Power Deregulation Policy Evolution

Dr Loi Lei LAI Head of Energy Systems Group City University London UK
Plenary speech for IEE Seminar on Spatial IT for Electric Power Systems Bangalore, India, 31 October 2003

Overview
Power deregulation determines the rights and responsibilities of utilities in competitive markets. The global spread of power utility deregulation is now in its second decade, there are good things and bad things. Power is essential for world economy growth. Only a financially and commercially sound power sector can attract new investments. This speech is about the evolution of power deregulation policies in various countries and demonstrate factors needed to be considered to produce full benefits from power utility deregulation.

California Power Market

Californias capacity was in decline. Difficult to build new facilities. From 1988 to 1998, generating capacity decreased 5 %. Reduced consumer rates by 10 % and then froze those rates for 6 years. No incentive to invest. Utilities were not allowed to enter into long-term contracts. The utilities could not hedge against price spikes.

Texas Deregulation
The state streamlined the generating plant approval process. Since 1995, Texas had added 22 new plants, for a capacity increase of 10 %. Texas allowed long-term contracts between wholesalers and retailers to hedge. It kept rates at a high enough level to attract new suppliers. However, future rate adjustments are planned to reflect market conditions.

Energy Policy Aims

Encourage the development of well-designed combined heat and power (CHP) units that are both highly efficient and have low emissions. Continue supporting energy firms competing in markets abroad. Implement a system of clear, open, and transparent rules and procedures governing foreign investment. Level the playing field for companies overseas. Reduce barriers to trade and investment.

Energy Policy Aims

Maintain reliability, support both load and resource diversity and enable an efficient wholesale electric market. Provide incentives for beneficial expansion and system improvement. Enable access to more economical and less polluting resources, thereby minimizing environmental impacts. Streamline and coordinate siting review processes to enable the timely construction of transmission. Promote diversity of Fuels.

Energy Policy Aims

Evaluate the market power mitigation and operational flexibility benefits of either additional generation in transmission-constrained areas or the addition of more transmission; Evaluate the use of additional emerging technologybased solutions in increasing transfer capacity in the existing transmission system where applicable. Implement end-use load management, energy efficiency and distributed generation resulting from consumers receiving closer to real-time signals on electricity price.

The Trend for Energy Policy

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

Market Structure
Wholesale sales and the interstate transmission market are subject to regulation largely by the U.S. Federal Energy Regulatory Commission (FERC). Retail sales and the distribution market are regulated by the states. The most important pieces of federal legislation affecting the wholesale sales and interstate transmission market are the Federal Power Act of 1935, the Public Utility Regulatory Policies Act of 1978 (PURPA), and the Energy Policy Act of 1992 (EPAct).

Political Pressure
Political pressure mounted to expand competition in generation. There were two primary factors limiting the increase in competition in the wholesale market: (1) Non-utility generators, found it difficult to enter the market because they had no exemption from the ownership restrictions of the Public Utility Holding Company Act (PUHCA). (2) The second constraint on market expansion was FERC's lack of authority to mandate wheeling over transmission lines. In 1992, Congress passed EPAct and eliminated both these constraints.

Changes in Wholesale Electricity Market

This transition from regulation to competition began in 1978 with enactment of the Public Utility Regulatory Policies Act, which promoted independent electricity generation. Open-access transmission policies adopted by the Federal Energy Regulatory Commission (FERC) in the late 1980s further promoted competition in wholesale power markets. Congress ratified these policies with enactment of the Energy Policy Act of 1992, which further promoted nonutility generation. FERC promoted competition with its open-access rule in 1996, which provided greater access to the transmission grid, the high-way for interstate commerce in electricity.

Changes in the Retail Electricity Market

Beginning in 1996, states began opening their retail markets to competition in order to lower electricity prices. Twenty-five states have opted to open their retail electricity markets to competition. These dramatic changes affecting the industry led to important structural changes. Independent power producers, which were once infant industries, now dwarf many utilities. While utilities had service areas that were limited to a single state or region, independent power producers are international companies that can build power plants across the globe.

Energy Policy for Japan

1) Reducing dependency on oil has been a top priority in Japans energy policy since 1973. As a result, the amount of imported oil dropped from 78% in 1973 to 51% in 2001. 2) According to the IEAs World Energy Outlook 2002, oil imports for developing countries in Asia are expected to increase from 42% in 2000 to 83% in 2030. 3) The Japanese energy policy aimed at maintaining energy stability in the Asian region. The main points are a)to promote cooperation in the development of natural gas resources in the Asia region, and b)to cooperate with Asian countries in price negotiations with oil-producing nations.

Energy Policy for Sweden

Energy policy has established the following main goals: Nuclear power will be phased out. Bio-energy will be prioritized. Competitive energy price must be made available. Important measures for achieving these goals include working toward efficient consumption and a change in energy production. For large electric boilers/furnaces Use of electrical power for heating will be reduced and to a great degree replaced by district heat. Incentives for new power production from alternative fuels will be provided.

Energy Policy for Norway

Development of the off-shore petroleum sector dominates the energy agenda and indeed the economy as a whole, while environmental protection is given high priority. Since the last IEA in-depth review, the approach to energy policy has evolved in a number of areas, providing a clearer distinction between government functions and those of commercial operators participating in a competitive market.

Oil
Continue to ensure that regulations, practices and revenue-taking policies do not present barriers to competition. Ensure that adequate opportunity exists for a variety of participants who may have valuable expertise and can enhance competition. Allow companies bidding in licensing rounds to form their own partnerships. Continue efforts to increase transparency in the licensing process while respecting commercial confidentiality.

Natural Gas
Review the current government regulatory model to ensure market access on fair terms to all gas producers. Monitor and seek to influence the debate on deregulation of the European gas market.

Electricity
Continue to allow the market to function without government interference and send appropriate price signals to suppliers and consumers. Eliminate barriers to private investment in generation. Consider real-time pricing to accurately reflect the costs of losses and constraints on the transmission system. Ensure full implementation of the regulatory incentive regime and monitor its results.

Energy and Environment

Establish a system for monitoring any shift in the economy toward those energy-intensive activities which are exempt from the CO2 tax and evaluate whether the alternative policy measures in use or proposed for these activities are sufficient to counteract such effects. Consider making contracts or agreements on how to account for and share credit for reductions in CO2 emissions Quantify the impact of the CO2 tax on gasoline and diesel consumption by private motorists.

R&D
Set long term strategic priorities for R&D and strengthen Research Councils capacity. Ensure that the financial returns offered to private oil companies are sufficient to encourage them to maintain levels of R&D. Assess the need for greater expenditure on energy conservation R&D generally, in light of the saturation of hydropower capacity and possible GHG reduction commitments. Ensure that agreements with industry on energy conservation take full account of the potential contribution of technology research, development and demonstration.

Chinese Energy Policy

Chinese industrial sector energy efficiency policy has gone through a number of different phases. An initial period of energy growth in the 1950s, 1960s, and 1970s was followed by implementation of significant energy efficiency programs in the 1980s. Many of these programs were dismantled in the 1990s during the continuing move towards a marketbased economy. The Chinese government passed the Energy Conservation Law in 1997 to enhance energy conservation management.

Transition to a Market-Based Economy

Energy price reforms included deregulation of coal prices, increases in oil prices, and partial deregulation of electricity prices. A simplified tax code introduced in 1994 eliminated tax rate reductions on energy efficiency technology development and investment projects. Some banks also began to reduce low-interest lending for efficiency projects. The Chinese government passed the Energy Conservation Law which provides broad guidance for the establishment of energy efficiency policies in China.

A Comprehensive Policy
In 1999, the China Energy Conservation Association (CECA) began a project with the goals of Developing and implementing regulations and relevant standards to promote industrial energy conservation and improvement of energy efficiency. Analyzing international industrial energy efficiency policies and programs and their adaptability to China. Analyzing the status and opportunities for energy conservation in key energy intensive industrial sectors. Reviewing existing energy conservation regulations and policies and making recommendations for new regulations and policies that work well under a market-based economy.

Current Situation
In 2001, there was a number of proposed energy efficiency policies include: A renewed focus on energy end-user efficiency and productivity improvement. Development of supporting regulations for the Energy Conservation Law, formulation of annual energy conservation plans to improve energy utilization efficiency and productivity. Formulation of preferential economic policies to support energy conservation projects. Enhanced energy management of key energy using enterprises.

Energy Efficiency
Develop tools to assess the quantitative results and the cost effectiveness. Evaluate steps to promote cost effective energy efficiency measures. Consider minimum energy performance standards for equipment and appliances. Establish monitoring criteria to evaluate the efficiency gains and emissions reductions.

International Energy Efficiency Policies

There are many types of policies and programs that have been used in countries worldwide to improve energy efficiency in the industrial sector. The most effective way to improve industrial energy efficiency is through an integrated approach. Individual industrial sectors committed to specific improvements in energy intensity over a given time period in exchange for governmental support in the form of financial incentives.

The Way to Evolve

The CECAs Policy Research Team is focusing on the use of sector agreements as an integrating energy efficiency policy for the industrial sector in China. China is at a crossroads between the past, in which the central government controlled energy use and directed energy conservation policy. The future in which a deregulated market, reduced government involvement, and international competitive pressure following admission to the WTO will all influence industrial sector policies, including those affecting energy efficiency.

Changes in the UK
Long term scheduling has been replaced with a gate closure strategy (NETA) defining the capacity that will be on the system, leaving NGT one hour to balance the system for maintenance of transmission security standards. Single vertically integrated utility had a clear vision of the future provision of generation capacity is now determined by companies entirely separate from the network owner or operator. The owner and operator with increased uncertainty for longterm transmission investments and short-term security of the network.

R&D Strategy
Forecasting and planning with uncertainties. Integration of renewables. Demand side management. Asset management. Data handling.

Forecasting and Planning with Uncertainty

In traditional power system, input data are assumed to possess a high degree of certainty. Over last ten years most new generating stations have used CCGT sets which could be built and commissioned as little as 18 months. New planning tools are needed to account for these uncertainties.

Integration of Renewable
Assess the effect of different mixes of distributed sources in terms of their spatial distribution, aggregate penetration level, mode of operation and expected output fluctuations. A special requirement is the development of improved planning tools and techniques for predicting wind farm output from 2 days up to real time.

Demand Side Management

The concept of demand-side control is not new. Demand side participation will play an important role in future network operation and reinforcement in view of the many uncertainties in network developments. Novel methods and uses of demand side control are needed.

Asset Management
Power system plant is installed at different times and is produced by different manufacturers. The same type of equipment from two manufacturers may have different operational characteristics and they may have installed at different points in the network. Novel techniques with respect to replacement, maintenance and use whether individually or collectively are required.

Conclusions
Politicians ignored economic realities and basic risk management & engineering skill. Short term benefits have resulted in significant economic damage. Many years of investment required to correct the problems. Deregulation hard to manage when there is a lack of capacity. Utilities and regulators need to adapt to constant change, as equilibrium does not seem to be attainable.

Conclusions
Unbundling works, but details need to reflect local conditions. Deregulation does not remove politics from power. Energy policies are evolving to lead to a transition from the physical chain to the information chain. In the physical chain, we talk about generation, transmission and distribution. In the information chain, it is about asset companies, serviced companies, trading hubs and risk managers.

Thank you