Grid Integration and Grid Development from a Financial and Regulatory Perspective

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SMART GRID REGULATION

Kenneth Lefkowitz Managing PartnerNew Europe Corporate Advisory Ltd. www.necadvisory.com

7th International Congress and Exhibition for South-East Europe

April 2011

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Smart Grid Regulation

Behavior modification

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Oil prices and fuel efficiency

• Today the US economy uses about the same amount of oil as it did in the late 1970s, but the economy is 125% larger;

• Despite the seven-fold increase in the real price of oil from 1960 to today, consumers spend about 25% less of their income on energy

Source: Seeking Alpha

http://en.wikipedia.org/wiki/File:CAFEStandard2.png

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Effective communication of incentives

Information overload Distributed decision-making

• Market price and consumption information must be broadly accessible• Incentive framework must be stable for long-term effectiveness

VS

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Benefits from energy efficiency

Source: US Department of energy, Cornivus University

Potential Reductions in Electricity and CO2 Emissions in 2030 Attributable to Smart Grid Technologies (assuming 100% penetration of smart grids)

Reductions in Energy and CO2 EmissionsDirect Indirect

Conservation Effect of Consumer Information and Feedback Systems 3% -Joint Marketing of Energy Efficiency and Demand Response Programs - 0%Deployment of Diagnostics in Residential and Small Commercial Buildings 3% -Measurement & Verification (M&V) for Energy Efficiency Programs 1% 1%Shifting Load to More Efficient Generation <0.1% Support Additional Electric Vehicles and Plug-In Hybrid Electric Vehicles 3% Conservation Voltage Reduction and Advanced Voltage Control 2%

Support Penetration of Renewable Wind and Solar Generation <0.1% 5%

Total Reduction 12% 6%

The total reduction of 18% in the USA does not include THEFTS. In Bulgaria for example, estimated commercial losses (thefts and

bad debts) are 10-11%

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Creating the right incentives

1) Liberalized and liquid electricity market

2) Investment is rewarded

3) Dynamic pricing:• Retail• Wholesale• System services

Source: GTM Research

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Regulation

Country TSO Unbundling

Supplier unbundling

Day ahead market

Exchange or bilateral

Regulatory scheme

Retail price (household)

Bulgaria Bilateral Cost-plus; revenue cap

€0.0675 /kWh

Greece Bilateral Cost-plus €0.0975 /kWh

Romania Exchange Cost-plus €0.0856 /kWh

Serbia Bilateral Cost-plus; revenue cap

€0.0549 /kWh

Source :Eurelectric, Energy Agency Of The Republic Of Serbia, Energo, ERRA, NordPool Consulting, Eurostat, Herbert SmithRetail prices of electricity are for 2010, household band C

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From cost-based regulation to incentive regulation

Source : KEMA Consulting, Webinar Training on Regulation 2009

Cost-plus regulation Revenue cap

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Liberalization of cross-border trade

Implied auction

Candidates

Preparing for implied auction

Explicit auctionSource :NordPool Consulting

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Costs and benefits

Investment Payback

• Reduced usage and lower bills;• Produce and sell own electricity;• Comprehensive energy management

• More expensive “smart” appliances;• Share consumption data;• Interruptibility;

• Drastic change in business model – from selling a commodity to providing a service.

• Lower sales• Cost – additional investments for

upgrading the traditional grid.

• Less thefts;• Improved efficiency of the grid and

less investments on expanding capacity;

• Remote reading of monitors• Better security and outage detection;• Predictability of energy demand• Intelligence on consumer habits

• Improved grid access for renewables;• Greater dispatch efficiency for base-

load and mid-load plants

• Lower overall demand;• Demand shifted away from peak

hours when price is the highest;

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Conclusion

In conclusion:•A price shock will be instrumental to spur efficiency;•With a clear and stable framework, investment in smart grids will take place, bringing net benefits for the whole value chain.

The way forward:•Remove populism from price regulation;•Regional DAM and hourly market and regional exchanges;•Improved cross-border trade;•Dynamic retail pricing;•Incentive-based regulation of natural monopolies.

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Kenneth LefkowitzManaging Partner

New Europe Corporate Advisory Ltd.mob: + 359 888 637-053e-mail: [email protected]


Thank you for your attention!

Questions?

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Smart grids in Europe

Status Regulatory support

World leader in smart meters, with 85% of homes equipped. In 2006 Enel completed the connection of +30mn users. One of the reasons for the whirlwind rollout – rampant thefts of electricity.

Digital smart meters are mandatory since 2006. Government’s vision is 95% of customers of the 100 utility firms to be on smart meters by 2011.

New energy strategy expected to include an action plan for smart grid development

First smart grid in Eastern Europe – a pilot project in Brasov launched in Dec 2010 with Electrica Sud Distribution.

100% penetration of smart meters in transmission and 1% penetration in distribution

Smart metering roll-out plan until 2013. Budget of €75mn with loans from EBRD and EIB. Regulator agreed to approve costs.

No elements of smart grids available yet, apart from a demonstration of EV plug-in sockets in Sofia

The distribution company has deployed only small-scale pilot projects so far, but is considering a smart grid alliance.

Smart metering roll-out plan until 2013. Budget of €75mn with loans from EBRD and EIB. Regulator agreed to approve costs.

Draft of the National Energy Strategy until 2020 plans revenues from carbon sales to be used for smart grid implementation

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Grid Integration and Grid Development from a Financial and Regulatory Perspective