and curtails renewable output as needed to

smooth out hourly and multihour ramps in accordance with
the capabilities of the fleet of dispatchable resources. This
occurs in instances where the system would otherwise be
unable to accommodate the steep upward ramps from the
mid-afternoon trough in net load to the evening peak,
as discussed previously. Planned and carefully managed
curtailment is therefore a critical tool for maintaining reliable operations. As long as renewable resource output can
be curtailed in the manner assumed, a high penetration
of wind and solar energy does not result in a significant
increase in unserved energy.
The quantity of managed renewable energy curtailment
increases exponentially as renewable penetration moves from
40 to 50%. For example, while the average curtailed renewable energy for the 50% large solar scenario is 9%, the marginal curtailmentthe proportion of the next megawatthour of renewable resources added to the portfolio that must be
curtailedis significantly higher: 2225% for most renewable
resources and 65% for solar PV, as shown in Table 2. Curtailment amounts to 26% of the renewable energy required to move
from 33 to 50% penetration under the large solar scenario.
This increase is driven largely by the heavy reliance on
solar PV resources. Solar production is highly concentrated
during the year, effectively placing limits on the quantity that
can be added without significant curtailment. Solar-driven
curtailment also affect other renewable resources, which are
also available to produce during daylight hours in the spring
and summer when the solar resource is strongest. The results
of this study indicate that the California grid is becoming
saturated with solar by the time it reaches 33% renewable
penetration; the continued procurement of solar PVs above
33% results in ever-increasing levels of curtailment.
Potential Integration Solutions

The study evaluates integration solutions that would reduce
the quantity of curtailment. The study considers the following
potential solutions:
Enhanced regional coordination, in which the operations of Californias grid are more carefully synchronized with those of its neighbors in the Western Interconnection. This allows flexibility that may be latent
in neighboring systems to help address Californias
flexibility challenges. It also allows California to find
a potential market for its surplus renewable energy
during some hours.
Conventional demand response (DR), in which electric
july/august 2015
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loads are reduced temporarily during times of grid

stress. Increased DR may help to meet load during the
hours after sundown in which a significant upward ramp
is required due to the drop-off in solar output. Conventional DR also serves as a proxy for evaluating the effectiveness of increasing the upward ramping capability of
Californias thermal fleet.
Advanced DR, in which electric loads are reduced during
some hours and increased during other hours to absorb renewable energy during hours when overgeneration occurs.
Energy storage, in which technologies such as batteries or
pumped hydro storage can absorb renewable energy during overgeneration conditions and supply energy to the
grid when the energy is needed.
Portfolio diversity, in which procuring a more diverse
portfolio of renewable resources reduces the number of
hours during which flexibility constraints create operational challenges. This solution is represented by the diverse scenario.
Table 3 shows the overgeneration statistics for the large
solar scenario and each of the solutions tested. Without
solutions, overgeneration comprises 9% of the available
renewable energy. Solutions are sized at approximately
5,000 MW of total capability.
The most valuable solutions are those that can reduce solardriven overgeneration during daylight hours when the system
experiences low load conditions. Figure 5 shows that downward
flexibility solutions, including increased exports, flexible loads,
and diurnal energy storage, all help to mitigate overgeneration. Alternatively, procurement of a more diverse portfolio of
renewable resources, which includes less solar and disperses the
renewable generation over more hours of the day, reduces the
daytime overgeneration compared to the large solar portfolio.
table 2. Marginal overgeneration (percent
of incremental magawatt-hours resulting in
overgeneration) by technology for various 2030
scenarios.
Technology
33%
RPS
40%
RPS
50% RPS
Large Solar
50% RPS
Diverse
Biomass
2%
9%
23%
15%
Geothermal
2%
9%
23%
15%
Hydro
2%
10%
25%
16%
Solar PV
5%
26%
65%
42%
Wind
2%
10%
22%
15%
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Integration solutions that provide only upward flexibility, like conventional DR, do not significantly reduce overgeneration. This means that upward ramping capability is
not a meaningful constraint on power system operations at
50% renewables in California under the conditions modeled for this study. This result may seem surprising, particularly since Californias early attempts to develop a standard
flexible capacity product have focused on a three-hour
upward ramping product. However, California already has
a relatively flexible fleet of natural gas and hydroelectric
resources, and this study suggests that adding 5,000 MW
of upward ramping capability does little to avoid flexibility
violations or reduce system dispatch costs.
Each of the solutions is assessed in isolation, with the
aim of indicating promising directions for further investigation. Preliminary analysis suggests that a portfolio of
solutions could substantially reduce the quantity of curtailment required to meet a 50% goal. However, the solutions
are subject to the economic law of diminishing marginal
returns, and avoiding all instances of renewable curtailment is likely to be cost prohibitive. Moreover, there are
likely to be significant challenges to implementing any of
these solutions. For example, the technical potential for
pumped storage or upwardly flexible loads in California
is unknown.
Cost and Rate Impacts

of a 50% Renewable Grid
The study estimates the statewide total cost and average
retail rate for each of the 33, 40, and 50% renewable scenarios. The total cost includes the cost of procuring and
operating the renewable and thermal resources, the cost of
transmission and distribution system investments needed to
deliver the renewable energy to loads, and nonstudy-related
costs such as the cost of existing generation, transmission,
and distribution. The total cost for the study area is divided
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by projected retail sales to calculate an average US/kWh

rate across all customer classes.
As a backdrop, the study estimates that the average retail
rate in California could increase from US14.4/kWh in 2012
to US21.1/kWh in 2030 (in 2012 U.S. dollars), a 47%
increase, before higher renewable levels beyond 33% are
taken into consideration. This increase is driven largely by
trends that are unrelated to renewable energy requirements,
such as the need to replace aging infrastructure. A 2011 analysis estimated that compliance with the current 33% standard
is expected to raise investor-owned utility rates by 68% in
2030 (relative to Californias 2011 renewable penetration of
approximately 13% of total energy).
Tables 4 and 5 show the cost and rate impacts of achieving a 50% renewable grid in 2030. The total cost of each
scenario, in terms of annual revenue requirement in 2030,
is shown in Table 4. The total increase in annual revenue
requirement associated with a 50% renewable goal in 2030
ranges from US$5.2 to US$13.3 billion above the 33% scenario; this includes CO2, fuel, and capacity savings as well
as increases in renewable procurement costs.
Table 5 shows average retail rates under the 33% scenario, and the increases in percentage terms for each of the
higher renewable scenarios relative to 33%. Under base
case assumptions about natural gas prices, CO2 allowance
prices and renewable energy costs, the 50% large solar scenario raises average retail rates by US3/kWh relative to
the 33% scenario. Figure6 plots the average rate increases
for each scenario under combinations of natural gas, CO2
allowance, and renewable energy costs considered, relative
to a 33% standard in 2030.
Study Findings
The analysis reveals several interesting findings.
Under a wide range of CO2, natural gas, and renewable
energy prices (gas prices from US$3 to US$10/MMBtu,
table 3. 2030 overgeneration statistics for the 50% large solar scenario and four solution cases.
50% RPS
Large Solar
Enhanced
Regional
Coordination
Advanced
DR or Energy
Conventional DR Storage
Diverse
Portfolio
GWh/year
12,000
4,700
12,000
5,000
5,400
Percentage of available RPS energy
8.9%
3.4%
8.8%
3.7%
4.0%
Hours per year
2,000
1,000
2,000
1,200
1,300
Percent of hours
23%
12%
23%
14%
15%
Overgeneration Statistics
Total overgeneration
Overgeneration
Extreme overgeneration events
48
99th percentile
15,000 MW
9,900 MW
15,000 MW
9,900 MW
10,000 MW
Maximum observed
25,000 MW
20,000 MW
25,000 MW
20,000 MW
19,000 MW
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Overgeneration (MW)
CO2 prices from US$10

30,000
to US$100/metric ton,
50% Large Solar
and a range of solar PV
Enhanced Regional Coordination
and wind costs), the
25,000
higher renewable sceConventional Demand Response
narios result in higher
Flexible Load/Energy Storage
20,000
electric rates. The rate
Diverse Renewable Portfolio
impacts are expected
15,000
to be lowest under the
high gas and CO2 price
10,000
sensitivity with low renewable energy costs.
Rate increases are ex5,000
5,000 MW
pected to be significantly higher under the
0
0%
5%
10%
15%
20%
25%
30%
50% scenarios than
% of Hours
under the 40% scenario. This is primarily
figure 5. Renewable integration solutions such as enhanced regional coordination, flexible
due to the exponential loads, energy storage, and procuring a diverse portfolio of renewable resources can signifiincrease in renewable cantly reduce renewable overgeneration.
energy curtailment as
the renewable target increases toward 50%, requiring a
these sensitivity results are reduced when PV costs are
significant overbuild of the renewable portfolio to meet
lower than in the base case.
the standard.
The small solar and rooftop scenarios are costlier
than the large solar and diverse scenarios. This is
The diverse scenario shows a substantially lower rate
largely due to the difference in cost and performance
impact than the more heavily solar dominated cases,
assumed for distributed PV systems relative to cenprimarily because the diverse portfolio results in less
tral station systems. Rooftop systems, in particular,
overgeneration. This is despite the fact that the first
are significantly more expensive than larger systems
cost of the resourcesthe cost of a renewable power
and have lower capacity factors (due to suboptimal
purchase agreementis higher in this scenario than
tilt and orientation as well as location in coastal arin the large solar scenario. This higher first cost is
eas). Differences in transmission and distribution
more than made up for by the reduced curtailment that
costs are small.
occurs due to a more diverse output profile.
The projected cost increases for the higher renewable
The rank order on costs between the scenarios stays
the same under all uncertainty ranges considered. scenarios are due largely to the high and increasing cost
Costs are expected to be highest under the rooftop so- of renewable integration. While wind and solar costs are
lar scenario, followed by the small solar, large solar projected to be comparable to the cost of conventional
and diverse scenarios. The cost differences between resources on a levelized cost of energy basis in 2030,
table 4. 2030 revenue requirement (in 2012 US$ billion) for each scenario,
percentage change is relative to the 33% scenario.
Revenue Requirement Category
33% RPS
40% RPS
50% RPS
Large Solar
50% RPS
Diverse
50% RPS
Small Solar
50% RPS
Rooftop
Solar
CO2 compliance cost
3.2
2.9
2.5
2.4
2.5
2.5
Conventional generation
20.3
19.5
18.7
18.1
18.7
18.6
Renewable generation
8.2
10.6
17.1
14.8
18.5
22.8
Transmission
6.5
7.1
7.8
7.9
7.4
7.3
Distribution
16.2
16.2
16.3
16.3
16.7
16.5
Miscellaneous/other costs
2.5
2.5
2.5
2.5
2.5
2.5
Total
56.9
58.8
64.9
62.1
66.3
70.3
Percentage change
n/a
3.2%
14%
9.1%
16.4%
23.4%
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This article assesses the operational impacts, challenges,

costs, GHG reductions, and potential solutions associated with
a 50% renewable grid in California by 2030.
by approximately 6 million
metric tons in 2030, while
a 50% goal would reduce
GHG emissions by 1415
million metric tons relative
to a 33% goal in 2030. The
High Gas and CO2, Low RE Cost
implied cost of GHG emisLow RE Cost
sion reductions is calculated
High Gas
as the change in total cost
High CO2
(excluding CO2 compliBase
ance costs) divided by the
Low CO2
change in GHG emissions
Low Gas
relative to the 33% scenario.
High RE Cost
The implied carbon abateLow Gas and CO2, High RE Cost
ment cost is $340/ton for the
Note: RE = Renewable Energy
40% scenario, $403/ton for
diverse scenario, and $637/
figure 6. Cost differences between renewable portfolios under a range of assumptions,
ton for the large solar scerelative to the 2030 33% scenario (in 2012 US cents/kWh).
nario. GHG abatement costs
would be reduced if lowerovergeneration and other integration challenges have a cost solutions to the overgeneration challenge can be
substantial impact on the total costs for the 50% renewable implemented.
scenarios.
Figure 7 shows GHG emissions for each of the six sce- Effect of Renewable Integration
narios. The 50% renewable scenarios reduce GHG emis- Solutions on Costs and Rates
sions relative to the 33% scenario. Increasing the renew- The cost impacts shown in Tables 4 and 5 incorporate only
able energy goal from 33 to 40% reduces GHG emissions the default integration solution of renewable energy
40%
50% Large Solar 50% Diverse
50% Small Solar 50% Rooftop Solar
Change Relative to 33% RPS (cents/kWh)
0.0
+2.0
+4.0
+6.0
+8.0
table 5. Average electric rates under the 33% RPS scenario and percent increases for
the higher renewable scenarios under a range of input assumptions (in 2012 U.S. cents/kWh).
50% RPS
Diverse
50% RPS
Small Solar
50% RPS
Rooftop
Solar
16.4%
23.4%
33% RPS
40% RPS
US/kWh
Percent Change Relative to 33% Scenario
21.1
3.2%
14%
Low gas
19.8
4.1%
16.5%
11.3%
19.1%
26.5%
High gas
22.9
2.2%
11.3%
6.6%
13.5%
19.9%
Base
50
50% RPS
Large Solar
9.1%
Low CO2
20.5
3.6%
15.2%
10.2%
17.7%
24.9%
High CO2
22.6
2.4%
11.8%
7.1%
14%
20.6%
Low RE cost
21
2.3%
9.9%
7.1%
11.6%
16.3%
High RE cost
21.2
4.2%
18.1%
11.1%
21.2%
30.5%
Low gas and CO2, high RE cost
19.2
5.7%
22.3%
14.7%
25.8%
36%
High gas and CO2, low RE cost
24.2
0.7%
5.8%
3.1%
7.2%
11.3%
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A number of promising integration

solutions are identified that could help to mitigate
overgeneration.
2030 CO2 Emissions

(Million Metric tons)
curtailment. Implementation of
80
one or more alternative solutions
56.9 MMt
49.5 MMt 48.5 MMt
49.5 MMt 49.4 MMt
63.7 MMt
(10%)
(21.6%) (23.3%)
(21.7%) (21.8%)
may reduce the cost impacts
70
by enabling a larger proportion of renewable energy out60
put to be delivered to the grid.
50
The study did not conduct a
detailed costbenefit analysis of
40
the renewable integration solutions but did provide high-level
30
cost and rate impacts under an
illustrative range of high- and
20
low-cost assumptions for each
10
solution. Even though the study
assumes that significant quanti0
ties of each solution (5,000 MW)
33% RPS 40% RPS 50% RPS 50% RPS 50% RPS
50% RPS
Large Solar Diverse Small Solar Rooftop Solar
are implemented, these cases are
not sufficient to fully eliminate
figure 7. Higher renewable penetration scenarios result in significant reductions in
overgeneration.
Californias GHG emissions.
Figure 8 shows the effect of
implementing these solutions,
compared to the 33% scenario.
Change Relative to 33% RPS (cents/kWh)
As a benchmark, the 50% large
0.0
+1.0
+2.0
+3.0
+4.0
solar scenario, with only the
default renewable curtailment
50% RPS
solution, is expected to increase
Large Solar
average rates by US3/kWh, or
Flexibility Solutions:
14%, relative to the 33% sce50% RPS Diverse
nario. The diverse scenario is
also shown as an integration
Enhanced Regional
Coordination
solution, along with a point estiAdvanced DR
mate of its rate impact under base
case assumptions. The diverse
Energy Storage
scenario reduces the average
rate by US1/kWh relative to the
large solar scenario.
The Enhanced Regional Coorfigure 8. Implementing low-cost solutions such as enhanced regional coordination or
dination and Advanced DR solu- a more diverse portfolio can significantly reduce the cost increases associated with a
tions provide cost savings rela- 50% renewable grid.
tive to the large solar scenario,
even under the high cost range. The low cost range for Conclusions
energy storage, modeled here as 5,000 MW of pumped stor- This article assesses the operational impacts, challenges,
age, reduces the total cost of achieving the 50% large solar costs, GHG reductions, and potential solutions associated
scenario by just over US0.5/kWh. Only the high-cost battery with a 50% renewable grid in California by 2030. It finds that
storage case results in higher costs. All of the solution cases there are no technical barriers to achieving a 50% renewable
modeled here result in higher expected rates compared to the grid. Renewable integration challenges, particularly over33% scenario.
generation during daylight hours, are likely to be significant
july/august 2015
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at 50% renewables. At high penetrations of renewable generation, a significant amount of renewable resource curtailment will be necessary to avoid overgeneration and to
manage net load ramps. Achieving a 50% renewable grid is
expected to result in electric rate increases of 914% under
base case assumptions about natural gas prices, CO2 allowance prices, and renewable energy costs.
While the cost increases are significant, a number of promising integration solutions are identified that could help to
mitigate overgeneration, including procurement of a diverse
portfolio of renewable resources, increased regional coordination, flexible loads, and energy storage. Timely implementation of a portfolio of renewable integration solutions will be
critical to achieving higher renewable penetration at a reasonable cost to electric customers. However, this will involve
substantial challenges related to cost, feasibility, and siting of
solutions. Additionally, California currently lacks a process
through which integration solutions can be identified and cost
recovery for solution investments can be authorized.
A 50% renewable grid is shown to cause increases in
electric rates under a wide range of natural gas prices, CO2
allowance prices, and renewable resource costs. The lowest-cost 50% renewable portfolio is one with a diversity of
renewable resource technologies. The highest-cost portfolio
is one that relies extensively on rooftop solar PV systems.
Lessons for California Policy Makers

Based on the findings in this article, California policy makers should keep in mind the following lessons when considering higher renewable mandates:
Increase regional coordination. Increased coordination of electric grid operations between California and
its neighbors can facilitate the task of integrating more
renewable resources into the bulk power system at a
lower cost. Although California already depends on its
neighbors for imports during summer peak periods, an
increased level of coordination across the west would include more sharing of flexible resources to support better
integration of renewable energy across the regionwind
energy in the Pacific Northwest and Rocky Mountains
and solar resources in the Desert Southwest.
Pursue a diverse portfolio of renewable resources.
Increasing the diversity of resources in Californias
renewable energy portfolio has the potential to reduce
the need for managed curtailment. More diverse renewable generation profiles can better fit within Californias energy demand profile. The benefits of developing a diverse portfolio are complemented by, and in
many ways tied directly to, increased regional coordination since the largest benefit is likely to be achieved
through increased geographic diversity across a wide
area. Significant reliance on rooftop solar, in particular, is shown to result in the largest rate increases.
Rooftop solar costs more to install and produces less
energy per Watt installed than ground-mounted solar.
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Implement a long-term sustainable solution to ad-
dress overgeneration before the issue becomes more

challenging. A long-term sustainable strategy to manage the potential large amounts of overgeneration that
could result from higher renewable penetrations should
be developed before it begins to impact the financing
of new renewable generation projects. A long-term sustainable solution must be technically feasible, economically efficient, and implementable in California. It must
include a mechanism for ensuring that renewable developers continue to receive a sufficient return to induce
investment in projects on behalf of California ratepayers. It must also include a process through which costeffective renewable integration solutions can be identified, investment authorized, and costs recovered.
For Further Reading

International Energy Agency. (2013). Energy policies of IEA
countries. [Online]. Available: http://www.iea.org/bookshop/
486-Energy_Policies_of_IEA_CountriesThe_European_
______________________________________
Union
____
Energy and Environmental Economics, Inc. (2015, 1 Mar.).
Investigating a higher renewables portfolio standard in California. [Online]. Available: ___________________
https://ethree.com/public_projects/renewables_portfolio_standard.php
__________________________
J. Hargreaves, E. Hart, R. Jones, and A. Olson, REFLEX:
An adapted production simulation methodology for flexible
capacity planning, IEEE Trans. Power Syst., vol. 30, no. 3,
pp. 13061315, Sept. 2014.
A. Olson, R. Jones, E. Hart, and J. Hargreaves, Renewable curtailment as a power system flexibility resource,
Electricity J., vol. 27, no. 9, pp. 4961, Nov. 2014.
Biographies
Arne Olson is with Energy and Environmental Economics,
San Francisco, California.
Amber Mahone is with Energy and Environmental Economics, San Francisco, California.
Elaine Hart is with Energy and Environmental Economics, San Francisco, California.
Jeremy Hargreaves is with Energy and Environmental
Economics, San Francisco, California.
Ryan Jones is with Energy and Environmental Economics, San Francisco, California.
Nicolai Schlag is with Energy and Environmental Economics, San Francisco, California.
Gabriel Kwok is with Energy and Environmental Economics, San Francisco, California.
Nancy Ryan is with Energy and Environmental Economics, San Francisco, California.
Ren Orans is with Energy and Environmental Economics, San Francisco, California.
Rod Frowd is with ECCO International, Caloundra,
Australia.
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july/august 2015
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Solar, Solar
Everywhere
By Bruce Mountain and Paul Szuster
AT THE END OF 2014, 16% OF AUSTRALIAS

detached and semidetached housesnearly 1.4 million
homeshad photovoltaic (PV) systems on their roofs. That
makes Australia, by a wide margin, the global leader in
rooftop PV installation per household. This outcome was
achieved from a negligible base at the start of 2010, and such
rapid expansion was widely unexpected.
This article documents the rise of rooftop PV in Australia. We explain why rooftop PV has grown as quickly as it
has and consider the outcomes that this has produced. The
currency used in this article is Australian (AU) dollars,
which was worth US$.80 at the time of writing.
The Rise of Rooftop PV Systems

in Australia
Between the end of 2007 and end of 2014, the number of
PV systems installed on the rooftops of Australian homes
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Opportunities and
Challenges for Australias
Rooftop PV Systems
increased from 8,000 to 1.4 million as shown in Figure 1,
broken down by Australian state.
The average size of PV systems in Australia is small by
global standards. For example, Germany, the global leader
in PVs, had an average system size per installation at the end
of 2012 of 40 kWpeak. The comparative figure in Australia is
just 4 kWpeak.
The size of rooftop PV systems in Australia has progressively increased from 1.1 kW for systems installed in 2009
to 4 kW for systems installed in 2014. The small system size
1540-7977/152015 IEEE
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reflects the dominance of household rooftop PV installation.

The design of PV subsidies has also affected system size. In
addition, the very high level of private home ownership in Australia is likely to have affected the propensity of households to
invest in PV systems (88% of all detached or semidetached
dwellings with rooftop PV systems are privately owned).
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contestable market, however, have been able to achieve price

reductions of around 1015% from regulated reference tariff prices. Rising electricity prices has stimulated consumer
awareness and, obviously, improved the relative economics of
distributed generation.
Subsidies
Explanatory Factors
The rapid expansion of rooftop PVs can be explained by
three factors: rising electricity prices, capital subsidies (certificate schemes) and production subsidies [feed-in tariffs
(FiTs)], and declining PV system costs.
From 2010 to 2012, significant capital and production subsidies were available to promote the uptake of PV systems.
Capital subsidies were paid through a mandatory renewable
energy certificate scheme. Production subsidies were paid
through jurisdictional governWment-determined FiTs.
Rising Household Electricity Prices
Capital Subsidies
Australian household electricity prices rose 90%, adjusted

for changes in the consumer price index, between 2007 and
2013, as shown in Figure 2. Rising network costs have been
the main contributor to these increases [see Productivity
Commission (2013) in For Further Reading for a full discussion of this].
Household electricity prices in Australia, at purchasing
parity rates of exchange, are higher than the average in the
European Union and Japan and much higher than average
prices in Canada or the United States, according to Mountain, (2012a). In 2015, the average household electricity prices
on regulated reference tariffs in the different jurisdictions of
Australia range between AU$280/MWh and AU$380/MWh,
with a national average of AU$320/MWh (see Figure 3).
Some households that have chosen tariffs offered in the
A nationwide mandatory renewable certificate scheme (the

Renewable Energy Target) funded capital subsidies. Under
this scheme, a number of certificates can be created once a PV
system has been commissioned. The number of certificates
per installed system is based on the expected, deemed,
production for 15 years. Over the period from 2009 to
2013, a multiplier for the deemed production affected the
certificate entitlement per installation for the first 1.5 kW
of installed capacity. The multiplier reduced from five in
July 2009 to one from the start of 2013.
Electricity retailers have an obligation to surrender a
number of certificates to the clean energy regulator each
year, which calculates the obligation as a proportion of
retailers sales volumes. Through this, the cost of certificates incurred by the retailers is recovered from energy
1.4
1.36
Qld
NSW
Vic
SA
WA
ACT
Tas
NT
1.19
1.2
0.99
(Millions)
1.0
0.8
0.64
0.6
0.4
0.28
0.2
0.09
0.01
0.02
2007
2008
0.0
2009
2010
2011
2012
2013
2014
figure 1. Australian cumulative solar PV installations, from the end of 2007 to January 2015. (Sources: Carbon and
Energy Markets and Clean Energy Regulator 2015).
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2.0
1.9
ElectricityDecember 1999 = 1.0
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
14
20
20
13
12
20
11
20
10
20
09
20
08
20
20
07
06
20
05
20
04
20
03
20
02
20
01
20
00
20
19
99
0.9
Year (as of December)
figure 2. The Australian household electricity price index, adjusted for changes in the consumer price index. (Source:
Australian Bureau of Statistics 2015.)
users. Large emission-intensive and trade-exposed energy

users are partially exempt from certificate obligations.
The capital subsidy arrangements were fundamentally
changed from the start of 2011. Before 2011, the certificates
created by PVs were fungible with the certificates from other
certificate-eligible renewable sources. At that time, certificate prices were determined in a market that reflected an
annual mandatory demand for certificates but a variant supply of certificates from PVs and other competing eligible
renewable energy technologies. After 1 January 2011, certificates from PVs became part of a subsidy scheme with
unlimited certificate volume, and the Australian government became a buyer of last resort offering a fixed price of
AU$40 per certificate. Again, charges are passed through to
users through an annual obligation determined by the regulator based on the number of certificates created.
The majority of PV owners sold their certificates to their
installers as part of their PV purchase. PV installers would
typically offer to purchase certificates from their customers
for AU$25AU$30 per certificate, and they would then typically sell these certificates to retailers directly or through
brokers for around 25% more than they paid.
Production Subsidies
Production subsidies were paid through jurisdictional,

state and territory government, determined FiTs that set a
price for electricity fed back into the electricity grid. The
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FiT prices varied significantly in each jurisdiction over the

period from 2008 to 2013, scaled back as solar PV installations increased, as shown in Figure 4.
In addition to jurisdictional FiTs, energy retailers typically also offered payments to households for electricity
exported to the electricity grids from their PV systems. In
all jurisdictions other than New South Wales (NSW) and
the Australian Capital Territory (ACT), the FiT and retailer
payments are based on the net metered generation, i.e., PV
production minus electricity used at the point of installation.
In NSW and the ACT, FiT payments were based on total PV
production (gross metered production).
The retailers in turn recover the aggregate mandatory
feed-in payments by charging this to the regulated network
service providers, except in Western Australia. The regulated
network service providers in turn recover the FiT payments
from electricity consumers through regulated charges to the
consumers that they supply. In the case of one jurisdiction
NSW, the retailers recover the FiT payments from the jurisdictional government that then in turn recovers this through
a levy on all energy users. The NSW government, uniquely,
also requires retailers to pay the government a set amount
(for fiscal year 2013/2014 this was deemed AU$.066/kWh)
for the electricity procured from PV owners.
In addition to FiTs, PV owners typically also receive
payment from their energy retailers for electricity production exported to the grid, which the retailers then sell
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35
Network Charge
Nonnetwork Charge
(AU Cents per kWh)
30
25
20
15
10
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Outcomes from
Various Perspectives
What have been the consequences, so far,
of the rapid rise of rooftop PV systems in
Australia? This section considers this from
the perspective of the households with
rooftop PV systems, electricity consumers
who have not installed PV systems, the network service providers, and the incumbent
grid-based generators and retailers.
Households with
Rooftop PV Systems
(AU Cents per kWh)
Households have invested an aggregate

of AU$11 billion in installing rooftop PV
0
systems over the last four years. Has this
SA
Vic
QLD
NSW
Tas
(Australian Jurisdiction)
been a profitable investment? Figure 5
shows the Australia-wide net present
figure 3. A breakdown of the average price for average consumption in
value (NPV) of investment in PVs by
Australia households.
1.36 million households over the period
to their other customers. In four jurisdictions, Victoria, 1 January 2010 to 31 December 2014. We find the internal
South Australia, Western Australia, and Tasmania, retail- rate of return [(IRR), the discount factor at which the NPV
ers were required to pay PV owners a specified price for is zero] to be 8.9%. In Figure 5,
the electricity exported to the grid while three other juris capital outlay is the present value of the outlay that
dictions Queensland, NSW, and the ACT, do not mandate
households made at the time of the PV systems
the price.
installation
capital subsidy is the present value of the renewable
energy certificates received by households at the
PV System Costs
time of installation
As a countrywide average, the installed cost of PV on household roofs declined from around AU$12 per watt in 2008
the mandatory production subsidy is the present value
of the jurisdictional government mandated FiTs
to fewer than AU$2 per watt in 2014. As of February 2015,
6-kW rooftop systems were being offered for AU$4,000
retailer payments is the present value of the payments
(after a AU$3,000 capital subsidy). The same system would
received by households from energy retailers for elechave cost AU$54,000 in 2009 (after a AU$8,000 capital
tricity fed back into the electricity grid
subsidy at that time). The decline in costs may be attributed
avoided energy purchases is the present value of the
to three main factors: appreciation of the Australian dollar
energy produced by PV and consumed at the house(over the period until the end of 2013), large reductions in the
hold, thereby avoiding purchases from the grid.
price of solar panels, and greater competition among system
The IRR varies for different jurisdictions depending
installers in Australia.
on many factors, including variances in irradiation, subsidies and costs, and ranges from
70
a high of 11.5% in South Australia
SA
WA
(which has good radiance and has
60
Qld
NSW
had higher subsidies) to 5.5% in
ACT
Vic
50
Tasmania (which has less favorable
Tas
irradiance and lower subsidies).
40
These calculations pertain to the
national and jurisdictional aggre30
gates. Individual households may
20
have a higher or lower return on
their investment depending factors
10
such as the price they paid, their
0
household electricity consumption,
2008
2009
2010
2011
2012
2013
2014
2015
the size of the PV system, and their
location.
figure 4. Jurisdiction-specific FiTs, 20082015.
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(Billions of Australian Dollars)
These calculations also pertain

Avoided Energy
to the costs and benefits of PVs
Capital Outlay
Purchases
received by the initial owners of the
(11.0)
3.2
$PV systems, i.e., those households
who incurred the outlay to install the
Retailer Payments
2
Mandatory
0.9
systems, the original PV owners, and
Production Subsidy
consequently received the capital
3.3
4
and production subsidies. Many of
Capital Subsidy
6
these homes will be sold before the
3.5
assumed 25-year life of the PV sys8
tem. When the house is sold, mandatory production subsidies end in
10
some states.
It might be argued that house12
holds obtain other benefits (beside
a financial return on investment) figure 5. Discounted present value (to households) of their investment in PVs
from installing PV systems. Such (in billions of Australian dollars).
benefits include greater control over
their electricity supply or meeting personal environmen- Production Subsidies
tal objectives. Households also have tax advantages for Figure 5 shows that the present value, discounting at the
their PV investment; their income produced from PVs is IRR, of the mandatory production subsidy (the FiT) is estinot taxed. Therefore, it might reasonably be argued that mated to be AU$3.3 billion, varying by jurisdiction. The
households would have been willing to accept a lower rate undiscounted total FiT subsidy is AU$4.5 billion. Figure 7
of return than 8.9%. In this sense, it might be argued that shows the profile of the payment of FiTs to 2030, at which
households with installed PVs have profited unreasonably point they will all have terminated. The large hump for NSW
from their investment in rooftop PV systems. However, it reflects the use in NSW of a gross FiT.
would be hard to argue that a return on investment of 8.9%
In total, approximately AU$10 billion (undiscounted)
is excessive; investors in grid-based generators are likely will be paid in capital and production subsidies for the 1.4
to have expected more, and in this sense households have million rooftop PV systems. Per MWh produced over the
been willing to invest with lower expected returns than life of the PV, the subsidy is around AU$100/MWh. Energy
grid-based competitors.
users, including the households with rooftop PVs, are bearing this subsidy. While the subsidy can be valued with reasonable certainty, it is more difficult to be certain about the
Electricity Consumers Without PV Systems
Electricity consumers without PV systems have been benefits that all users would share as a result of the impact
impacted in a few ways. As production and capital subsidies of PV systems on the wholesale electricity market and on
have been recovered from consumers, they are bearing the networks. A preliminary discussion follows.
consequence of higher network charges as a result of lost
revenue from houses that have PV systems, and they are get- Electricity Distributors
ting the benefit of lower wholesale prices as a result of merit- The beneficial impact of household PVs in reducing network
order effects. In the next section, we quantify the impact of losses and effectively augmenting capacity by pushing electricsubsidies and then examine the impact of network revenues ity back into the grid in the opposite direction to the predomiand wholesale market prices in the following section.
nant flows is likely to be significant. For example, in Western
Australia, the Independent Market Operator (2013) estimates
that PV systems in Perth are producing generation equivalent
Capital Subsidies
In the period 1 January 2010 to 31 December 2014, approxi- to around 27% of their installed capacity at the time of regional
mately 153 million solar PV renewable energy certificates peak demands. Rooftop PV production at the typical time of
were created. The estimated total undiscounted cost of these regional peak demand is estimated to range between 28%
certificates is A$5.5 billion. As shown in Figure 5, the esti- (Queensland), 29% (NSW), 35% (Victoria) and 38% (South
mated present value of this, discounting at the IRR, is AU$3.9 Australia) of its installed capacity, according to the Australian
billion. Figure 6 shows that the value of capital subsidies Energy Market Operator (2012). Assuming that 30% of the
peaked in 2011 so that despite continued (solid) increases 3.75 GW of rooftop PV capacity coincides with the simultanein PV installation rates over the period (see Figure 1), the ous peak demands in the regional electricity markets of Ausdecline in the PV multiplier meant that total certificate sub- tralia, this amounts to an aggregate average demand reduction
of a little over 1,000 MW at the time of the peak demands.
sidy declined significantly.
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(Billions of Australian Dollars per Year)
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is effectively recovered in
higher network prices.
1.6
1.47
1.4
1.24
1.15
1.2
Qld
NSW
Vic
WA
Tas
ACT
SA
Grid-Based Electricity
Retailers and
Generators
1.0
What impact has household

PVs had on reducing whole0.8
sale electricity prices? We
0.6
estimate that the 1.36 mil0.46
lion rooftop PV systems
0.39
0.4
installed by the end of 2014
0.2
will produce around 5.8
TWh per annum. This is
$just 3.5% of Australias cen2010
2011
2012
2013
2014
trally dispatched electricity
figure 6. Renewable energy certificates created through the installation of household PVs
production. At first sight, a
in billions of Australian dollars (2014).
3.5% reduction in average
Network costs in Australia are extraordinarily high by inter- demand is unlikely to have a significant or lasting impact on
national standards. Regulated network service providers in Aus- wholesale market prices. However, 90% of PV production
tralia have been provided with regulated expenditure allowances occurs in just six hours, from 10 a.m. to 4 p.m., so the PV
that average AU$3 million per megawatt of capacity added on share of consumption is more appropriately stated as a perdistribution networks and AU$1.3 million per megawatt of centage of consumption during this time, in which case the
capacity added on transmission networks. On the assumption PV share of the market (half-hourly demand) rises to around
that the 1.36 million PV units were effective in avoiding aug- 5%. This is just a national average, and again the assessment
mentation on both distribution and transmission networks, the is made more meaningful by looking at individual regions.
In South Australia, where PV systems are installed on
value of the avoided expenditure might therefore be estimated at
between AU$1.3 billion (1,000 MW multiplied by AU$1.3 mil- 21% of households, the PV share of South Australias cenlion per megawatt) and AU$3 billion (1,000 MW multiplied by trally dispatched electricity production between 10 a.m. and
4 p.m. is around 18%. Furthermore, this PV production is
AU$3 million per megawatt).
However, the extent to which PVs actually avoid the at the time when the supply cost curve is most likely to be
need for augmentation of much of the distribution network relatively steep, which implies that an effective reduction
is not clear. Residential maximum demands occur around in residual demand, total demand minus PV production,
or after sunset, and so the ability of PVs to defer augmen- can be expected to have a reasonably significant impact on
tation of residential feeders and other bits of the network wholesale market prices.
The conclusion from this preliminary analysis is that
dominated by residential load is likely to be small. Load
flow and statistical studies would be useful in understand- household PV system can be expected to have already had a
ing with greater certainty how asset utilization is affected reasonably significant impact on wholesale electricity prices,
by PVs at or near the times of peak demand at different at least in some of Australias regional electricity markets. The
points on the network, from the local reticulation lines all benefit of this should be calculated and counted as part of the
the way to zone and bulk supply substations, subtransmis- assessment of PV subsidies. According to McConnell et al.,
retrospective modeling of the merit-order effect on wholesale
sion and the extra-high-voltage transmission lines.
The income for electricity distributors from households with prices from PVs in the Australian energy market found for 5
installed rooftop PV systems is much lower than for households GW of capacity the reduction in wholesale prices would have
without PV systems. The effect around Australia varies for many been worth in excess of AU$1.8 billion over two years. This
reasons, including system size, network tariffs, and the correla- area is amenable to rigorous analysis, and it would be valuable
tion between household consumption and PV production. We to undertake such analysis to quantify the possible value of
estimate annual revenues are reduced by between AU$240 per such wholesale market price effects.
household per year for households with rooftop PVs in Victoria
to AU$450 per household per year in Tasmania. This reduced Challenges and Opportunities
the income that network service providers collected from households with rooftop PVs in 2014 by around AU$414 million. Death Spiral for the Centrally
Under the Australian regulatory arrangements, network service Dispatched Model?
providers effectively cover this shortfall by raising their prices, The uptake of PVs in Australia, even as subsidies have
and so the network revenue reduction from households with PVs declined, has led to a debate on whether the economics of
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As rooftop PV systems have expanded, tariff structures,

particularly with respect to network charges, have become more
topical and widely discussed.
(Millions of Australian Dollars per Year)
PVs, installed at the point of use, is such that the established Tariff Structures
centrally dispatched electricity model is now in a death spi- As rooftop PV systems have expanded, tariff structures, particral, declining demand for grid-supplied electricity leading ularly with respect to network charges, have become more topito higher prices leading to declining demand. We estimate cal and widely discussed. Network charges make up about half
that rooftop PV systems can now be installed at a price, after of the total bill to average consumption households in many
capital subsidies, of around AU$.06/kWh. This compares to states of Australia, and so network tariffs paid by retailers and
the nationwide average household electricity price of around that influence their retail offering to households are significant.
AU$320/MWh, or an average incremental consumption
A particular focus for the tariff debate has been on the size of
charge of around AU$250/MWh. In other words, households the fixed element of network and retail tariffs. There are no regcan produce their own electricity for around a quarter of the ulatory controls for the way that network charges are reflected
incremental charge. This suggests a significant potential in the electricity tariffs determined by retailers, and the split
for further expansion of PVs, and if battery storage can be between fixed and variable elements of both network and retail
supplied for lower than around AU$250/MWh for 15-kWh tariffs vary widely across Australia. For example, in Victoria,
systems, then it would be more economical for many house- the fixed element of the network service provider charges for
holds who have the opportunity to leave the grid altogether.
household tariffs makes up about 5% of the charge, while for the
Larger rooftop PV installations (such as shopping centers retail tariff (which is the tariff the householder sees), the fixed
and retail outlets) are only starting to expand in Australia, element is around 15% of the average bill. The opposite applies
typically based on power purchase agreements or leasing. in Queensland, where up to 30% of the network charge is fixed,
Such larger consumer electricity prices are typically about but just 10% of the charge that households actually pay is fixed.
3040% lower than that paid by households, but scale econThe regulatory arrangements in Australia grant monopoly
omies in PV installation can make up part of the difference rights to network service providers and, with this, the right to
in the relative economics of PVs to grid-supplied electricity. recover revenue lost from one group of customers from the
On the basis of what we have seen and our knowledge remaining customers. Network service providers do this, in
of the relative economics and expectation of future costs, it due course, by raising their prices so that they recover their
is not difficult to conclude that the traditional centrally dis- regulated revenue entitlement. (For many, network service
patched industry model is facing a serious competitive threat providers prices, rather than revenues, are regulated. This
for a large segment of the market (by number of customers, brings additional complications, although the essential point
even if not by proportion of aggregate sales). This is not to remains.) In this sense, household PVs, like other distributed
suggest that the demise of
the centrally dispatched
500
system is certain or will
happen quickly. The rate
450
of decline in battery costs
400
Vic
Qld
NSW
Tas
ACT
WA
SA
is obviously very important
350
in determining future out300
comes. But, regardless of
250
this, regulatory policy, tariff structures, technology,
200
and market developments
150
will have a major impact.
100
The incumbent utilities,
50
with vast sunk costs in
0
networks and generation,
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
are unlikely to sit idly and
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
watch their assets become
increasingly stranded.
figure 7. Jurisdictional mandated FiTs, 2010 to 2030, in millions of Australian dollars (2014).
july/august 2015
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generators or indeed other forms of demand reduction, are

able to impose higher prices on others if they reduce their
purchases from the grid. Network service providers have
been increasing the fixed element of their tariffs much more
quickly than the variable elements to address what they call
cross-subsidies to households with rooftop PVs.
Consumer advocates, on the other hand, say that fixed
charges are already high by international standards, recovering stranded sunk costs through fixed charges is inefficient
and unfair, and consumers needs have changed and the
network businesses, which have been extremely profitable,
should be exposed to stranding risk. Generators that rely on
networks to get their electricity to consumers are also pushing for a reduction in network charges, although they have not
participated in tariff structure debates.
Regulators in Australia have so far sided with the network
service providers in protecting their monopoly. Although they
have suggested that tariffs should reflect long-run marginal
costs, they have not specified what this actually means in practice, and the tariff structures determined by the networks are not
policed. Likewise, retail tariff structures for most households in
Australia are determined by retailers, not regulators.
Institutional, Regulatory, and

Market Arrangements
Australian regulatory institutions, laws, and energy markets
developed in the era when widespread distributed generation
did not exist. Households with rooftop PV systems account
for around 20% of the Australian electorate. They have
proved to be remarkably successful in making their views
known to members of parliament and have sought to press
their interests in this way. Thus, despite being largely disengaged from regulatory institutions and government energy
departments, households with rooftop PV systems have been
highly effective in influencing energy regulation.
Institutions, laws, and regulations will need to change so
that they better reflect the reality of a rapidly changing industry.
Technology change has shifted paradigms, and Australian governments have found it difficult to cope with the change. The
prospect of a rapid rise of both distributed and grid-scale storage only increases the importance that the government is able
to develop policies and regulations that serve the public interest.
Conclusions
Australias experience in the rapid uptake of rooftop PV systems
has been, by world standards, remarkable and unusual. High
electricity prices, rapidly declining PV costs, and, for a while,
generous subsidies conspired to deliver rapid growth in small
rooftop systems. While subsidies have since pulled back significantly, the demand for rooftop PV systems remains robust.
Our analysis finds that households with installed rooftop
PVs made substantial capital investments of their own and in
aggregate have achieved a return on investment comparable to
what utilities would have accepted. As the rooftop PV market
matures, financing, through leasing, is becoming more widely
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accepted particularly in the commercial sector. With rooftop PV

production now so much cheaper than grid-supplied electricity,
there is considerable interest in the scope for battery storage
(both grid scale and distributed) in combination with distributed generation to allow consumers and groups of consumers to
achieve even higher levels of independence from the grid.
The incumbent utilities obviously have substantial grid
investments to defend. Most are utilities trying to work out how
to defend their existing businesses while at the same time offering products and services to customers who have expressed a
strong desire to reduce their reliance on the grid. Consumers,
for their part, are much more engaged in electricity markets
than they were just five years ago. Step change improvements
in technology and reductions in PV costs are giving consumers
with rooftop PV systems much more power in their negotiation
with utilities. The centrally dispatched model now has to justify
its value in a world where self-reliance and decentralized markets are rapidly becoming the norm.
For Further Reading

Australian Energy Market Operator, Rooftop PV information
paper, 2012.
Australian Taxation Office. (2013, Nov.). Authorisation
Number 90083Private ruling for Are you assessable on energy credits generated from your domestic solar power grid?
[Online]. Available: _________________________
http://www.ato.gov.au/rba/ content/?ffi=/
misc/rba/content/90083.htm
_________________
K. B. Burke, The reliability of distributed solar in critical
peak demand: A capital value assessment, Renewable Energy,
vol. 68, pp. 103110, Aug. 2014.
Clean Energy Regulator. (2013, Oct.). List of SGU/SWH
installations by postcode. Australian Government Clean
Energy Regulator. [Online]. Available: http://ret.cleanener____________
gyregulator.gov.au/REC-Registry/Data-reports
______________________________
Independent Market Operator, Electricity statement of opportunities, Perth, Western Australia, Australia, 2013.
B. R. Mountain, Electricity prices in Australia: An international comparison, Energy Users Assoc. of Australia, Melbourne, Victoria, Australia, Tech. Rep., 2012.
B. R. Mountain, Reducing electricity costs through demand response in the national electricity market, ENERNoC,
Melbourne, Victoria, Australia, Tech. Rep., 2012.
B. R. Mountain and S. C. Littlechild, Comparing electricity distribution network revenues and costs in New South
Wales, Great Britain and Victoria, Energy Policy, vol. 38, pp.
57705782, June 2010.
Productivity Commission, Electricity Network Regulatory
Frameworks, vol. 1, Canberra, Victoria, Australia, 2013.
Biographies
Bruce Mountain is with Carbon and Energy Markets (CME),
Australia.
Paul Szuster is with Carbon and Energy Markets (CME),
Australia.
p&e
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Its All
About Grids
IN GREAT BRITAIN, IT IS PROJECTED THAT AN

unprecedented amount of transmission investment will
take place in the next decade and that these investments
will be the largest transmission network reinforcements
since the post-World War II expansion. In Figure 1, the
projected range, to 2030, of onshore, offshore, and crossborder investments is presented against the estimated asset
values. The value of the transmission assets is expected
to more than double to 2030 with investments projected
The Importance of
Transmission Pricing and
Investment Coordination
in Integrating Renewables
By Goran Strbac, Christos Vasilakos Konstantinidis,

Rodrigo Moreno, Ioannis Konstantelos,
and Dimitrios Papadaskalopoulos

july/august 2015
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1540-7977/152015IEEE
61
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between 20 billion and 50 billion across onshore (main

transmission system), offshore (connecting mainly offshore
wind farms) and cross-border interconnection transmission projects. The exact level and cost of these transmission
investments will depend on a number of factors, including the location of new conventional and renewable energy
sources (RES) plants (considering on- and offshore developments); decommissioning of existing ones; demand growth;
cross-border trading of energy and ancillary services; and
uptake of distributed generation, energy storage, demandside response, and other smart grid technologies.
Given this uncertainty and to a certain degree flexibility
on the potential investment plans, it becomes imperative that
these investments are undertaken, as much as possible, in
an efficient and timely manner that will largely depend on
how transmission investment is undertaken and how costs
are allocated. In this context, we analyze two main factors
that can significantly impact the level and cost of the transmission investments going forward by drawing on our recent
experience of 1) reviewing transmission pricing in Great
Britain and 2) examining the benefits of alternative policy
approaches associated with different levels of coordination
and Great BritainEuropean Union (EU) market integration
among offshore wind generation and interconnector projects
in the North Seas, respectively.
Effects of Transmission
Pricing Options in Great Britain
In principle, the mechanisms used to allocate short- and
long-term transmission network costs could materially affect
the value of a generator and its output and hence also affect
the generators locational decisions. For instance, the choice
of where to locate a wind farm should involve consideration
of the trade-off between regional variation in wind speeds
(i.e., load factors) and the costs imposed on the transmission
Onshore
Transmission
Offshore
Transmission
Interconnection
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system; similarly the choice of the location of gas-fired generators entails a trade-off between regional variation in gas
prices and electricity transmission system costs, along with
other factors such as the availability and costs of cooling
water. Efficient network charges that recover the costs of
infrastructure, congestion/constraints, and losses convey
pricing signals to investors and therefore provide a means of
ensuring the overall system economic efficiency.
In this context, we will explore this question further by
drawing on the recent experience of reviewing transmission
charging regime in Great Britain and the analysis carried out
(as part of this process) to assess the impact of the alternative
network charging options.
Great Britain Transmission Arrangements

The British wholesale market is characterized by a single
national wholesale price that reflects the prevailing marginal cost in a system without network congestion/constraints. Although there is no location-specific pricing,
infrastructure costs are recovered through network tariffs called transmission network use of system (TNUoS)
charges that include a location-specific component. Given
the dominant north-to-south power flows, network charges
for generators vary from around 25/kW/yr in Northern
Scotland to 5/kW/yr in South West England (Figure 2),
while network charges for demand customers, based on
their peak demand, vary from 23/kW/yr in North Scotland to 45/kW/yr in South West England.
For 2015/2016, the total revenue collected will be 2,637
million, and it is expected to almost double by 2030. The cost
is split 27/73 (the exact split is currently under review with
proposals to review it annually or change the split to 15/85)
between generation and demand, and currently, the majority of transmission network costs (about 75%) are collected
through nonlocation specific flat charges (called residual
charge) implying a high level
of cost socialization. The locational part of the TNUoS tariffs
is computed using a methodology
that intends to reflect the longrun marginal costs of transmission investment. This part of the
transmission tariff was recently
reviewed through a regulatory
project called TransmiT.
Project Transmit Overview

Total
0
10
20
30
40
50
(Billions of )
Current Asset Value
Minimim Expected Investment to 2030
Maximum Expected Investment to 2030
figure 1. Great Britains current and future transmission asset value.

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The TNUoS charging methodology called investment cost related

pricing (ICRP) aims at setting
network charges that proxy the
network investment costs needed
to accommodate a marginal
megawatt of generation capacity or demand. Since historically
july/august 2015
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We analyze two main factors that can significantly

impact the level and cost of the transmission investments
going forward.
the transmission system was planned and built to provide the
capacity required during peak demand conditions, the current ICRP methodology reflects the network investment costs
needed to meet this requirement.
However, the need to accommodate peak demand conditions is no longer the sole driver of transmission capacity
requirements. Increasingly, investments to expand the transmission system are required to integrate renewable generators into the transmission system, particularly wind farms.
Wind generators typically produce less during extreme
winter conditions when demand is highest. Instead, their
production is highest on windy days when overall electricity demand is typically lower than peak levels. These dual
drivers of transmission investment are now reflected in the
network planning standards, which specifies the criteria that
transmission owners must apply when deciding how much
transmission capacity to provide. As a result, transmission
system operators (TSOs) are obliged to provide sufficient
boundary capacity to fulfil two criteria:
a demand security criterion that requires sufficient
boundary capacity to ensure continued system operation in peak demand conditions, on the assumption
that intermittent generation and interconnectors are
unavailable and with all other generation variably
scaled uniformly to match generation to demand
an economic criterion that requires sufficient boundary capacity to ensure economic operation of the system (balanced network investment and congestion/
constraints), on the assumption that output from different low-carbon generation technologies (intermittent,
nuclear, and carbon capture and storage), conventional
generation, pumped storage, and interconnectors are
scaled by specific factors to meet demand.
For this reason, in 2010, the Great Britain energy market regulator, Ofgem, announced a fundamental review of
current electricity charging arrangements, called Project
TransmiT, which aimed to improve the charging methodology. Through this process, Ofgem originally proposed
to consider three possible scenarios for network charging
going forward:
the status quo, whereby the current model would continue with minor modifications
a socialized or uniform charging model, whereby generation TNUoS charges would be paid through a uniform charge per megawatthour of energy output
an improved ICRP charging model, which seeks to
alter the existing charging model to reflect the fact
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that different types of generation may impose different costs on the transmission system.
The way the uniform charges are calculated is straightforward; the total amount of revenue that needs to be recovered from generators [27% of the annual regulatory asset
value (RAV)] is just split by the total generation capacity resulting to a fixed uniform charge on a /kW/yr basis.
To calculate the status quo and improved ICRP charges, a
transport model is used that calculates the marginal cost of
investment in the transmission system, required as a consequence of an increase in demand or generation at each
connection point or node on the transmission system, by
analyzing the system power flows during peak demand
conditions. The key difference between the two charging
methodologies is how generation is scaled so as to meet
this peak demand condition. In the status quo, all generation capacity is scaled down uniformly. In the case of
improved ICRP, the transport model runs twice with different scaling factors for different technologies. The first run,
called peak scenario (accounting for the demand security
criterion), assumes that interconnection and RES load factor is zero and all other generators are scaled uniformly.
The second scenario, called year-round (that accounts for
the economic criterion), sets different scaling factors for
different types of plant (Table 1).
25.42
22.79
30.25
19.75
26.15 21.55
16.40
18.51
12.84
16.49 15.53
11.07
8.64
7.47
6.34
7.41
5.18
3.49
2.44
5.57
2.92
4.44
0.04
3.04
1.69
0.19
5.16
figure 2. Great Britain generation transmission tariffs

/kW/yr.
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table 1. Scaling factors per generation technology

for improved ICRP transport model.
Demand
Security
Criterion
Technology
Economic
Criterion
Peaking plant (e.g., OCGTs)
Variably scaled
0%
Wind, wave, and tidal
0%
70%
Nuclear and CCS
Variably scaled
85%
Pumped storage
Variably scaled
50%
Interconnectors
0%
100%
Other
Variably scaled
Variably scaled
For each network circuit, the power flow in the peak

and year-round scenarios is compared, and the costs of
each circuit are attributed to the scenario with the highest power flow. This ensures that the marginal costs of
each transmission circuit are reflected in only one of the
two scenarios resultant charges. In this way two tariffs
are obtained: the peak security tariff and the year-round
tariff. An intermittent plant would not be exposed to
the peak security tariff. All generators will be charged
the year-round tariff in relation to their average annual
load factors while applying a series of heuristic rules and
approximations.
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Stage 1: Impact Assessment
This first stage determines the whole system evolution and its
associated cost and consumers bill when different network
charging options are modeled. The modeling horizon for this
analysis was 2030, and the modeling exercise involved iterating among a power market model, a transmission investment model, and transmission charging model until all three
converged (see Figure 3). To model the evolution of the
wholesale power market, the AURORAxmp market model
(referred to hereafter as Aurora) was used. A separate model
to optimize investment in renewable generation capacity
was created that works in tandem with Aurora. Both of these
models use assumptions on a range of fundamental market
drivers, such as the volume and characteristics of existing
generation capacity, commodity prices, the costs of new
generation capacity, and electricity demand growth, as well
as TNUoS charges. To model optimal operation and investment in the transmission system our dynamic transmission
investment model (DTIM) was used (implemented in FICO
Xpress), which takes locational generation and demand data
as an input. Using the forecast of transmission investment
from the DTIM, TNUoS charges for the period to 2030 were
computed for proposed network charging methodologies,
which were then fed to the power market modeling.
Stage 2: Cost Reflectivity Assessment
Tariff philosophy in Great Britain establishes that locational

network charges should reflect the long-run marginal cost
The modeling framework developed for analyzing transmis- (LRMC) of the network infrastructure. Hence, DTIM was
sion charging options consists of two stages, impact assess- used to estimate the LRMC of transmission infrastructure
associated with particular types of generation at different
ment and cost reflectivity assessment.
points in the network. The
methodology of calculating the LRMCs is similar
Power Market Modeling
to the improved ICRP,
$,"( $+()#$)
Wholesale Power Market
but instead of considering
Model
ModelAurora
only peak demand and two
1&) # /(%) %$$ # $%
1$') %$
(&)%"
generation scenarios, all
$,"( $+()#$)
1&) # /() # $% $*#$)
year-round demand and
$')%'(- )
( %$(
1")()%()0'% )"2
generation conditions (of
1&) # /( # $$%) %$%
$,"(
+"%&#$)( +n
New Investment
%()($*( .+$*)
which many may present network congestion)
are analyzed and used to
Transmission Modeling
calculate annuitized transmission charges for every
Transmission Charging
Transmission Investment
plant in the system.
Model
ModelDTIM
Modeling Framework
1 "*")(% '( +n

)%$'$(# (( %$.()#
')' () ( %()($
& ).
#$
)a
1&) # /('$(# (( %$ $%'#$) $+()#$) +$

)%$
$') %$ & ).$
#$
1!(() %()'%
Between Constraint Costs and
$%'#$) $+()#$)
figure 3. An overview of the impact assessment modeling framework.
64
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Modeling Results
Generation Investment
Patterns
Our analysis suggests that

although the capacity mix
is broadly similar across
july/august 2015
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Investments to expand the transmission system

are required to integrate renewable generators into the
transmission system, particularly wind farms.
different charging methodologies, there were some marked
differences. As expected, under less location-specific network charging regimes, both RES and new conventional
plants tend to locate further in the north of Great Britain
where wind resources are better and gas charges lower.
Similarly, more wind capacity is located offshore and less
onshore, while offshore wind generation development is
concentrated in more remote sites, as illustrated in Figure4,
which contrasts wind generation investment patters under
location specific (i.e., status quo) and uniform pricing.
Interestingly, improved ICRP also results in (slightly) more
renewable generation capacity that is located further north of
Great Britain.
Transmission Costs
As expected, given the significantly different generation

investment patterns, and as Figure 5 shows transmission
investment costs, congestion/constraints costs and losses
are substantially higher under uniform network charges.
Because improved ICRP results in slightly more renewable
generation capacity that is also located further north, it tends
to increase transmission system costs, as well as transmission losses due to increased north-to-south power flows.
The Impact on Wholesale Power Prices
Uniform TNUoS charging removes the possibility for new

entrant combined-cycle gas turbines (OCGTs) and opencycle gas turbines to locate in zones with negative TNUoS
charges where plants would receive a remuneration rather
than be charged, which increases the costs needed to be
recovered through power market prices and hence create
welfare transfer from consumers to producers (Figure 6).
Likewise, the improved ICRP charging model also changes
the fixed costs of new entrant plants and, in particular, in the
period to 2020, the long-run marginal cost of new entry is
around 1/MWh higher than the status quo.
The Impact on Consumers
As a result of higher power prices and transmission system

costs, this modeling estimated that uniform network charges
would increase costs to consumers by 19.8 billion in net present value (NPV) terms between 2011 and 2030 compared to
the status quo. This equates to 3.56 per megawatthour of
energy demand, or around 2.2% of the energy component
of 2020 consumer bills. Introducing the improved ICRP
methodology would also increase consumer bills by around
july/august 2015
magazine
3.4 billion in NPV terms over the period to 2030 (see Table 2
where the NPV base year for the comparison of status quo
with uniform and improved ICRP charges is different because
the analysis was undertaken for different periods).
Cost Reflectivity Analysis
The impact assessment analysis quite clearly suggests that the

status quo charging methodology results in lower consumer
bills and system costs compared to both of the alternative
charging methodologies. Whereas the inefficiencies associated
with uniform charging were somewhat expected, this is not the
case with improved ICRP, which is a more advanced charging
methodology. As a result, the two charging methodologies were
further compared using the cost-reflectivity modelling frame
work presented earlier.
As Figure 7 shows, both the improved ICRP (red lines) and
status quo (blue lines) methodologies send locational signals
to wind farms that understate the LRMC (black line) of transmission. However, because improved ICRP compresses the
locational spread between tariffs in the north and in the south
compared to the status quo, this analysis suggests that improved
ICRP is less cost reflective for Scottish wind farms than the status quo. This finding implies that the cost of network reinforcement caused by connecting wind farms will be subsidized by
other market participants.
On the other hand, as Figure 8 shows, both improved
ICRP and the status quo methodologies set locational tariffs to peaking plants in Scotland in excess of the LRMC of
transmission that their presence imposes on the system relative to the LRMC of connecting in other parts of the country.
Because improved ICRP compresses the spread between
tariffs in the north and in the south more than the status quo,
this suggests that improved ICRP is more cost reflective for
this category of generation. However, under both improved
ICRP and status quo methodologies, TNUoS charges are
lower for peaking plants in England and Wales than in
Scotland. In summary, while the improved ICRP charging
methodology does make changes to TNUoS charges that
(on the face of it) recognize the dual drivers of transmission
reinforcement (peak security and year-round investment
requirements), these changes are calculated through a series
of heuristic rules and approximations. The analysis presented shows that the combination of these approximations
used in the improved ICRP methodology produces locational charging signals that reflect the LRMC of transmission less (or no more) accurately than the status quo, which
65
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6
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West Scotland
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figure 4. Wind generation investment patterns under (a) locational (i.e., status quo) and (b) uniform pricing (GW).
5
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1
0
Offshore
South/South West
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Modeled Onshore
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20152030 (GW)
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20152030 (GW)
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Cumulative Transmission
Investment Costs (2010 Mn)
Transmission Constraint
Costs (2010 Mn)
Transmission Losses
(% of Annual Energy Demand)
200
8,000
3.0%
180
7,000
2.5%
160
6,000
140
5,000
120
4,000
100
2.0%
1.5%
80
3,000
1.0%
60
2,000
40
Locational
(a)
Uniform
Locational
Uniform
(b)
2027
2029
2023
2025
2021
2017
2019
2015
2013
0.0%
2011
2029
2027
2025
2023
2021
2019
2017
2015
2013
0.5%
2011
2029
2025
2027
2023
2021
2019
2017
0
2015
0
2013
20
2011
1,000
Uniform
Locational
(c)
figure 5. Transmission system costs.
is also supported by the results obtained through the impact

assessment analysis.
Effects of Coordination Policies Across

Transmission Regimes in the North Seas
As the radial approach most closely resembles todays connection practices, it is chosen as the counterfactual, and costs
associated with other policy choices are presented in relation
to this approach. Furthermore, consideration of the extreme
case of energy neutrality in the counterfactualmember-state
centric rather than EU-wide energy system developmentis
used to assess the benefits of full integration of the EU electricity market. Thus it is something of a caricature in that
countries are not exactly energy neutral, but deviations from
energy neutrality are relatively small. Recent analysis conducted by the EU commission demonstrates that, although the
market coupling is enhancing the energy exchange between
North Seas member states, larger countries are still broadly
energy neutral. In other words, the total energy imports/
exports are relatively small as a proportion of the total energy
consumption.
Offshore wind power is expected to make a significant

contribution toward decarbonizing the Great Britain and
European energy system. It is envisaged that todays
installed capacity levels of about 5 GW of offshore wind
generation may reach 150 GW by 2030, with approximately half of this capacity located in the North Seas.
Given Europes goal of increased integration of the
power markets by expanding cross-border interconnectors, there is a significant opportunity to integrate offshore wind generation and interconnector projects in the
North Seas to take advantage of potentially significant
economies of scale and thus reduce network costs.
In this context, this section examines
table 2. Savings associated with system development
under status quo.
the benefits of different policy approaches
associated with different levels of coordinaImproved ICRP Charging
Uniform Charging
tion and Great BritainEU market integraVersus Status Quo
Versus Status Quo
mn (NPV 20112030)
mn (NPV 20142030)
tion among offshore wind generation and
interconnector projects in the North Seas,
Power purchase costs
13,899
1,717
as summarized in Table 3. These policy
Renewable subsidies
262
269
approaches range from a radial incremenLosses
4,082
687
tal approach, to more strategic approaches
Congestion/constraints 344
116
to integrating offshore wind generation
and increasing levels of market integration,
Demand transmission
1,182
769
ranging from limited (energy neutral and
investment charges
self-secure) to a fully integrated EU elecTotal
19,768
3,379
tricity market.
july/august 2015
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In this article, we demonstrate that effects of transmission

arrangements on consumer bills are significant, when a large
amount of RES is expected to connect.
Modeling Approach
We have applied our DTIM that has been enhanced to
facilitate optimal transmission network investment decision-making process under different levels of coordination
in integrating offshore wind generation and different levels
of EU market integration. Furthermore, the capability of
dealing with uncertainty in future generation deployment
has been included in the model. Within a holistic optimization process, DTIM balances costs of multiple transmission investment propositions against the associated costs of
system operation such as cost of congestion/constraints, cost
of wind curtailments, cost of network losses, and reliability
across multiyear time horizons. The DTIM explicitly optimizes offshore grid topology, and for this purpose we have
identified a large number of candidate corridors to be potentially constructed (and shown in Figure 9) and have used
advanced optimization techniques to identify network sections that should be built. All network asset investments are
structured on the basis of fixed and variable costs, enabling
the model to explicitly consider the effects of economies of
scale and hence to more accurately capture the fundamental differences between incremental and strategic network
investment philosophies. Uncertainty in offshore generation deployment in terms of time, location, and amount is
considered explicitly in this study through a min-max regret
approach. This is an important contribution given that all
existing North Seas grid studies have been based on deterministic analysis frameworks and have not explicitly considered the time dimension associated with offshore wind
deployment decisions.
The study considered four offshore wind development scenarios covering the period 20152040. We have
adopted a scenario tree approach, where a consistent set
of possible future developments is compiled and analyzed
to identify optimal investment commitments that would
lead to optimally robust performance across all envisaged
futures (considering that investment decision in the first
stage is made before uncertainty is resolved). The amount
of offshore wind generation across the different scenarios
and time scales considered in this study is presented in
Figure 10.
Key Findings
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2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Baseload Power Price (/MWh)
From Figure 11, we observe that, in the case of large-scale

deployment of offshore generation resources, coordination
through offshore hubs could deliver significant economic
benefits when compared to incremental point-to-point connections. As expected, benefits will depend on the scenario,
i.e., the amount of offshore wind generation deployed. For
a large penetration of offshore wind, savings in network
investment from coordinating connection of offshore wind
clusters are about 40 billion, while for small-scale deployment, benefits are about 8 billion. This is significant given
160
that the total asset value of the
present onshore, offshore, and
140
interconnection infrawstructure
120
associated with the regions of
the North Seas countries is esti100
mated to be below 60 billion.
Assessing the benefits of
80
establishing an offshore grid
60
through developing offshoreto-offshore links, and the inter40
action between offshore grid
Locational
Uniform
and interconnection, is one of
20
the key objectives of this study.
0
We observe that the benefits of
connecting offshore clusters via
a grid would be relatively modest in the energy neutral case
figure 6. The impact on power prices of uniform charging versus status quo
(a small increase in network
( nominal).
july/august 2015
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Nuclear2013
Wind2013
80
70
60
50
40
30
20
10
0
10
20
30
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80
70
60
50
40
30
20
10
0
10
20
30
(a)
5 6
8 9 10
11 12 13 14 15 16
5 6
8 9 10
12
(d)
Nuclear2030
Wind2030
15
Nuclear2020
80
70
60
50
40
30
20
10
0
10
20
30
(c)
80
70
60
50
40
30
20
10
0
10 1 2 3
20
30
14
(b)
Wind2020
80
70
60
50
40
30
20
10
0
10 1 2 3
20
30
12
11 12 13 14 15 16
(e)
80
70
60
50
40
30
20
10
0
10
20
30
12
14
16
(f)
LRMC
Status Quo
Improved ICRP
Improved
ICRP Sensitivity
Status Quo Sensitivity
figure 7. A comparison of LRMC, improved ICRP, and status quo TNUoS for wind and nuclear across system zones
(/kW/yr). Zones 16 are located in Scotland, and zones 716 are located in England and Wales.
investment costs savings comes from relaxing the constraints of connecting wind farms to single country of origin but sharing the connection between member states).
Additional savings in system operation costs achieved
july/august 2015
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through an offshore network are relatively modest due to

limited energy exchanges between member states.
On the other hand, the benefits of full EU market integration are very significant. In addition to savings associated
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Baseload Gas2013
75
65
55
45
35
25
15
5
5
15
25
9 10 11
12
Marginal Gas2013
75
65
55
45
35
25
15
5
5
15
25
13 14 15
(a)
10
11
10
12
13
14
15
16
10
11
15
16
10
11
13 15
16
(d)
Marginal Gas2030
Baseload Gas2030
13
Marginal Gas2020
75
65
55
45
35
25
15
5
5
15
25
(c)
75
65
55
45
35
25
15
5
5
15
25
11
(b)
Baseload Gas2020
75
65
55
45
35
25
15
5
5
15
25
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12
13
14
15
75
65
55
45
35
25
15
5
5
15
25
16
(e)
10
11
13
15
16
(f)
LRMC
Status Quo
Status Quo
Sensitivity
Improved ICRP
Improved ICRP
Sensitivity
figure 8. A comparison of LRMC, improved ICRP, and status quo TNUoS for baseload and marginal gas across
system zones (/kW/yr). Zones 16 are located in Scotland, and zones 716 are located in England and Wales.
with network development, we observe significant benefits

from a reduction in generation operating costs. This is driven
by making use of North Seas grid infrastructure and interconnection to fully integrate operation of the EU electricity
generation system. In the high offshore wind scenario, total
savings are about 75 billion, while for small-scale deployment, benefits are about 24 billion. In addition, a fully
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integrated EU market will also generate security of supply

savings that will exceed 25 billion (not presented in figure).
As expected, the proactive policy choice will bring further
benefits in both network investment and operation. Most of the
savings, when compared with the fully integrated approach,
are associated with a reduction in network investment cost
achieved through integrated optimization of offshore wind
july/august 2015
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NO1
20
SE
24
NO2
2
19
31
18
22
3
25
DK1
UK3
4
DK2 21
32
10
12
11
30
17
UK2
14
26
IR
13
29
16
15
DE1
DE2
NL
27
UK1
23
BE
DE3
28
6
8
7
DE4
FR
Existing OnshoreOnshore Corridor
Candidate Cross-Border Interconnector
Candidate OffshoreOnshore Corridor
Candidate OffshoreOffshore Corridor
figure 9. A set of corridors in the North Seas.
generation that will be connected and the corresponding network investment.

In the context of uncertainty, this study investigated
a min-max regret approach to the development of an offshore grid network and examined the extent to which strategic infrastructure investment decisions could deliver the
flexibility to accommodate various future wind development scenarios through facilitating multiple network
designs that are not overly constrained by the design
choices in earlier years. To that effect, the min-max planners have to find the optimal compromise between all
possible choices that will enable them to both operate
the system efficiently in the short term (the planners will
have to live with their initial commitments until further
july/august 2015
magazine
reinvestment can be undertaken) but also render them

well positioned to adjust to actual developments at minimum cost. Of course, first-stage commitments can pose
substantial limits to how optimally the system can adjust
to the eventual realization.
Our analysis demonstrates that it is more cost-effective
to marginally over invest and run the risk of stranded
assets than under invest and considerably constrain the
available wind energy output. In other words, the potential
regret associated with overbuilding the grid in expectation of high levels of deployment is much lower than the
regret associated with underbuilding the grid on the basis
of overly conservative deployment expectations. In addition, our analysis illustrates how the min-max approach,
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20402044
20352039
20302034
20252029
20202024
Commissioned
Under Construction
Projects
figure 10. A scenario tree capturing possible paths of future offshore wind deployment in the North Seas. The yellow balloons indicate development status of offshore wind
projects used to build each scenario (e.g., in scenario 1, it is assumed that all wind projects currently classified as commissioned, under construction, and permit granted are
deployed by 2020).
S4
20
19
18
17
16
9 GW
Second Epoch
Investment
20 GW
Third Epoch
Investment
30 GW
Fourth Epoch
Investment
40 GW
Fifth Epoch
Investment
50 GW
S3
15
Fifth Epoch
Investment
14
13
12
11
15 GW
Second Epoch
Investment
36 GW
First Epoch
Investment
20 GW
Second Epoch
Investment
53 GW
Third Epoch
Investment
57 GW
Fourth Epoch
Investment
78 GW
Fourth Epoch
Investment
86 GW
Third Epoch
Investment
3
2
1
100 GW
150 GW
119 GW
Fifth Epoch
Investment
204 GW
25 GW
Second Epoch
Investment
88 GW
Third Epoch
Investment
150 GW
Fourth Epoch
Investment
175 GW
Fifth Epoch
Investment
All Projects Are

Commissioned
Commissioned
Under Construction
Permit Granted
Projects
10
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S1
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that optimizes investment

in the first stage under four
potential future scenarios,
would involve the development of assets that create
future options and are not
built under any single scenario optimization (that
does not consider occurrence of alternative scenarios). In other words, this
min-max model can identify the optimal investment
strategy that is not based on
investment schedules determined by individual (deterministic) scenario models.
We demonstrate that the
benefits of endogenously
optimizing min-max regret
based investment would
deliver additional savings
between 1 billion and
5 billion per decision-making period (in this study five
years) even if significant
volumes of offshore wind
fail to materialize. Interestingly, we observe that these
additional cost savings
are achieved through the
construction of offshoreto-offshore links aimed at
providing flexibility to deal
with uncertainty, through
integrating offshore wind
clusters while enabling further cross-border transfers
between North Seas countries as shown in Figure 12.
Other Aspects
of Transmission
Arrangements
on Future System
Costs
TSO Incentives
The majority of the Great
Britain TSOs revenue is
based on their RAV. As has
been widely reported in literature, historically there
has been a tendency (supported by the RAV-based
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Operation
90
Network Investment
80
70
60
Billion
50
40
30
20
10
0
S1
S2
S3
HUB
S4
S1
S2
S3
S4
S1
S2
EN
S3
FI
S4
S1
S2
S3
S4
PRO
figure 11. Savings in operation and network investment costs of different policy approaches when compared to the
radial solution.
approach) to favor capital investment to other smart assetlight alternatives. It would be important to recognize the
benefits that may be associated with the early adoption of
new smart operation practices (e.g., value of learning by
doing) as well as the increased exposure to technical and
commercial risks and that the corresponding benefit and
risk premiums are included in the rate of return applicable
to smart solutions. These policy measures would level the
playing field (between traditional asset-heavy and less costly
smart solutions), remove commercial distortions that may be
hindering direct comparison between competing technologies and encourage TSOs to adopt cost-efficient advanced
operational measures where appropriate. To achieve this,
it may appropriate to consider increasing the rate of return
associated with projects that deliver lower-cost solutions
(e.g., cost-efficient smart measures) compared to more costly
upgrade projects and ensure that such measures are pursued
proactively by TSOs.
The Regulators Role

Under the current incentives scheme, the Great Britain regulator Ofgem has evolved into a sole buyer of transmission
services. However, this necessitates a progressively in-depth
understanding of transmission planning, extensive cost
benchmarking, and importantly, but increasingly more difficult to achieve, full appreciation of the investment tradeoffs between operational measures, smart grid technologies,
and various asset types. Given the unprecedented level of
transmission investment that is expected to take place, the
risks associated with the decision-making process will also
increase, particularly as uncertainty in timing, location, and
volume of this investment will be significant. In this context, there is consensus developing that regulators efforts
july/august 2015
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may be better placed in the design and oversight of the

investment framework itself to ensure that the proper incentives are given to network operators and users so that the
most cost-efficient solutions emerge endogenously without
table 3. Range of policy approaches
and their key characteristics.
Approach
Key Characteristics
Radial
t Incremental connection of offshore wind

projects to shore
t Offshore-to-offshore connections not
considered
t Member states are net energy neutral and
self secure
Hub
t Strategic connection of offshore wind

clusters to shore
t Offshore-to-offshore connections not
considered
self secure
Integrated
energy
neutral
t Offshore-to-offshore connections
considered
self secure
Fully
integrated
considered
t Unconstrained cross-border electricity
trade
t EU wide security
Fully
integrated
proactive
considered
t Co-optimization of network and generation investment
t Unconstrained cross-border electricity
trade
t EU wide security
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The need to accommodate peak demand

conditions is no longer the sole driver of transmission
capacity requirements.
the need for extensive scrutiny on an individual basis. With
such a framework in place, the regulators role can shift from
detailed investment evaluation to ensuring that commercial
incentives, market design, and planning process are fit for
purpose in view of technological advancements.
system operator (ISO), which will plan and operate but

not own the transmission network infrastructure. The ISO
would not have the conflicts of interest that the current
TSO as an entity combining transmission ownership and
operation potentially has, and at the same time it would
be in a better position to evaluate the efficiency of transmission investment than the regulator. If this institutional
setup is accompanied by a transparent and efficient process for transmission planning then there is scope for
From TSO to ISO Paradigm

As a result of the aforementioned concerns, Great Britain is moving toward the introduction of an independent
(a)
(b)
(c)
figure 12. An optimal first-stage network design under proactive for (a) scenario 1, (b) scenario 4, and (c) min-max proactive. The color code is the same as in Figure 9.
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Our analysis demonstrates that it is more

cost-effective to marginally over invest and run the risk
of stranded assets than under invest.
significant cost savings in network related costs and in
turn consumers bills.
Conclusions
In this article, we demonstrate that effects of transmission
arrangements on consumer bills are significant, when a
large amount of RES is expected to connect, which inadvertently leads to fundamental changes in the way the system
is planned and operated. Our analysis and the experience
from the transmission charging review recently concluded
in Great Britain suggests that transmission pricing inefficiencies can lead to significant increases in consumer bills
both due to elevated transmission related costs but also due
to significant welfare transfer from consumers to producers.
Of equal importance are the potentially missed opportunities of adopting innovative nonnetwork (or nonwires) solutions
due to lack of efficient transmission pricing. This is because
the incentives for active market participant engagement in the
transmission planning process are muted since they do not
face the system costs that they create and therefore cannot
reap the benefits of system savings that they may introduce.
For new technologies such as demand-side management, storage, special protection schemes, and other smart grid solutions, these potential revenue streams can be very significant.
Our analysis of different policy approaches associated
with different levels of coordination and Great BritainEU
market integration between offshore grid (to connect offshore wind generation) and interconnection projects in the
North Seas suggests that benefits from regimes coordination,
regional integration and explicit consideration of uncertainty
in the planning process are significant. This will require the
development of new regulatory and market approaches that
would facilitate strategic and coordinated network planning
and investment under uncertainty associated with low carbon technology deployment necessary for achieving European decarbonization targets.
Moving toward 1) cost-reflective network pricing, 2)
strategic, coordinated, and integrated planning and operation of transmission beyond countries jurisdictions, and
3) improved incentive regulatory framework for network
activities (including separation of ownership and operation),
presents the opportunity to robustly deliver policy objectives
at significantly reduced cost.
Acknowledgments
The authors are grateful for all contributions received
from NERA, Ofgem, and E3G and from our colleagues
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M. Pollitt, D. Newbery and R. Green. Dr. Moreno gratefully

acknowledges the financial support of Conicyt (through
Grants Conicyt/Fondecyt/Iniciacion/11130612 and Conicyt/
Fondap/15110019).
For Further Reading

G. Strbac, M. Pollitt, C. Vasilakos Konstantinidis, I. Konstantelos, R. Moreno, D. Newbery, and R. Green, Electricity transmission arrangements in Great Britain: Time for
change? Energy Policy, vol. 73, pp. 278297, Oct. 2014.
G. Strbac, R. Moreno, I. Konstantelos, D. Pudjianto, and
M. Aunedi. (2014, July). Strategic development of North Sea
grid infrastructure to facilitate least-cost decarbonisation.
[Online]. Available: http://www.e3g.org/docs/NorthSeaGrid_Imperial_E3G_Technical_Report_July_2014.pdf
___________________________________
G. Strbac, C. Vasilakos, R. Moreno, D. Papadaskalopoulos, S. Gammons, R. Druce, and P. Davies. (2014, February).
Assessing the cst reflectivity of alternative TNUoS methodologies. [Online]. Available: https://www.ofgem.gov.uk/
_________________
ofgem-publications/87413/nera-imperialreportassessingth_______________________________________
ecostreflectivityofalternativetnuosmethodologiesprepared_______________________________________
forrwenpower.pdf
___________
G. Strbac, C. Vasilakos, D. Pudjianto, R. Moreno, S.
Gammons, R. Druce, V. Kvekvetsia, R. Brejnholt, and P.
Davies. (2013, October). Project TransmiT: Modelling the
impact of the WACM 2 charging model. [Online]. Available:
https://www.ofgem.gov.uk/ofgem-publications/85153/con______________________________________
sultationresponsefromrwe2.pdf
____________________
G. Strbac, C. Vasilakos, D. Pudjianto, R. Moreno, S.
Gammons, R. Druce, and R. Brejnholt. (2011, March).
Project TransmiT: Impact of uniform generation TNUoS.
[Online]. Available: https://www.ofgem.gov.uk/ofgem-pub_________________________
lications/54268/nera-report-rwe-impact-uniform-genera______________________________________
tion-tnuos.pdf
_________
Biographies
Goran Strbac is with Imperial College London, United
Kingdom.
Christos Vasilakos Konstantinidis is with Imperial College London, United Kingdom.
Rodrigo Moreno is with the University of Chile (DIE
Energy Centre) and Imperial College London, United
Kingdom.
Ioannis Konstantelos is with Imperial College London,
United Kingdom.
Dimitrios Papadaskalopoulos is with Imperial College
p&e
London, United Kingdom.
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IMAGE LICENSED BYINGRAM PUBLISHING
Distribution
Pricing
ENERGY TRANSPORTATION COSTS TYPICALLY

make up a quarter of consumers electricity bills, and
most of this amount (90% in the United Kingdom, 75% in
Brazil and Spain, and 60% in India, for example) is due to
energy transportation through the distribution network. This
cost could escalate over the next few decades as distributed energy resources are expected to grow substantially in
response to the financial incentives many governments have
created for renewable and efficient generation to meet their
CO2 reduction targets.

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The cost, however, can be minimized if distribution network operators (DNOs) have an appropriate distribution
pricing scheme to influence existing and new network users
concerning when and where to use the network. Through
an economic pricing scheme, DNOs could take the lead in
promoting efficient investment and effective use of distribution networks for the long-term interests of consumers and
society as a whole.
Furthermore, economically efficient pricing is vital
in encouraging significant growth in distributed energy
resources (DERs), as DNOs can be rewarded for reducing
network losses and building new infrastructure, and also for
reducing the cost of energy supply. Moreover, with advances
1540-7977/152015 IEEE
july/august 2015
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By Furong Li, Jose Wanderley

Marangon-Lima, Hugh Rudnick,
Luana Medeiros Marangon-Lima,
Narayana Prasad Padhy, Gert Brunekreeft,
Javier Reneses, and Chongqing Kang
in smart-grid technologies, distribution pricing has a greater role in sending economic signals to
network users encouraging them to respond to real time energy and network needs.
The Current Distribution Pricing Framework

Most of the tariff structures and charging methodologies currently in practice for the distribution
system were developed in the 1970s and 1980s; they cannot serve either to promoting network efficiency or to encourage sustainability for the following reasons:
The majority of the distribution pricing methodologies in practice were designed for a passive
system with little embedded generation, microgeneration, and demand responses.
The majority of the pricing methodologies for distribution systems are not cost reflective
that is, they do not reflect the costs/benefits that embedded or microgeneration might bring to
the distribution network and energy supply. As a result, the pricing system cannot efficiently
influence how and when network users should use the system.
There is a lack of a commonly accepted pricing structure across the industry worldwide. As
a consequence, there is little consensus in distribution pricing models among different countries, or among DNOs within the same country.
As the boundary between transmission and distribution networks becomes increasingly
vague, there is still a huge gap between transmission and distribution pricing methodologies.
Many regulators around the world are concerned that such a structure can neither minimize
investment costs nor optimize the use of the current and future distribution energy systems.
Moreover, the electricity supply industry is undergoing a transformation to promote greater interactions between network users and
the grid through smart monitoring, communication, and management systems. Consequently, the pricing mechanism is the key to
ensuring the success of the smart grid. Yet there is no established
practice or common pricing principle that can best serve the industry in the coming period of great change. Instead, tariff structures
and charging methodologies differ vastly from one country to
another and from one distribution network to another within the
same country.
Are We Ready
for the Smart Grid?
Distribution Pricing Process

The design of a distribution pricing scheme can generally be separated into two steps: establishing the regulatory revenues (the allowed revenue over a certain period of time) and allocating this
allowed revenue from network users; revenue recovery comes through the connection and the useof-system (UoS) pricing and tariff structure.
The regulatory revenue of distribution utilities is usually established in the tariff reviewing process, which usually occurs in a four-, five- or eight-year period. This revenue is the total allowed costs
for operation, maintenance, and investment that DNOs require to provide the distribution services in
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Next, during revenue reconciliation,

Regulatory Revenue
Assessment
Pricing Structure
O&M Costs
Cost Drivers
Base Rate Returns
Cost Allocation Method
Assets Depreciation
Connection Charges
UoS Charges
Feed-in-Tariff for DG
Time Period Tariff
Revenue Reconciliation
figure 1. Distribution network pricing process.
their designated distribution areas. In this process, the regulatory agency typically calculates the total required revenue on
the basis of operation and maintenance (O&M) expenditure
(OPEX) and capital expenditure (CAPEX), then combines
these together to calculate a total expenditure (TOTEX).
Regulated revenue is designed to cover efficient O&M costs,
base rate returns, depreciation of assets, and other costs.
The pricing structure represents the process that DNOs use
to collect money from network users to match the regulatory
allowed revenue. In other words, the pricing structure dictates how DNOs allocate the allowed revenue among network
users: suppliers, large industrial customers, and distributed
generators (DGs). This generally involves a two-step process.
First, network charges are set from the charging methodology approved or used by the industry regulator, such as
Office of Gas and Electricity Markets in the United Kingdom and Agncia Nacional de Energia Eltrica in Brazil.
charges are converted into tariffs,

scaling tariffs up or down such that
revenue recovery exactly matches
regulatory revenue.
Figure 1 summarizes the distribution network pricing process and illustrates its key
aspects.
The Survey
A survey was conducted to compare distribution pricing structures among seven countries
(see Figure 2). Survey questions relate to key
aspects of each countrys pricing mechanisms
and incentives for using distribution systems.
What Are the Voltage Levels

of the Distribution Network?
The voltage levels in kilovolts of the distribution networks differ across the seven countries, and even within countries in
Europe and Latin America (see Table 1 and Figures 3 and 4).
Is There Any Locational Pricing Structure

in the Distribution Network?
Until very recently (2007), there were no locational pricing structures within distribution networks anywhere in
the world. There were, however, different sophistications
for nonlocational UoS charges.
For the United Kingdom and Brazil, tariffs differ at different voltage levels within a distribution network. For Chile,
tariffs differ on the basis of density and asset type. For
countries like Germany, tariffs do not differ between voltages within the same network, but they do differ between
figure 2. The seven countries participating in the survey: Brazil, Chile, China, Germany, India, Spain, and the United
Kingdom.
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Consumo BT Aereo
Consumo BT Subterraneo
Consumo MT Aereo
Consumo MT Subterraneo
Red MT Aereo
Red MT Subterraneo
Red BT Aereo
Red BT Subterraneo
Red BT Subterraneo
Doble Calzada
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Camera BT
Subida a Poste
Poste BT
Transformador Aereo
Transformador Subterraneo
PAD Mounted
figure 3. MV network in Santiago, Chile. (Reprinted by permission of Systep.)
different distribution networks, reflecting diverse underlying

cost at the regional level. Moreover, in countries like Spain
and India, tariffs are the same for all customers connected to
the same voltage level.
Post-2007, the United Kingdom and Brazil lead the way
in introducing locational charges at the extra-high voltage
(EHV) distribution level. Both countries reform is driven
by anticipated substantial growth in DGs. The regulators of
the two countries are concerned by the lack of incentives
for DGs to locate at economically efficient places that will
best utilize the existing network and minimize the requirement for costly network upgrading. However, for demand,
high-voltage (HV) and low-voltage (LV) networks still use
the distribution reinforcement model (DRM) approach,
where customers at the same voltage level are subject to
the same incremental cost regardless of their locations. The
incremental cost is based on the historical cost in accommodating demand increments.

In Brazil, additional regulatory concern arose from DGs
migration tendency to the transmission networks, as they are
financially better off with locational transmission charges.
In Germany, there are no locational signals for generators or load. Network tariffs differ among network operators because of different underlying costs, but not due to
any systematic geographical component. DGs receive a premium for avoided network charges of higher voltage levels.
Avoided network charges are calculated per regional networkthat is, without systematic locational signals. Contribution-to-network costs (Baukostenzuschsse) charged from
newly connecting generation or load are intended to favor
needs-based network expansion and avoid overdimensioned
network capacity. This does not convey locational signals
table 1. A summary of distribution voltage levels .

Voltage Level
United
Kingdom
Germany
Spain
Brazil
Chile
India
Extra-high voltage (EHV)
132, 33, 22
110
220, 132, 72.5,

66, 45, 36
138, 88, 69,

34.5
N/A
132, 33
Medium or high voltage

(MV or HV)
11, 6.6
20, 10
15, 20
13.8
23
11
Low voltage (LV)
0.415
0.4, 0.23
0.4
0.22
0.38
0.44
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AVDA
CALLE
CARR
Consumo BT Aereo
Consumo BT Subte
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Transformador Aereo
Transformador Subterraneo
PAD Mounted
Red_BT. Aereo
Red_BT. Subte
figure 4. LV network in Santiago, Chile. (Reprinted by permission of Systep.)

either, as calculations can be based on average cost of similar cases and does not necessarily relate to concrete and
prompt network investment.
In India, the tariff structure varies across different states.
In any given state, the pricing structure is uniform for a given
type of customer. No geographical differentiation in tariff
exists. Connection charges do reflect the impact of location
from the connection point, but there is currently absolutely
no locational signal to grid users.
In Spain, as in India, there is no geographical differentiation in tariffs, either for demand or for generators.
This is a very delicate and controversial issue in Spanish
regulation. Furthermore, there are no differences in tariffs
for different distribution companies. That is, tariffs are the
same for all customers connected to the same voltage level
all over Spain.
In China, there is no locational pricing. However, for the
generation side, a benchmark price system is used to determine the price of newly installed generators.
What Cost Is Used in Your Charging

Calculation? Is the Marginal Cost or Long-Run
Incremental Cost Used? How?
In the United Kingdom, DNOs can choose between two methodologies to charge for the use of their EHV networks: longrun incremental cost pricing (LRIC) and forward cost pricing
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(FCP). LRIC seeks to quantify the additional costs/benefits

to future network investment from a nodal incrementthat
is, either injecting or withdrawing power from a node. FCP
sets prices that can recover the projected network cost over
next ten years.
FCP has a number of components:
FCP demand charges are based on incremental cost to
accommodate future demand within a network group.
FCP generation credits are derived on the same basis.
FCP generation charges are the average cost of the ten
years increment costthat is, the total incremental
cost divided by the total generation volume over the
ten year period.
For HV/LV networks, the coming years reinforcement
cost to accommodate demand growth is forecast based on
the present years expenditure.
In Brazil, average long-run incremental costs are determined for each voltage level: the ratio of future investment
costs and load growth are set in terms of present value.
This structure is then used for allocating the total required
revenue among the voltage levels. This structure is applied
to all users except for the generators connected to 138 kV
and 88 kV.
In India, embedded costs of networks comprise interest on debt, return on equity, depreciation, operation and
maintenance expenses, and interest on working capital.
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With advances in smart-grid technologies,

distribution pricing has a greater role in sending
economic signals to network users.
Marginal and incremental costs are not reflected in cost
allocation. Cost allocation is based on the peak conditions
existing in a year.
In Germany, historical cost of the last completed accounting
year is used both for the benchmark, which is the base for the
revenue cap in each five-year regulatory period and for starting prices. Cost components include depreciation, interest on
debt, return on equity, and cost for network losses. There is no
forward-looking component in the calculation. However, network operators can apply for investment budgets for planned
investment. The costs are socialized onto the end users.
In Spain, access tariffs for transmission and distribution
networks are set by the government, taking into account
recommendations from the Spanish regulatory body, the
Markets and Competence National Commission (CNMC).
The CNMC tariff methodology is based on assigning costs
to consumers according to the cost-causality principle. Thus,
network costs are first allocated to energy and capacity, taking
into account the results of a reference network model. After
that, energy and capacity costs by voltage level are assigned to
different time periods: energy costs are assigned proportionally to energy consumption, and capacity costs are assigned to
specific hours in the year (between 876 and 1,500 hours) with
the highest demand in each voltage level. Finally, for each
time period and voltage level, energy costs are allocated to
consumers according to their energy consumption and capacity costs based on their peak demand in the corresponding
time period. A cascade network model is used to assign the
costs of the different voltage levels between the consumers
connected to the different voltage levels. Commercial costs
are assigned as a fixed charge per customer, and other costs
are assigned to create as little distortion as possible.
In Chile, distribution networks are assumed to be designed
to supply under peak demand condition, so the average cost
of the required efficient infrastructure to supply that demand
is used for charging calculations. Energy valuations are only
needed for the purpose of calculating distribution losses to
be paid by demand.
In China, there is no locational pricing. However, for the
generation side, a benchmark price system is used to determine the price of newly installed generators.
What Cost Allocation Methods

Are Used in Your Charging Methodology?
In the United Kingdom, for EHV networks the LRIC charging model allocates long-run incremental costs based on the
distance of the traveling paths and the degree of their utijuly/august 2015
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lization for power injection and withdrawal at every single

node of the system. For FCP the allocation of future cost is
averaged within each network group. At the HV/LV level,
the DRM charging model allocates years-ahead cost based
on postage stamp.
In Brazil, inside each voltage level the allocation is based
on the postage stamp. Among the voltage levels, the LRIC is
used for allocating the allowed revenue.
In India, the network cost allocation is based on the costof-supply principle. The network costs are initially classified based on the type of costs involvedthat is, whether
they are demand, energy, or customer related. These costs
are allocated on the basis of contribution of individual
customer categories on each type of cost. Actual customer
costs are a reflection of the proportion of the number of
customers connected to the system in each category. The
electricity price is similar throughout the state for a given
customer category. The pricing scheme is very close to a
postage stamp method.
In Germany, all network costs are socialized. The network charge is a postage stamp in each voltage level. Only
load pays the charge; the generation charge is zero. Distance
between feed in and consumption is irrelevant. There is
regional differentiation because the charges are calculated
for each network of which there are some 900. Cost from
higher voltage levels is passed on to lower levels and finally
to consumers.
In Spain, as in Brazil and Germany, a postage stamp
method is implemented inside each voltage level. The distance between generation and consumption is irrelevant.
In Chile, a postage stamp scheme is used inside each
voltage level, with differences only arising depending on the
density of the area served and whether networks are underground or overhead.
Is Demand Treated the Same

as the Generation? If Not, Why They Are
Treated Differently?
In the United Kingdom, LRIC treats demand the same as
generation. Both are examined for how they will impact the
present value of future reinforcement at each node of the
EHV network. For FCP and DRM, demand and generation
are treated differently. The FCP generation charge is based
on statistical generation growth, which is lumpy in nature,
and its cost allocation is based on average cost pricing. The
FCP demand charge is based on gradual demand growth,
and its cost allocation is based on a marginal approach. The
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table 2. A summary of cost drivers and allocation methods in the distribution pricing structure.
United
Kingdom
Cost
drivers
Cost used
Germany
Spain
Brazil
Chile
India
Geographical
location
YesEHV
NoHV/LV
No
No
YesEHV
No
No
Voltage level
Yes
No
Yes
Yes
Yes
No
Density
YesEHV
NoHV/LV
No
No
No
Yes
No
Asset types
(underground or
overhead)
YesEHV
NoHV/LV
No
No
No
Yes
No
Tariff differentiation
between differing
DNOs
Yes
Yes
No
Yes
Yes
No
Embedded cost
HV/LV
N/A
No
N/A
No
Yes
Marginal cost
N/A
No
No
EHV
generator
No
N/A
Incremental cost
EHV, locational
(LRIC, FCP
demand)
New
investment cost
is socialized on
case-by-case
basis
No
HV/LV: ratio
of future
investment
costs and
load growth
in present
value
Yes
N/A
EHV, (FCP
generation)
Average cost
based on historical
expenditure
HV/LV
EHV/HV/LV
No
N/A
Yes
N/A
Cost-causality
principle
No
No
Cost
allocated
to cost
drivers, time
periods and
consumers
according
to cost
causation
No
No
No
HV/LV
postage stamp
Postage stamp
Postage
stamp
EHVICRP
(generator
only)
Postage
stamp
Principle
of costof-supply,
similar to
postage
stamp
Cost allocation method
EHVLRIC
distance of
traveling path
EHVFCP
average within
each group
Boundaries
between
connection and
use charges
Connection
charge
Yesshallow
Yesshallow
UoS charge
Yesall users
Reinforcement Yes
charge
reinforcement
required
one voltage
level above
connection
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HV /LV
postage
stamp
Yesshallow
(consumer),
deep
(generator)
Yesshallow Yes
demand
only if more
than 100 m
away
Yes
shallow
(demand),
deep
(DGs)
Yesconsumer Yesall
only
users
Yesall
users
Yesall
users
Yes
consumer
only
Yesload and N/A

generator not
from renewable
energy or pit
gas
N/A
Yes
generator
N/A
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The electricity supply industry is undergoing

a transformation to promote greater interactions between
network users and the grid.
DRM was designed for a passive network: both generation
and demand are considered to require network upgrading, so
both are charged for the use of the network.
In Brazil, the consumption side is based on the LRIC for
each voltage level. There is a locational signal for generators
connected at 138 and 88 kV based on the investment cost
related price (ICRP). For lower voltages, the generation tariff is
based on the regional average charges applied to all consumers.
In India, for the central transmission utility, generally
there are no network charges levied on generation utilities.
All the network revenue is recovered from demand customers. The present pricing structure evolves from that existing
during integrated market environment, wherein the thrust
of the approach was to recover the revenue incurred. As all
the utilities were government owned, the necessity for charging generation utilities was never felt. The present charging
structure is a reminiscent of those existing during those times,
and are still evolving. As far as the state transmission utilities are concerned, the charges are restricted to connection
charges only. Usually, the generation utility is expected to
make arrangements for connection to the network utility. The
DGs are generally not connected at lower voltages associated
with state distribution utilities. Thus, at present the question of
similarity is not relevant for distribution networks.
In Germany, generators do not pay UoS charges; they
only pay for connection to the next grid connection point.
Load customers pay a two component fee: an annual fee in
ct/kWh related to the maximum capacity consumed during
the year and an energy fee in cent/kWh related to the energy
consumed. Additionally, Baukostenzuschsse, as defined
earlier are allowed to recover necessary reinforcement costs
for connection of load or generation. Generators in the distribution network have to be compensated for avoided cost-ofnetwork charges at higher voltage levels unless they are subsidized via a feed-in-tariff (renewable energy feed-in-tariff
or combined heat and power [CHP] law). The main reason
for this is to promote DG.
In Spain, until 2011 generators did not pay UoS charges.
Currently, they pay a 0.5/MWh flat UoS charge, for all
the generators connected to transmission and distribution
networks. They also pay a charge for connection to the grid.
Load customers pay, besides a connection charge, a three
component tariff as UoS charge: a fixed charge, in /month;
a capacity charge according to their contracted power, in
/kWmonth; and an energy charge, in /kWh.
In Chile, the distribution company has the right to receive
remuneration for all its installations, based on the efficient
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network model; thus, all users have to pay for the utilization of the network, including both demand and generation.
However, network charges for generators have had limited
application, as discussions often arise about the need to reinforce networks when a new injection is being incorporated
into the distribution network.
A summary of the differences among network pricing
structures is shown in Table 2.
What Approaches Are Used for Revenue

Reconciliation?
In the United Kingdom, LRIC, FCP and DRM use fixed
adders to minimize the distortion to charges generated from
the charging methodologies. This is to be reconsidered by the
industry, as pockets of the network see very large scaling.
In Brazil, if the application of the LRIC for each voltage
level is not enough, multiplied adders are used to match the
required revenue.
In India, the complete network costs are reflected and
recovered by the usual network pricing models. Hence, revenue reconciliation is not required.
In Germany, network costs are reflected in the calculation
of charges, which are regulated by a revenue cap. At the end
of a calculation period, network companies have to compare
real revenues from network charges to allowed revenues.
Insofar as pass-through costs are concerned, a comparison
of realized cost and cost factored into the network tariffs is
carried out. Differences are included as cost-reducing or costincreasing factors in future calculations. The DG compensation for avoided network charges presses on the revenues at
transmission level. This is beginning to become a problem.
In Spain, as in India, the total distribution costs are
reflected and recovered by the used-pricing methodology.
Hence, revenue reconciliation is not necessary.
In Chile, distribution costs of the efficient model company are reflected and recovered in the pricing methodology, and real companies will have enough revenues, or not,
depending on how far they are from the benchmark. No revenue reconciliation is considered.
Are Your Charges Set for Annual

Use-of-System or for Some Other Periods?
Is There Any Time Period Tariff?
In the United Kingdom, all charges calculated from the
network charges are annual charges. They are then converted into hourly charges based on customers load factor and coincident factor. At present, the United Kingdom
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Post-2007, the United Kingdom and Brazil

lead the way in introducing locational charges at the
EHV distribution level.
offers two band tariffs: one is normal tariff and the other
is economic, where companies offer cheaper rates for
energy usage at off-peak periods. Different companies
have slightly different time band for off-peak times.
In Brazil, for voltage levels from 138 to 13.8 kV, there are
a set of time-of-use tariffs, whereas for low voltages there
are only the flat tariffs. The tariffs are set by the regulatory agency for each distribution company according to their
time band for peak and off-peak.
In India, the UoS charges are usually set on an annual
basis. Some tariff structures for high-valued customers do
reflect a time-period based tariff, taking into account seasonal impact.
In Germany, charges are set annually. Apart from the
usual network tariffs, special rates can be negotiated;
however, they have to be offered as choices to all customers (nondiscrimination). Charges for load are differentiated by the typical annual utilization hours. Furthermore, charges make up a component related to peak load
of customers. Factoring in a coincidence factor serves to
distribute costs based on contribution of individual users
to system peak.
In Spain, UoS charges are calculated using an annual

basis. At present, LV customers can choose between a flat
tariff, a tariff with two time periods, and a tariff with
three time periods. MV customers can choose between a
three-time period tariff and a six-time period tariff, while
EHV customers have a tariff with sixtime periods.
In Chile, distribution charges are calculated every four
years, on an annual basis, depending on peak demand of
customers, as related to system peak demand. They correspond to capacity payments reflecting capacity use of
installations; energy charges are only related to system
losses. Customers may choose how their peak demand
is measured, and different tariffs exist depending on the
metering scheme used. System peak demand occurs within
certain hours of the day and in certain months of the year,
so that customers may adapt their consumption to reduce
their capacity payment.
In China, there is a set peak-valley and time-of-use price
as well as seasonal power price for nonresidential users. There
have been some pilot projects of peak-valley and time-of-use
price for residential users in some provinces, such as Shanghai
and Zhejiang, but most residential users have a flat tariff.
Is There Any Specific

Tariff for Distributed
Generation or
Microgeneration Such as
a Feed-in Tariff?
figure 5. A large penetration of photovoltaic generation in the urban parts of the

United Kingdom. (Source: Western Power Distribution, United Kingdom.)
84
magazine
In the United Kingdom, for distributed generation larger than 5

MW, there is a renewable obligation certificate on the top of
energy sale. DGs have to pay for
the UoS and connection charges
themselves. For distributed or
microgeneration below 5 MW,
at present prices are negotiated
with the local supplier; most
will receive a floor price that is
delinked from the price variation in the energy market. Since
April 2010, small-scale generators receive a feed-in tariff
that provides greater certainty
on the return on investment in
the event that they make their
machines function.
july/august 2015
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table 3. A summary of the distribution pricing structure.
United
Kingdom
Germany
Spain
Brazil
Chile
India
Retail market
Consumers can
choose their own
supplier
Yes
Yes
Yes
Yesbut only if
demand 3 MW
Yesbut
only if
demand
2 MW
Yesrestricted
consumers
Charges set for

annual use of the
system
Yesfurther
converted
into hourly
charges
Yes
Yes
Yes
Yes
Yes
Time period tariff
Peak and off

peak
Time-differentiated
tariff for consumer
over night
LVflat tariff,
two or three time
periods
EHV/MVtime
of use
Flat tariffs
MVthree or six
time periods
LVflat tariffs
Flat tariffs,
except for
high-value
consumers
No
Yes
subsidization
of wheeling
charges and
energy banking
EHVsix time
periods
Specific tariff
for distributed
generation (feedin-tariff)
Yes
renewable
obligation
certificate
Yesavoided
network charges
of higher voltage
levels
Yesflat feed-intariffs and UoS

charges for DG
In Brazil, since 2009 a locational tariff has been set to

generation connected to 138 and 88 kV networks. Other generations embedded at the distribution grid pay an average
consumer tariff.
In India, renewable energy is predominantly available
in the form of distributed generation. To promote renewable generation, a two-pronged strategy via demand and
supply has been adopted. On the demand side, accounting for specific resource availability, state electricity
regulatory commissions require distribution utilities
to purchase a minimum percentage (from 2 to 10%) of
renewable energy. On the supply side, competitive bidding has been set as the preferential route for renewable power purchase, but because there are few renewable power developers, encouraging rates are not being
offered. The subsidization of wheeling rates and energy
banking has also been offered to encourage renewable
power. The central electricity regulatory commission is
also contemplating free-wheeling for renewable power on
an interstate transmission network, to allow access to the
highest-paying bidder.
In Germany, distributed generation is recompensed for
avoided transmission network charges, which are avoided by
feeding into the distribution network. Renewable generation
receives a feed-in tariff. The level of the tariff is dependent
on technology and the size of the generator.
In Spain, renewable generation and CHP receive a feedin tariff, depending on the technology and the size of the
generator, although recently these tariffs have been reduced
and, in some cases, eliminated. These incentives are updated
by the regulator and are the same for all the generators in
july/august 2015
magazine
Yeslocational
tariff only for
generation
connected to
138/88 kV
Spain; there are no locational signals. As mentioned, DGs

pay a flat 0.5/MWh UoS charge.
In Chile, there is no feed-in tariff for any generation. As
of 2010, a minimum nonconventional renewable energy
quota requirement was set for contracts, including all
renewables except hydro generation over 20 MW, starting
from 5% and growing to 20% by 2025. While exception
of transmission wheeling tariffs is given to this energy, no
exception is made for distribution charges.
In China, there is no specific tariff for distributed generation or microgeneration.
figure 6. Completed installation for home-area energy

storage to work together with photovoltaic generation and
a local DC network. (Source: Western Power Distribution,
United Kingdom.)
85
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Major advances have already been made in Europe

and South America in reforming distribution pricing and
tariff structures to meet low carbon requirements.
A summary of the differences among tariff structures is
shown in Table 3.
Conclusions
Major advances have already been made in Europe and
South America in reforming distribution pricing and tariff
structures to meet low carbon requirements. The advances
made (the United Kingdom and Brazil, in particular) are to
facilitate the economic connection of renewable energies, to
maximize the use of the existing system, and to encourage
the growth of efficient and renewable generation at all voltage levels. The advances can be summarized as follows:
Introducing locational UoS charges to encourage the
appropriate location of new generation and demand
and facilitate cheaper connection of efficient and renewable energies
Introducing better alignment between transmission
and EHV distribution network charging methodologies and discourage uneconomic DG migration
Introducing new performance based revenue control,
ensuring that customers to pay a fair price for rewiring
a smart distribution system.
These advances represent step changes to distribution
regulation, pricing, and tariff structures, which have had
very little linkage with the state of the system in the past
2030 years. These advances are targeted to support the efficient integration of distributed generation, particularly those
DGs of a renewable nature at EHV levels. Those advances,
however, are not designed for the extensive MV/LV network,
as is photovoltaic generation shown in Figure 5, nor are they
designed for promoting demand-side participation to maximize operation efficiency and reduce investment cost, as
Figure 6 illustrates.
The move to a low-carbon energy system within a smartgrid environment requires active demand side participation;
users should play a key role in balancing intermittent generation and reducing network constraints. This is a structure that places operational cost at the heart of the pricing
and tariff structure, that can incentivize active generation/
demand interactions at all voltage levels while also reducing
network fixed costs. The main challenge is how to assess and
allocate future network costs that encourage the right balance between network investment, performance, and risks.
86
magazine
For Further Reading

M. Rodrguez, I. J. Prez-Arriaga, J. Rivier, and J. Peco,
Distribution network tariffs: A closed question? Energy
Policy, vol. 36, no. 5, pp. 17121725, May 2008.
H. Rudnick, A. Arnau, S. Mocarquer, and E. Voscoboinik, Stimulating efficient distributionIncentive price
regulation stimulates efficiency in electricity distribution
in Latin America, IEEE Power Energy Mag., vol. 5, no. 4,
pp. 5067, 2007.
J. W. Marangon Lima, Allocation of transmission fixed
charges: An overview, IEEE Trans. Power Syst., vol. 11, no.
3, pp. 14091418, Aug. 1996.
J. W. Marangon Lima, J. C. C. Noronha, H. Arango, and
P. E. Steele dos Santos, Distribution pricing based on yardstick regulation, IEEE Trans. Power Syst., vol. 17, no. 1,
pp. 198204, Feb. 2002.
F. Li and D Tolley, Framework for assessing the economic
efficiencies of long-run network pricing models, IEEE Trans.
Power Syst., vol. 24, no. 4, pp. 16411648, Nov. 2009.
A. Picciariello, J. Reneses, P. Fras, and L. Sder, Distributed generation and distribution pricing: Why do we
need new tariff design methodologies? Electric Power Syst.
Res., vol. 119, pp. 370376, Feb. 2015.
J. Reneses and M. Rodrguez, Distribution pricing:
Theoretical principles and practical approaches, IET
Generation, Transmission, Distribution, vol. 8, no. 10,
pp. 16451655, Oct. 2014.
Biographies
Furong Li is with the University of Bath, United Kingdom.
Jose Wanderley Marangon-Lima is with the Universidade Federal de Itajuba, Brazil.
Hugh Rudnick is with Pontificia Universidad Catlica
de Chile, Chile.
Luana Medeiros Marangon-Lima is with the Universidade Federal de Itajuba, Brazil.
Narayana Prasad Padhy is with the Indian Institution
Technology, Roorkee, India.
Gert Brunekreeft is with Jacobs University, Germany.
Javier Reneses is with the Institute for Research in TechnologyIIT, Universidad Pontificia Comillas, Spain.
Chongqing Kang is with Tsinghua University, China.
p&e
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history
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Roy Billinton and Kelvin Chu
early evolution of LOLP

evaluating generating capacity requirements
THIS ARTICLE FOCUSES ON THE

early application of probability methods in the evaluation of generating
capacity adequacy and reserve capacity requirements in an electric power
system. The primary objective is to illustrate the evolution of the loss of load
probability (LOLP) from a concept to a
numerical system index that has been
widely accepted as a system standard
for over 50 years. The observations in
this article are supported by the Bibliography on Application of Probability
Methods in the Evaluation of Generating Capacity Requirements, presented
by Roy Billinton at the IEEE Winter
Power Meeting in New York, New
York, 30 January4 February 1966
and designated as Conference Paper
No. 31 CP 66-62.
The bibliography consists of 96 technical papers published between 1933
and 1966 and are arranged in chronological order. The reference numbers
used in this article are the paper numbers in the bibliography, and the paper
citations in this article follow the format, style, and punctuation used in the
1966 bibliography. The authors of the
papers came from a wide range of orJDQL]DWLRQV7KHLUFRPSDQ\DIOLDWLRQV
are provided to illustrate the wide industrial participation in the thought process
that culminated in the acceptance of an
LOLP of one day in ten years as an industry standard.
Since the launch of IEEE Power & Energy Magazine, most of the articles appearing in the History column have dealt with significant technological developments in electric power equipment and systems and with the remarkable engineers and scientists who brought them about. This article, by Roy Billinton and
Kelvin Chu, represents a change of pace as it chronicles the early evolution of
the application of probability theory and methods and statistical techniques in
the evaluation of electric power system generating capacity and reserve capacity requirements. From 1933 to 1966, many talented engineers representing a
broad spectrum of backgrounds and organizations contributed to the development and acceptance of the consensus that is the subject of this article.
Roy Billinton earned B.Sc. and M.Sc. degrees from the University of Manitoba and Ph.D. and D.Sc. degrees from the University of Saskatchewan. He joined
the University of Saskatchewan in 1964 after working in the System Planning
and Production Division of Manitoba Hydro. He was the head of the Electrical
Engineering Department in the College of Engineering, associate dean, and acting dean and is currently a distinguished professor emeritus. Dr. Billinton is an
IEEE Life Fellow, a foreign member of the U.S. National Academy of Engineering, and a fellow of the Royal Society of Canada and the Canadian Academy of
Engineering. His area of research is power system reliability, economics, and
performance. Dr. Billinton has served on many IEEE Power & Energy Society
committees and other industry committees.
Kelvin Chu earned B.Sc., M.Sc., and Ph.D. degrees from the University of
Saskatchewan. After teaching at Clarkson University in 1989, he joined Manitoba Hydro as the reliability section head in 1990. He later held senior positions
at the U.S. Northwest National Laboratory, Bell Telephone Laboratories, and
ConEdison of New York. He is currently a principal engineer in the General
Electric Energy Consulting Group. His area of research is in power system reliability, load forecasting, and reliability assessment of next-generation telecommunications networks. Dr. Chu is a Senior Member of IEEE and is the newly
appointed secretary of the IEEE LOLE Working Group.
We welcome Roy Billinton and Kelvin Chu as our guest history coauthors for
this issue of IEEE Power & Energy Magazine.
Carl Sulzberger
Associate Editor, History

88
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1540-7977/152015 IEEE
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Development of the
LOLP Index
The bibliography indicates that interest
in the use of probability methods in the
determination of generating capacity requirements became evident in 1933 [reference 1]. This was followed by a series
of publications [references 210] between
1933 and 1946. The first coordinated attempt to discuss the application of probability techniques in generating capacity
reserve assessment is considered to have
occurred at an American Institute of
Electrical Engineers (AIEE) Conference
in Chicago, Illinois, in 1947, where the
following four papers [references 1114]
were presented on this subject. All four
papers proposed the application of probability theory to consider generating unit
outages, and they presented some examples of a loss of load (LOL) index but did
not suggest a criterion for an acceptable
level of reliability.
11. Generating Reserve Capacity Determined by the Probability Method,
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G. Calabrese, AIEE Trans., 1947, vol.

66, pp. 143950.
12. Calculating Probability of Generating Capacity Outages, W.J. Lyman, AIEE Trans., vol. 66, 1947,
pp. 147177.
13. Outage Expectancy as a Basis for
Generator Reserve, H.P. Seelye, AIEE
Trans., vol. 66, 1947, pp. 148388.
14. Probability Methods Applied to
Generating Capacity Problems of a
Combined Hydro and Steam System,
E.S. Loane and C.W. Watchorn, AIEE
Trans., vol. 66, 1947, pp. 164557.
Reference 11, [1947] by G. Calabrese (Consolidated Edison Company of New York), presented the basic
methodology and illustrated the LOLP
using daily values of 0.00001, 0.0001,
and 0.001 but did not specifically indicate a criterion value.
Reference 12, [1947] by W.J. Lyman
(Duquesne Light Company), proposed
the use of megawatt outages and did
not consider the LOLP.
Reference 13, [1947] by H.P. Seelye
(Detroit Edison Company), suggested
that a reasonable interval between the occurrences of generating capacity deficiencies might be once in 20, 30, or 50 years
but did not mention an LOLP value.
Reference 14, [1947] by E.S. Loane
(Duquesne Light Company) and C. W.
Watchorn (Pennsylvania Water and
Power Company), noted an acceptable lower LOLP limit of one day in
27 years and an upper limit of one day
in 58 years and implied that one day in
8.66 years would perhaps be undesirable. (The average of LOLP values of
0.001 and 0.0001 on a natural logarithmic scale is 0.000316, which corresponds to one day in 8.66 years).
It is important to note that all the
authors suggested that the choice of an
appropriate level of service reliability
for a system should be based on personal judgment and local conditions.
The four papers [references 1114]
presented at the 1947 AIEE meeting
in Chicago can be considered as the
starting point in the evolution and application of probabilistic techniques
in generating capacity reliability assessment. These papers also initiated
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the determination of the generally accepted loss of load expectation (LOLE)

index criterion of 0.1 days/year presently in use. To track the origin of this
criterion, the papers listed in the 1966
bibliography that were deemed to be
related to generating capacity planning
or reserve requirements were reviewed.
This review focused on the following
requirements:
Did the paper mention the application of LOLP, and if yes, was a
criterion provided?
If a criterion was provided or a value quoted, was there a justification
given for the criterion or value?
The following papers indicated the
use of LOLP and any suggested criterion or value. References 1114 are
covered above.
17. Probability Theory Helps Determine System Reserve Generating
Capacity, G. Calabrese, Power,
New York, New York, vol. 92, July
1948, pp. 42326.
Reference 17, [1948] by G. Calabrese, discussed LOLP but did not
indicate any specific value.
22. The Determination and Allocation of the Capacity Benefits Resulting from Interconnecting Two
or More Generating Systems,
C.W. Watchorn, AIEE Trans., vol.
69, Pt. II, 1950, pp. 118086.
Reference 22, [1950] by C.W. Watchorn, utilized the LOLP approach
and suggested a criterion of one day in
eight to ten years and used one day in
8.66 years as an example in his calculation. He also stated: It is believed that
a reasonable level of service reliability,
when the effect of probable load forecasting error is included in the evaluation, is the probability of failure to
carry the load in the order of an average rate of one day in 8 to 10 years.
23. Determination of Reserve Capacity by the Probability Method, G.
Calabrese, AIEE Trans., vol. 69, Pt.
II, 1950, pp. 168189.
Reference 23, [1950] by G. Calabrese, suggested that an LOLP of one
day in 50 years after voltage reduction
should be satisfactory. He also indicated that the reliability level may be
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different for different generation mixes

and should include all local factors. In
his discussion of this paper, C.W. Watchorn noted: The level of service reliability of a loss of load expectation of
in the order of the average rate of one
day in ten years in [sic] both reasonable
and adequate. The discusser has already so recommended or indicated on
several occasions, (Watchorn quoted
three of his papers [references 14, 22,
and 25] in this statement as if the issue had been fully discussed in these
papers. In fact, he did recommend or
indicate the criterion in these papers
but did not provide any information on
how or why this value was chosen).
24. The Relation of Thermal Plant
Design to Reserve Capacity Requirements, M. J. Steinberg, Electrical Engineering, vol. 69, January
1950, pp. 64-7; Also Elect. World,
vol. 133, January 2, 1950, pp. 58

60; Also Power Generation, vol.
54, February 1950, pp. 769.
Reference 24, [1950] by M.J. Steinberg (Consolidated Edison Company
of New York), used a criterion of one
day in seven years as an example but
provided no justification.
25. Elements of System Capacity Requirements, C.W. Watchorn, AIEE
Trans., vol. 70, Pt. 11, 1951, pp.
116385.
Reference 25, [1951] by C.W. Watchorn, noted the use of a one day in ten
years LOLP criterion that included all
the factors that affect capacity requirements but in a brief statement without
additional justification.
27. Determination of Generator Standby Reserve Requirements, H. T.
Strandrud, AIEE Trans., vol. 70, Pt.
I, 1951, pp. 17988.
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Reference 27, [1951] by H.T. Strandrud (Bonneville Power Administration), used an LOLP of one day in
14.6 years in his example and indicated that the reliability level should
be decided for each system by considering such factors as the cost of reserves and the possible consequences
of dropping load.
34. Evaluation of Unit Capacity Additions, M.J. Steinberg and V.M.
Cook, AIEE Trans., (Power Apparatus and Systems), vol. 75, Pt. III,
April 1956, pp. 16979.
Reference 34, [1956] by M.J. Steinberg and V.M. Cook (Consolidated Edison Company of New York), uses a one
day in seven years criterion for the examples shown in the paper. It was stated
as being based on judgment and that it
generally conforms with the views of
other companies employing this method.
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37. The Effect of Interconnections

on Economic Generation Expansion Patterns, L.K. Kirchmayer,
A.G. Mellor, and H.O. Simmons
Jr., AIEE Trans., (Power Apparatus
and Systems), vol. 76, June 1957,
pp. 20314.
Reference 37, [1957] by L.K. Kirchmayer (General Electric Company)
et al., utilized an LOLP index of one
day in ten years and a value of one day
in two years when adding large units.
The paper also states that the average
reliability standard was not universally
applicable, and there is a need for a
better standard to balance between the
economic loss of failure and the cost of
providing service. In his discussion of
this paper, C.W. Watchorn suggested
that a criterion of one day in ten years
approximated fairly closely the results of such an economic standard of
service reliability. No justification was

provided.
40. Determination of Reserve and Interconnection Requirements, H.D.
Limmer, AIEE Trans., (Power Apparatus and Systems), vol. 77, August 1958, pp. 54450.
Reference 40, [1958] by H.D. Limmer (Public Service Electric and Gas
Company), utilized a one day in ten
years LOLP based on 253 weekdays.
42. Use of Probability Methods in
the Economic Justification of Interconnecting Facilities Between
Power Systems in South Texas,
A.P. Jones and A.C. Mierow, AIEE
Trans., (Power Apparatus and Systems), vol. 77, 1958, pp. 52030.
Reference 42, [1958] by A.P. Jones
(Central Power and Light Company,
Texas) and A.C. Mierow (Central and
Southwest Operating Committee, Texas),
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utilized an LOLP of 0.000555 which

equates to one day in seven years considering 257 peak load days/year.
43. Determination of ReserveGenerating Capability, H. Halperin
and H.A. Adler, AIEE Trans.,
(Power Apparatus and Systems),
vol. 77, 1958, pp. 530-44.
Reference 43, [1958] by H. Halperin
and H.A. Adler (Commonwealth Edison Company in Chicago), introduced
a frequency and duration approach to
generating reserve assessment using a
criterion of once-in-five-years. This is
a frequency index and not an expected
duration index. This pioneering paper
stimulated some excellent discussion.
72. Application of Probability Methods to Generating Capacity Problems, AIEE Subcommittee on
Application of Probability Methods, AIEE Trans., Pt. III, (Power
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Apparatus and Systems), vol. 79,

1960 (February 1961 section), pp.
116577.
Reference 72 [1960] is an important reference developed by the Working Group of
the AIEE Subcommittee on Application of
Probability Methods. The paper presented
the results of three separate reliability measures applied to the same problem. The
three methods were designated as
LOLP
loss of energy probability
Interval between outages.
This is a benchmark paper that created some excellent discussion. No specific LOLP criterion was given, and the
paper stated: The selection of a satisfactory level of reliability or a corresponding index appropriate to any methods of
measurement requires at some point the
exercise of informed judgment.
The paper also stated in regard to the
loss of load probability approach that: Regardless of the form in which the result is
presented, its significance as a probability
of existence of a specified condition, and

nothing more, must be recognized.
In his discussion of the AIEE Working Group paper, C.W. Watchorn suggested that 0.1 day of failure per year or one
day of failure in ten years is a generally
accepted standard of service reliability.
Virtually all the applicable references
from this point on used an LOLP index of
one day in ten years in their applications.
The creation and movement toward
the use of an LOLP of one day in ten
years or an LOLE of 0.1 days/year as
a generally accepted generating capacity adequacy criterion can be briefly
described in three phases. In Phase 1
from 1947 to 1950, no specific LOLP
was suggested, and authors generally
investigated a range of LOLP values.
Most authors also agreed that the objectives for service reliability would be
different for different systems and that
they had to be determined with judgment and based on local conditions. In
Phase 2 from 1950 to 1960, the LOLP
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values presented in various papers began to converge to a narrower range,

i.e. from one day in five years to one
day in 15 years. By 1960, the LOLP
index was in the range of one day in
five years to one day in ten years. In
Phase 3 from 1960 on, the LOLP index
of one day in ten years seems to have
been widely recognized by the electric
power industry, and most papers used
or quoted this value as a standard.
There are obviously many other people in addition to those cited in the bibliography who actively participated and
contributed in the early evolution of probability techniques in generating capacity
reliability evaluation and in the LOLP
criterion discussions. The authors cited,
however, are pioneers who documented
their views and presented them for discussion in established technical forums. It
is interesting to note that C.W. Watchorn
authored or coauthored 11 papers in the
bibliography over a 19-year period from
1945 to 1964.
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Based on the review of the papers listed in the bibliography, it

appears that C.W. Watchorn was the person who first proposed an
LOLP of one day in ten years as a reasonable criterion for reserve capacity planning. It is interesting to see how his thinking evolved over
time as expressed in his publications. In 1947, he commented that one
day in 27 years and one day in 88 years, respectively, were acceptable
lower and upper limits with one day in 8.66 years being in the unacceptable range [reference 14]. By 1950, he suggested one day in eight
to ten years and used one day in 8.66 years in an example calculation.
He did not provide any justification and wrote in reference 22:
It is believed that a reasonable level of service reliability, when
the effect of probable load forecasting errors is included in the evaluation, is the probability of failure to carry the load of in the order
of an average rate of one day in from eight to ten years, he said.
By 1957 he seemed to consider an LOLE of 0.1 days/year as a
criterion that corresponded to an economic standard of service reliability. His discussion on the 1960 AIEE Working Group report
[Reference 72] suggests that the use of 0.1 days/year is now a tradition but the tremendous advantage of money saving might warrant
a break from this tradition. By 1964, Watchorn appears to quote the
use of an LOLE of 0.1 days/year without any qualification.
It should be noted that the numerical value of the LOLP produced in a particular generation adequacy study is highly dependent
on the factors incorporated in the analysis. As an example, consider
two studies of a given system. In the first study, no load forecast uncertainty is considered. In the second study, significant load forecast
uncertainty is included. The calculated LOLP in the second case
will be higher than that in the first case, and the system load carrying capability at the criterion risk will be lower than in the first case.
There are a number of important factors that create similar effects.
The use of a particular LOLP criterion such as one day in ten years
as the system criterion should include recognition of the standard
factors that are incorporated in the analysis.
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Epilogue
There have been many utility applications, studies, reports, and published papers involving the LOLP index over the almost 50 years
since the 1966 Bibliography was presented at the IEEE 1966 Winter
Power Meeting. Many reports published since the mid-1960s indicate the use of an LOLP index of one day in ten years in generating capacity adequacy assessment. The National Electric Reliability
Study, Final Report, authored by the U.S. Department of Energy,
Office of Energy Emergency Operations, in 1981 noted that electric
utility system reliability criteria have been established on the basis
of historical reliability levels that provided trouble-free service in
the past. The reliability criterion used in planning is that the LOLP
should not exceed one day in ten years. These reports and many
others that utilize this LOLP index do not attempt to justify this criterion value but seem to accept it as a universal standard.
For Further Reading

R. Billinton, Bibliography on application of probability methods in the evaluation of generating capacity requirements, in
Proc. IEEE Winter Power Meeting, New York, Jan. 30Feb. 4
p&e
1966, paper no. 31 CP 66-62.
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PES elections
meet the candidates
BEGINNING IN AUGUST, THE VOTing membership of the IEEE Power &

Energy Society (PES) will have the opportunity to elect our future leadership.
The offices of president-elect, secretary,
and treasurer for the period 20162017
will be decided. The candidates are presented together with their photos, biographies, and candidate statements.
President-Elect
Erich W. Gunther
Erich Gunther is the
chair, chief technology
officer, and cofounder
of EnerNex, an electric power engineering
and consulting company. He has more
than 30 years of experience in the design
and development of innovative solutions
to a wide array of power system problems, most notably in ways to take advantage of communications networks and
advanced technologies to improve the efficiency, operating practices, and security
of the electric power system.
He currently serves as the chair of
the Harmonics Working Group, served
as chair of the Intelligent Grid Coordinating Committee, is a member of the
IEEE Smart Grid Steering Committee,
and served as a member of the PES
Governing Board from 2010 to 2014.
He has been privileged to participate
in the successful launch of the IEEEs
100
magazine
smart grid activities and in the transition of those activities to the PES. He
is a recognized expert in the IEEE
Distinguished Lecturer program and
speaks at IEEE PES events and Chapter meetings around the world, sharing best practices in the disciplines of
smart grid and power quality.
Prior to EnerNex, he was the vice
president of technology development
for Electrotek Concepts. He holds one
U.S. patent, has coauthored two books,
and has published over 100 articles in
numerous publications. He received
his master of engineering degree from
Rensselaer Polytechnic Institute. He is
a private airplane and helicopter pilot,
an amateur radio operator (WG3Q),
and an IEEE Fellow.
Candidate Statement
Societys dependency on electric energy for our livelihood and personal

well-being continues to increase at a
high rate. Every aspect of society benefits from the rapid evolution of electric power infrastructure capability, reliability, cost effectiveness, and safety.
You, my fellow members of the PES,
are on the front lines of this wave of
innovation and deserve to have the best
possible information, tools, and leadership to help you to meet this challenge
of rapid technology evolution and
complexity. My goal is to ensure that
we succeed together through activities
that include
improving access to information, tools, and services to facilitate more efficient use of your
time in the technical and related

activities you support
active engagement with government and industry organizations
to accelerate the application of
what you create
provide access to educational activities that foster skill enhancement
and professional advancement.
I am proud to be a member of the
PES, and I look forward to working with
you to maximize the impact we have on
improving electric power infrastructure
for the betterment of society.
Bruno Meyer
Bruno Meyer is managing director of
ARTERIA, the telecommunications
subsidiary of RTE.
Since 1990, he has
held several managing positions at EDF, ranging from power
systems simulation to transmission and
distribution technology, power system
design, or energy economics. He was also
in charge at EDF of customer satisfaction
surveys. At RTE he was deputy director
of key accounts for two years.
As managing director, he has proved
to be a results-oriented executive with
acknowledged successes (33% growth
in income and 85% in profit over the
past four years). And he still is committed to encouraging innovation and
cooperation.
He has been involved in IEEE
PES since 1990: as a member of
the Governing Board (20052008);
july/august 2015
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participating in conferences, working groups and committees; publishing papers; and Chapter chair as
well as regional representative for
Europe, the Middle East, and Africa.
He was always attentive to promote
IEEE activities and has encouraged
young professionals to join the Society. He is a member of the International Steering Committee of IEEE
Powertech. He is a Fellow of the
IEEE (2008).
Throughout his career, he has
promoted international cooperation
among utilities, manufacturers, consultants, and academics. He was involved
in projects in Europe, the United
States, Canada, Brazil, China, Japan,
and Africa, stimulating innovation in
a multicultural environment. He has
also shown leadership by launching
new projects and products. His fields
of expertise include power systems,
smart grids, and telecommunications.
He has degrees from Unicamp (B.Sc.,
1979) Sao Paulo (M.Sc., 1981), and Edinburgh (Ph.D., 1984). He has received
the CIGRE Technical Committee
Award in 1999.
focus on the value of membership.

Favor growth in regions outside
the United States.
Thanks to my 30 years experience in power industry, 20 of which as
a manager, I will meet the challenge
to preside this great organization and
bring the most value to PES members.
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Saifur Rahman
Saifur Rahman is
the founding director of the Advanced
Research Institute
at Virginia Tech
where he is the
Joseph R. Loring
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Candidate Statement
Active in PES since 1990, it is an honor

to be nominated for president-elect. If
elected, my first duty would be toward
our members. I would work for their
benefit, with the help of the Governing
Board. My strategic focus would be on
three points:
The IT and telecommunications
revolution. Innovations are changing the world at an incredible pace.
I will make sure that our industry
seizes the potential for change and
for better efficiency.
Increase the global footprint
of PES. Improve the strength
and leadership of our Society.
Favor interactions with stakeholders and with policy makers to contribute to the design
of the future.
Attract new members, enhance
existing programs, and develop
new ones aimed at young members. Retain existing members;
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Professor of Electrical and Computer Engineering. He also directs the Center for
Energy and the Global Environment. He
is a Fellow of the IEEE and an IEEE Millennium Medal winner. He is the founding editor-in-chief of IEEE Electrification Magazine and was also the founding
editor-in-chief of IEEE Transactions on
Sustainable Energy. He served as a vice
president of the PES from 2009 to 2013
and currently serving as a member of the
Board of Governors of the IEEE Society
on Social Implications of Technology
(SSIT). In 2006 he served on the IEEE
Board of Directors as the vice president
for Publications. He served as the chair
of the U.S. National Science Foundation
Advisory Committee for International
Science and Engineering from 2010 to
2013. He is a PES Distinguished Lecturer
and has lectured on smart grid, energy
efficiency, renewable energy, demand response, distributed generation, and critical
infrastructure protection topics in over 30
countries on all six continents. He has a
Ph.D. in electrical engineering from Virginia Tech.
Candidate Statement
IEEE PES, as a global organization,

provides platforms for knowledge development and knowledge sharing among
members of the academia, industry, and
government. As a former member of the
governing board of this Society for over
ten years spanning the 1990s2000s,
I have seen how fast it has grown and
how well it has positioned itself to serve
members in all segments of the Society.
If chosen as the president-elect for 2016
2017, I hope to develop business models
for educational and training products for
new systems and technologies in smart
grid, advanced power generation, transmission and distribution, and environmental mitigation. PES is fortunate to
have a very active member base associated with almost 200 chapters globally,
and I have visited many of them during
my over 40 years as a member of PES.
I would like to see that this very rich
resource that our Society hasboth
in terms of content and knowledgeable
peopleis shared with members in
all corners of the world through online
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Secretary
Institute, Beijing, China, and the B.Sc.

degree from Taiyuan University of
Technology, China. She is a Senior
Member of the IEEE.
Jessica Bian
Candidate Statement
Jessica Bian is a visionary leader and

architect. She has
spearheaded
the
electric industrys
reliability metrics
and grid risk assessment. She is currently with the Federal
Energy Regulatory Commission (FERC).
Prior to FERC, she was the director of
performance analysis at the North American Electric Reliability Corporation
(NERC). Under her leadership, a total
of 18 industry-wide reliability indicators
and three composite indices were established for the first time to determine the
reliability, adequacy, and associated risks
to the interconnected North American
bulk power system. In the spring of 2012,
she steered multiple technical industry
groups and directed the completion of the
first-ever industry-wide state of reliability report, marking a major step forward
in benchmarking the North American
grid reliability. She is widely recognized
as a pioneer and trusted world leader in
the field.
Before joining NERC, she was with
PJM Interconnection and ERCOT,
where she was responsible for real-time
operations support, resource economic
dispatch, and operator training simulator projects. She started her career
at Westinghouse Electric and was involved in generator design and flexible
ac transmission systems applications.
She has led or participated in numerous PES technical committees
since 1995. She holds two patents and
has published over 70 articles in transactions, journals, and proceedings. She
received the 2014 IEEE PES Wanda
Reder Pioneer in Power Award for her
technical accomplishments and for being an inspiring role model to young
women engineers in power. She earned
the Ph.D. degree in electrical engineering from Tulane University, the M.Sc.
degree from Electric Power Research
The PES is the home to the worlds most

innovative and hard-working leaders in
the power and energy field. The industry is experiencing significant changes,
including the increased availability of
natural gas; the growth in renewable,
demand-side, and storage technologies;
and new environmental requirements.
My goal is to be a catalyst of action and
a messenger of the future, empowering PES members to adapt the changes
and creating opportunities for young
engineers to advance their professional
careers. Successfully addressing these
challenges will require every member
to join together in developing creative,
socially responsible solutionsthat
simultaneously honor the unique interests of each.
I shall use my team motivation and
effective leadership skills to help each
member maximize the benefits from
involvement with this undisputed internationally leading technical association. I welcome the opportunity to continue my service to PES as secretary.
Specifically, I would bring my thoughtful, yet optimistic approach to the role,
as well as my commitment to work
toward bringing together members
voices for the betterment of society.
delivery and face-to-face regional and

international meetings.
Henry Louie
Henry Louie is the
PES vice president
(VP) of Membership
and Image and has
been on the PES
Governing Board
since 2010. He
has been involved in the creation of the
IEEE Smart Grid, the PES Scholarship
Initiative, the PES Resource Center, the
PES Webinar Series, and IEEE Smart
Villages. As VP of Membership and
Image, he has grown PES membership by 20% and has fostered diversity through the creation of Women in
Power, Young Professionals, Platinum,
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and Social Media committees. He is

the past chair of the PES Seattle Chapter, a member of the PES Long-Range
Planning Committee, past member of
the PES Nominations and Appointment
Committee, and is currently secretary
of the PES Working Group on Sustainable Energy Solutions for Developing
Communities.
He is an associate professor in the
Department of Electrical and Computer Engineering at Seattle University and cofounder of Kilowatts for
Humanity, a nonprofit organization
bringing off-grid electricity service
to the energy impoverished. His industry experience includes positions
as a business development manager
for 3TIER and as a field engineer for
Power Engineers.
He is a 2015/2016 Fulbright Scholar to Zambia, where he will be teaching and researching electrification in
rural communities. He received the
2013 IEEE Region 6 Northwest Area
Outstanding Educator award. He is
ZZZXOWHLJFRP
_______
a Senior Member of the IEEE and in

2014 was named a Distinguished Lecturer of the IEEE for this talks related
to energy poverty. He received his
B.S.E.E. from Kettering University,
his M.S. from the University of Illinois, and his Ph.D. from the University of Washington.
Candidate Statement
As one of the longest-serving members of the PES Governing Board, I

have the experience and perspective
to effectively serve as secretary. I
will work with the president to set an
agenda for the Society that emphasizes
support and development of programs
that benefit our members and increases PESs international activities and
membership.
Under my leadership as VP of Membership and Image, PES has become
larger and more diverse than it has ever
been before. PES has greatly expanded our benefits to members, including
the Resource Center, Scholarship Plus
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Initiative, and Webinar series. As secretary, I will continue to support these

activities and encourage the development of appropriate and impactful new
programs.
As a past Chapter chair, I understand the importance of a local PES
presence. As secretary, I will make
supporting Chapters worldwide a priority. While living in Zambia, I will
enthusiastically create Chapters and
grow membership in Africa.
My contributions to PES have been
a highlight of my career, and I look forward to continuing to serve the Society.
Gonzagas
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Treasurer
Juan Carlos Miguez
Juan Carlos Miguez graduated
from the Universidad de la Republica, Montevideo, Uruguay, in
1969. He worked
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for three years with Siemens in Germany in the design of data switches.
Back in his country, he developed the
countrys Telex network and launched
a project for designing and building
data switches locally. It was a major
success, applied first for Telex and
later for X-25.
In 1979, he moved to Salto Grande,
a newly built 1890 MW hydroelectric
facility jointly owned by Argentina and
Uruguay. For 25+ years, he was responsible for SCADA and EMS. His group
also designed, developed, and operated
the extensive companys data network.
He was promoted to manager for Engineering and Planning in 2007 until his
retirement.
From 1967 to 2013 he also taught
courses in electronics, electromagnetic
theory, and data networks in engineering schools in Uruguay.
In 1989, he founded the Uruguayan
IEEE Section. Since then he has volunteered every year and served on the
IEEE Board of Directors (19981999).
Active in IEEE Member and Geographic Activities and other boards, he has
given ample proof of leadership, vocation to serve and dedication to work for
the benefit of the humanity.
After a tenure as Chapter representative, he served for six additional
years (20062011) as Region 9 representative in the PES Governing Board,
getting first-hand knowledge of the
Society, its strengths, and its problems. Recently, he has been successfully promoting technical conferences
in Latin America. He was the general
chair of PES T&D LA 2012 and ISGT
LA 2015, the first international IEEE
conferences in Uruguay. In 2012, he
nominated and secured approval for
the hydroelectric Rincon del Bonete
as the first IEEE Milestone in the
country, the fourth one approved in
Latin America.
Among other qualifying jobs in the
IEEE, he was Region 9 treasurer in
2012 and 2013, having direct and recent experience with IEEE monetary
issues. Presently he serves on the IEEE
Life Members Committee.
104
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Candidate Statement
The technical Societies constitute the

core and the strength of the IEEE; to participate in one as dynamic and successful
as PES gives me legitimate pride.
I have volunteered actively for 27
years in many IEEE boards and units,
from founding the Section in my country to serving in the IEEE Board of
Directors, also including six years
of experience on the PES Governing
Board. In all my roles, I have worked
hard turning ideas into achievements,
giving proof of leadership, and gaining
a solid knowledge of the Institute.
If you elect me, I am confident that
my experience in the industry and in
the IEEE will allow me to fulfill the
role of treasurer. I will dedicate my
time, skills, and knowledge to support
the ideas and projects that flourish in
the PES community of volunteers,
which I believe are the lifeblood of
the Institute. I will always strive to get
things done and to support the strategic
goals of the board for the benefit of its
members and humanity.
Christopher E. Root
Christopher Root
has been on the PES
Governing Board
in various roles
since 2007. He
joined the board
as a member at
large and has been elected secretary and
treasurer. He is extremely active in PES
Board activities and tries to bring a utility executive prospective to the board.
He is a Senior Member and has been a
PES member since 1983. He is the chair
of the PES Leadership in Power Award.
He has a good understanding of how the
Society works from both a procedural
basis (from being secretary) and financially (from being treasurer).
He is currently the chief operating
officer of the Vermont Electric Power
Company and has dealt with large budgets for over 20 years, which is invaluable in understanding budgets and the
budgeting process. This is critical in
being treasurer of PES.
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He was instrumental in reinvigorating the Boston PES Chapter and has

started a new PES Chapter in Vermont.
He brings a utility as well as a practicing engineer perspective to the board.
He tries to view the Society from both
a local Chapter view as well as a global view. He has had an opportunity
to meet with Chapter representatives
from around the world, and these experiences have been helpful in making
decisions at the Governing Board.
He has a B.S.E.E. from Northeastern University with a focus in power
systems and an M.Eng. from Rensselaer Polytechnic Institute in power
systems. He has also attended the
Harvard Business Schools Program
for Management Development. He is a
registered Professional Engineer in Massachusetts and Rhode Island.
Candidate Statement
I believe that PES is a very strong

Society in both financial and in
leadership areas. As treasurer, I can
attest that the Society continues to
grow in both membership and revenues. The increased revenues continue to be reinvested in the membership. Whether it be in scholarships
and student opportunities around the
world or in improving our education
venues, it is critical to reinvest in our
members needs. PES needs to continue to grow its Web offerings for
education and technical information
opportunities.
I have tried to take both a local
Chapter and global perspective at the
Governing Board. I believe that both
are very important. Support for our local Chapters is critical to develop local interest in PES from professionals.
Our technical committees provide an
important service to the world and our
industry. We must continue to review
their efforts and support them.
I ask you to return me to the Governing Board as treasurer. I believe it is
important to have a utility executive on
the board to bring this perspective to
PES leadership.
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PES meetings
for more information, www.ieee.org/power
THE IEEE POWER & ENERGY

Societys (PESs) Web site (http://
____
www.ieee.org/pes) features a meetings
___________
section, which includes calls for papers
and additional information about each
of the PES-sponsored meetings.
October 2015
IEEE PES Innovative Smart Grid
Technologies
Conference
Latin
America (ISGT LA 2015), 57 October, Montevideo, Uruguay, contact
Juan Carlos Miguez, ___________
j.miguez@ieee.org,
http://isgtla.org
Technologies Europe (ISGT Europe

2015), 2125 October, Warsaw, Poland,

contact Desire Rasolomampionona, __
desire.rasolomampionon@ien.pw.edu.pl,
_________________________
http://www.ieee-isgt-eu.org/
November 2015
Technologies Conference Asia (ISGT
Asia 2015), 46 November, Bangkok,
Thailand, contact Boonmarg Smitthileela, _______________
boonmarg.s@egat.co.th, http://
____
www.ieee-isgt-asia-2015.org/
__________________
IEEE PES PowerAfrica Conference
(PowerAfrica 2015), 1014, November, Tunis, Tunisia, contact Urenna
Onyewuchi,
urenna28@yahoo.com,
______________
urenna.p.o@ieee.org,
http://sites.ieee.
_____________
org/powerafrica
IEEE PES Asia-Pacific Power & Energy Engineering Conference (APPEEC 2015), 1518 November, Brisbane, Australia, contact Chandima
Ekanayake, chandima@itee.uq.edu.au,
________________
http://ieee-appeec.org/
May 2016
IEEE PES Transmission and Distribution Conference and Exposition (T&D
2016), 35 May, Dallas, Texas, USA,
contact Tommy Mayne, __________
mayne25@char____
ter.net, http://www.ieeet-d.org/
July 2016
IEEE PES General Meeting (GM
2016), 1721 July, Boston, Massachusetts, USA, contact Paula Traynor,
p&e
ptraynor@epri.com
____________
The IEEE Power and Energy Society is looking for an accomplished Executive
Editor for IEEE Power & Energy Magazine its award-winning agship publication,
dedicated to disseminating information on all matters of interest to electric power
engineers and other professionals involved in the electric power industry. We are
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in my view (continued from p. 112)

ability to store gas can provide the necessary temporal arbitrage that would be
increasingly important with greater penetration of renewables.
The other essentially untapped potential for balancing an intermittent renewable supply is not through batteries
or dispatchable gas plants. The demandside alternatives remain a huge potential
resource through near-term use of conventional dispatchable demand participation in wholesale electricity markets
and through the as-yet unrealized but
great promise of the smart grid and distributed energy resources. The cheapest source of balancing services for renewables might be thermal storage in
buildings coupled with better information technology. Despite the fog of false
promises, there could be a demand-side
revolution in the making.
Hence, there does not appear to be
any fundamental technological problem
of accommodating a large penetration
of renewables. The challenge is more
one of conflicting policies and costs.
Current policies for advancing renewables have important impacts on
electricity markets. By subsidizing
renewables through supply push, average costs go up but marginal operating
costs go down. And the marginal costs
determine the economics in the shortterm organized markets. The problem is
most evident in Germany, but the same
symptoms appear in the U.S. organized
markets. Wholesale electricity market
prices have fallen enough to threaten
the economic viability of nuclear and
traditional coal-fired plants. The principal cause in the United States has been
the low cost of natural gas and other
environmental regulations. But the contribution of renewables to this problem
is evident in the regular appearance of
negative prices for electricity, down to
the size of the production tax credit subsidy. Given the design of the subsidy,
this makes perfect sense for the renewable suppliers. However, this subsidy
works at cross purposes of ensuring the
necessary dispatchable capacity and
ramping capabilities to integrate increasing levels of renewables.
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The high costs of the subsidies and

mandates increases the average costs
for customers. This higher cost is hidden in part by the decline in wholesale electricity prices and the transfer
of economic rents away from existing
generators. But this dampening of the
total cost increase seen by customers is
only temporary. Furthermore, the collection of the increased cost of the subsidies and mandates is largely spread
across a wide base and disconnected
from the incentives needed to develop
alternative sources of supply or stimulate the development of demand-side
alternatives.
For most effects, these trends have
been the unintended consequences of
the push for renewables through mandates and subsidies. There has been a
slow-motion race to improve electricity markets to support cleaner energy
broadly conceived and to pursue renewables narrowly defined by the requirements of regulators. We have been here
before, especially more than 20 years
ago in California, where the mandates
to purchase power from qualifying facilities produced very high costs and
precipitated the wholesale restructuring
of the wholesale electricity system. Is
history repeating itself?
In addition to the focus on technology that is simply too expensive,
the approach of mandates and subsidies carries another cost that may in
the long run be even more important.
The high cost of renewables, for the
United States and most other developed economies, not to mention from
the perspective of developing economies, presents an enormous challenge
for cleaner energy. We are not likely
to meet these challenges, such as from
climate change, by deploying existing
technologies on a large scale. Success
will require sustained and pervasive
innovation. The results of that innovation are inherently unpredictable. At
least two policy implications emerge
from this condition.
First, a primary externality problem is in upstream R&D. For all the
usual reasons, this is a problem to be
addressed by government. There is far
too little expenditure on R&D to create
new technologies and too much expenditure on the deployment of existing
technologies that are too expensive.
Deploying existing technologies helps
reduce the unit cost but not enough to
justify the deployment. We need better
technologies.
Second, without knowing which
technologies to embrace, it is more important to construct the incentives for
experimentation and adoption without specifying which technologies to
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110
magazine
adopt. This provides a central role

for electricity markets and improvements in market design. For example,
rather than subsidizing technologies
we like, and socializing the costs, we
should tax the emissions we dont like
and let the prices work through to the
demand side to change the incentives
for consumption.
Organized electricity markets have
come a long way, but they are far from
perfect. There are many opportunities
to improve market design, through better wholesale market pricing and better retail models that send the right
signals. With good incentives, markets
can produce surprises. And the surprises would be more likely to be good
and less likely to require compensating
mandates to offset the unintended consequences.
Good electricity market design can
be a powerful tool and an alternative
to expensive mandates and subsidies,
for achieving a cleaner energy system.
If the necessary innovation occurs, renewables can be an important part of
the cleaner energy mix. If the innovative, lower-cost renewable supplies
do not arrive, good electricity market
design will be even more important in
stimulating and supporting demandside alternatives.
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111
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in my view
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William W. Hogan
a cleaner energy system

renewable energy and electricity market design
THE RAPID GROWTH RATES FOR

renewable energy are part of a larger policy agenda to promote a cleaner energy
system. The health and environmental
impacts of emissions from traditional fossil fuel technologies provide a substantial
reason for changing the energy system.
For the greatest part, these emission impacts are externalities that provide a justification for policy to supplement natural market forces. The idealized example
of a tax on harmful emissions provides a
benchmark for comparing the efficacy of
various policies.
An emissions tax would work through
the market to affect production, consumption, and investment. Not everything that
could be done would be, but supply and
demand choices would alter the energy
system to balance overall costs and benefits. The role of renewable energy technologies in this mix would be uncertain.
Without an adequate emissions tax,
some or all of the emission externality
would remain, and markets alone would
not adopt the right mix of cleaner technologies. Furthermore, the cost situation
in the United States illustrates a larger
worldwide problem. With the exception
of a few places close to high-quality wind
sources or isolated locations like Hawaii
where fossil generation technologies are
expensive, abundant renewable technologies such as wind and solar are simply
too expensive. Even with an appropriate
set of emissions taxes, calculations with
U.S. Energy Information Administration estimates imply levelized costs on
an equivalent basis for wind and solar for
112
magazine
2019 entry would be 40 and 90%, respectively, more expensive than an advanced
gas combined cycle pant. Hence, existing
renewable technologies would not, and
probably should not, be deployed yet.
Nevertheless, the policy
response has included a
search for other means to encourage the adoption of renewable technologies. There
are now direct subsidies (e.g.,
production tax credits), indirect subsidies (e.g., mandated
transmission investments),
and purchase mandates (e.g.,
renewable portfolio standards). These policies have
been effective, particularly
in places like California.
The growing penetration of
renewables has created a number of collateral impacts on electricity markets.
Wind and solar energy are intermittent supply sources. This produces a
common concern. When the wind and
solar insolation vary, the resulting instability of supply creates a potential for
operational problems of maintaining the
required nearly instantaneous balance
with aggregate demand. Over relative
short time horizons of seconds to a few
five-minute dispatch intervals, the problem seems quite manageable for three
reasons. With small penetrations, intermittency is de minimis. With large penetrations, geographic diversity will help
average out the effects. And the tools and
techniques for forecasting are improving
enough to meet the challenges of anticipating the movements in renewable supply for these shorter time frames.
The more serious problem is over periods of an hour or two when the wind
can drop off across a very large region,
the sun is setting, or clouds are gathering. The problem here is
not so much unpredictable
intermittency but a need
for unusually high but predictable levels of ramping
capability. This challenge
is the point of the now
famous California duck
curve that shows the potential dramatic change
in the ramping requirements that somehow must
be provided. The current
configuration of the nonrenewable generation fleet
in California is not up
to the task, but there are
many options available to meet the need.
The main tasks are to make the appropriate investments in time and to find a way
to pay for them.
In principle, battery storage would
provide a tool for balancing the temporal variations in renewable supply. Once
again, California is in the lead with its
storage mandate directed at the regulated
utilities. However, inexpensive storage,
such as from large-scale hydro, is largely
unavailable for other environmental
reasons. Calculations for existing and
known battery technologies consistently
indicate that batteries are too expensive
to deploy on a large scale and would have
a hard time competing with dispatchable natural gas plants. Barring almost a
complete elimination of natural gas, the
The policy
response has
included a
search for
other means
to encourage
the adoption
of renewable
technologies.
(continued on p. 109)
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