Abstract: Regulation of utilities in the XXI Century is challenged by the fast pace of change notably the acceleration of innovation, the restructuring of industry as sets of modular chains and the spreading of new information and communication technology. Living in this world of rapid and renewed changes regulators are also challenged by the basic characteristics of their institutional embeddedness. In the real world, far from being the alpha and the omega of regulation, regulators only act in a multilevel and multichannel frame of regulatory institutions. However regulators can bring a core piece of "reflexive governance" to favour the new industry and institutions' changes. It is by building "knowledge platforms" on an "open forum" model.

Abstract: The provision of local public services is increasingly being contracted out to private companies. We observe that local governments regularly choose the same private operator for a range of different services, and develop a model of relational contracts that shows how this strategy may lead to better performance at lower cost for public authorities. We test the implication of our model using an original database of the contractual choices made by 5000 French local public authorities in the years 1998, 2001 and 2004.

Abstract: Electricity storage is considered a valuable source of flexibility whose applications cover the whole electricity value chain. However, most of the existing evaluation methods for electricity storage are conceived for only one specific use of the storage, which often leads to the conclusion that the investment on storage does not pay off. We think that the value of storage cannot be properly estimated without taking into account the possibility of aggregating the services that storage can offer to different actors. In this paper, we propose a new business model that allows aggregating multiple revenue streams of electricity storage in a systematic way. The main idea of the business model is to coordinate a series of auctions in which the right to utilize the storage unit is auctioned in different time horizons. The model consists of an optimization module and a coordination mechanism. The former simulates the optimal strategy of a certain actor using the available storage capacities in a certain auction, while the latter ensures non-conflicting uses of storage by actors in different auctions. The functioning of the model is demonstrated by a case study. The results show that a storage unit can achieve a higher return on investment in the manner proposed in the business model.

Abstract: This paper employs a framework of dynamic energy analysis to model the growth potential of alternative electricity supply infrastructures as constrained by innate physical energy balance and dynamic response limits. Coal- red generation meets the criteria of longevity (abundance of energy source) and scalability (ability to expand to the multi-terawatt level) which are critical for a sustainable energy supply chain, but carries a very heavy carbon footprint. Renewables and nuclear power, on the other hand, meet both the longevity and environmental friendliness criteria. However, due to their substantially di¤erent energy densities and load factors, they vary in terms of their ability to deliver net excess energy and attain the scale needed for meeting the huge global energy demand. The low power density of renewable energy extraction and the intermittency of renewable ows limit their ability to achieve high rates of indigenous infrastructure growth. A signi cant global nuclear power deployment, on the other hand, could engender serious risks related to proliferation, safety, and waste disposal. Unlike renewable sources of energy, nuclear power is an unforgiving technology because human lapses and errors can have ecological and social impacts that are catastrophic and irreversible. Thus, the transition to a low carbon economy is likely to prove much more challenging than early optimists have claimed.

Abstract: This paper analyses the value and cost of line-pack flexibility in liberalized gas markets through the examination of the techno-economic characteristics of gas transport pipelines and the trade-offs between the different ways to use the infrastructure: transport and flexibility. Line-pack flexibility is becoming increasingly important as a tool to balance gas supply and demand over different periods. In the European liberalized market context, a monopolist unbundled network operator offers regulated transport services and flexibility (balancing) services according to the network code and the balancing rules. Therefore, gas policy makers should understand the role and consequences of line-pack regulation. The analysis shows that the line-pack flexibility service has an important economic value for the shippers and the TSO. Furthermore, the analysis identifies distorting effects in the gas market due to inadequate regulation of line-pack flexibility: by disregarding the fixed cost of the flexibility in the balancing rules, the overall efficiency of the gas system is decreased. Because a full market based approach to line-pack pricing is unlikely, a framework is presented to calculate a cost reflective price for pipeline flexibility based on the trade-offs and opportunity costs between the right to use the linepack flexibility and the provision of transport services.

Abstract: Climate change policy, in particular in Europe, will a¤ect the energy sector through the exposure to massive penetration of distributed energy resources or decentralized generation into electricity distribution and transmission grids. As the prerequisites for infrastructure regulation still prevail in the future, the question arises whether the current regulatory model is still valid. In this paper, we chararcterize some of the e¤ects of climate change policy on the network tasks, assets and costs and contrast this with the assumptions implicit or explicit in current economic network regulation. The resulting challenge is identi ed as the change in the direction of higher asymmetry of information and higher capital intensity, combined with ambiguities in terms of task separation. Methodolog- ically, we argue that this may require a mobilization of the litterature related to delegated and hierarchical systems, e.g. team performance, as the externalities are joint products from multiple independent stages where individual regulation may introduce distortions. To provide guidance, we present a model of investment provision under regulation between a distribution system operator (DSO) and a potential investor-generation. The results from the model con rm the hypothesis that network regulation should nd a focal point, should integrate externalities in the performance assessment and should avoid wide delegation of contracting-billing for climate change technologies.

Abstract: In many countries, the electricity systems are quitting the vertically integrated monopoly organization for an operation framed by competitive markets. In such a competitive regime one can ask what the optimal management of the nuclear generation set is. We place ourselves in a medium-term horizon of the management in order to take into account the seasonal variation of the demand level between winter (high demand) and summer (low demand). A flexible nuclear set is operated to follow a part of the demand variations. In this context, nuclear fuel stock can be analyzed like a reservoir since nuclear plants stop periodically (every 12 or 18 months) to reload their fuel. The operation of the reservoir allows different profiles of nuclear fuel uses during the different seasons of the year. We analyze it within a general deterministic dynamic framework with two types of generation: nuclear and non-nuclear thermal. We study the optimal management of the production in a perfectly competitive market. Then, we build a very simple numerical model (based on data from the French market) with nuclear plants being not operated strictly as base load power plants but within a flexible dispatch frame (like the French nuclear set). Our simulations explain why we must anticipate future demand to manage the current production of the nuclear set (myopia can not be total). Moreover, it is necessary in order to ensure the equilibrium supply-demand, to take into account the non-nuclear thermal capacities in the management of the nuclear set. They also suggest that non-nuclear thermal could stay marginal during most of the year including the months of low demand.

Abstract: This paper provides a survey of the history and future of storage development in the US and policy and analytical questions relating to storage. The paper discusses the history of storage development in the US, and some of the limitations in how storage investment was justified beginning in the 1970s, when much of the US’s current storage capacity was built. Then we discuss potential uses of storage beyond serving as an alternative to peaking capacity and uses of storage by entities other than a traditional vertically-integrated utility. After we lay out some policy and research questions related to energy storage and show how questions such as regulation, market products, and ownership can greatly affect the true value of storage and incentives for and efficiency of storage use and investment.

Abstract: In September 1989, as part of its privatization program, the Government laid down an eight year timetable for opening up to retail competition the entire electricity market of England and Wales, phased over the period 1990-1998. It might be assumed that the Government was in a position to specify all the arrangements, and that this was part of a considered policy to facilitate the introduction and implementation of competition. But previous accounts suggest that the outcome was part of a deal between generators and regional companies to limit competition (Henney 1994), or was intended to set targets to force companies, regulators and government to come up with practical solutions (Helm 2004). The Department of Energy’s internal History of Electricity Privatisation, only now available, shows that there is merit in these last two suggestions. However, it also documents the significantly evolving views within Government as the implications of retail competition became clearer, not least for electricity contracts and for privatization of the coal industry. Initially, retail competition was hardly worth mentioning, later it was a mild concern that could be met by a small tranche of spot-price contracts, by July 1989 the plan was to introduce full competition immediately with short-term instead of long-term contracts. But the industry resisted, and in September 1989 the Government accepted the industry proposal of a franchise monopoly to enable a mix of short, medium and long-term contracts, though it insisted that the franchise should have an eight year limit. The approach may not be a model for others, but it may not be atypical of how governments actually behave in balancing conflicting objectives and practical constraints, save perhaps for the distinctive commitment to competition exhibited by the leading actors here.

Abstract: Gas transportation networks exhibit a quite substantial variety of technical and economical properties ranges roughly from an entrenched natural monopoly to near to an open competition platform. This empirical fact is widely known and accepted. However the corresponding frame of network analysis is lacking or quite fuzzy. As an infrastructure, can a gas network evolve or not from a natural monopoly (an essential facility) to an open infrastructure (a “highway” facility)? How can it be done with the same transportation infrastructure components within the same physical gas laws? Our paper provides a unified analytical frame for all types of gas transportation networks. It shows that gas transport networks are made of several components which can be combined in different ways. This very “lego property” of gas networks permits different designs with different economic properties while a certain infrastructural base and set of gas laws is common to all transportation networks. Therefore the notion of “gas transportation network” as a general and abstract concept does not have robust economic properties. The variety and modularity of gas networks come from the diversity of components, the variety of components combinations and the historical inclusion of components in the network. First, a gas network can combine different types of network components (primary or secondary ones). Second, the same components can be combined in different ways (notably regarding actual connections and flow paths). Third, as a capital-intensive infrastructure combining various specific assets, gas transportation networks show strong “path dependency” properties as they evolve slowly over time by moving from an already existing base.

Abstract: European energy policy is characterized by a complex allocation of authority between the European Union and its Member States which results in an intricate interplay of regulatory competence. Knowing the difficulties European countries face in coordinating and proposing common solutions in the area of energy, there is the urgent need to question the legal foundations underlying the decisionmaking process. Institutional paralysis, low reactivity to events and changes as well as systematic political horse-trading across all questions call for an alternative framework allowing some pioneering Member States to promote ad hoc common policies escaping the formal and procedural requirements of EU law. Our paper assesses the legal feasibility of short-run differentiation by means of partial international agreements inspired by the Schengen regime, namely entirely outside the EU framework. The key challenge from a legal point of view is to assess the substantive compatibility of such agreements in energy with the existing rules of the Union. Short run differentiation in energy cannot indeed be assessed at a high level of generalities. We therefore take two areas where legally-binding coordination at the sub-Union level is often called for: nuclear policy and gas security of supply. The possible substantive content of such cooperation is derived from the economic and political literature before legal feasibility is assessed. Our findings suggest that the scope for such agreements is limited for security of gas supply whereas it could be an improved cooperation device in certain areas of nuclear policy. Download the EXECUTIVE SUMMARY

Abstract: We investigate the political determinants of liberalization in OECD network industries, performing a panel estimation over thirty years, through the largest and most updated sample available. Contrary to traditional ideological cleavages, we find that right-wing governments liberalize less than left-wing ones. This result is confirmed when controlling for the existing regulatory conditions that executives find when elected. Furthermore, governments’ heterogeneity, proportional electoral rules, and European Union membership all show positive and statistically significant effects on liberalization. Our findings suggest that, despite the conventional wisdom, the political-economic rationale behind liberalization paths in network industries is far from being assessed.

Abstract: Answering to the formidable challenge of climate change calls for a quick transition to a future economy with a drastic reduction in GHG emissions. And this in turn requires the development and massive deployment of new low-carbon energy technologies as soon as possible. Although many of these technologies have been identified, the critical issue is how to make them happen at the global level, possibly by integrating this effort into a global climate regime. This paper discusses the preferred approaches to foster low-carbon energy technologies from a regulatory point of view. Specific promotion policies for energy efficiency and conservation, renewable energy, carbon capture and sequestration, and nuclear power are examined, but the focus is on the regulatory instruments that will be needed for the deployment of enhancements to electricity grids and the associated control systems so that they are able to integrate intelligent demand response, distributed generation and storage in an efficient, reliable & environmentally responsible manner. The paper also comments on the interactions between technology and climate change policies and provides recommendations for policy makers.

Abstract: Cross-border trade remains a contentious issue in the restructuring of the European electricity market. Difficulties stem from the lack of a common market design, the separation between energy and transmission markets and the insufficient coordination between Transmission System Operators (TSOs). This paper analyzes the cross-border trade problem through a set of models that represent different degrees of coordination both between the energy and transmission markets and among national TSOs. We first present the optimal organisation, not implemented in Europe, where energy and transmission are integrated according to the nodal price paradigm and Power Exchanges (PXs) and Transmission System Operators (TSOs) are integrated. This is our reference case. We then move to a more realistic representation of the European electricity market based on the so-called marketcoupling design where energy and transmission are operated separately by PXs and TSOs. When considering different degrees of coordination of the national TSOs' activities, we unexpectedly find that some arrangements are more efficient than the lack of coordination might suggest. Specifically we find that even without a formal coordination of the TSOs' counter-trading operations, non discriminatory access to common counter-trading resources for all TSOs may lead to a partial implicit coordination of these TSOs. In other words, an internal market of counter-trading resources partially substitutes the lack of integration of the TSOs. While a full access to counter-trading resources is a weaker requirement than the horizontal integration of the TSOs, it is still quite demanding. We show that quantitative limitations to the access of these resources decrease the efficiency of counter-trading. The paper supposes price taking agents and hence leaves aside the incentive to game the system induced by zonal systems.

Abstract: This paper provides an empirical analysis examining the effect of both transaction characteristics and the institutional environment on governance choice. Using a dataset of 237 corporate-specific value chains in the global LNG industry, we introduce inter-organizational trust as a shift parameter. Following transaction cost economics, it is hypothesized that specific investments under uncertainty provide incentives to integrate vertically. Second, it is argued that inter-organizational trust changes the relative costs of vertical integration and non-integration and supports less hierarchical organizational structures. These economic relationships are tested based on probit and ordered probit models. Estimation results provide broad support for both propositions.

Abstract: Reducing the European Union GHG emissions by at least 80% by 2050 will require a near zero carbon electricity, road and rail transport industry, and heating and cooling in buildings. As compared to “business as usual” the amount of energy required will basically vary according to the level of energy efficiency: it is the “system scale”. Then it is the “system design” which will provide the needed carbon-free technologies consisting of renewable, nuclear and fossil fuels with carbon capture and storage. A zero carbon energy system by 2050 is then demonstrated to be feasible. However it is far from easy and requires immediate and substantial policy action. The main policy implications are addressed in this paper. The 5 years 2010-2015 will be decisive in establishing a regulatory environment whereby the EU will be in a position, by 2020, to take the next steps to achieve the 2050 goal.

Abstract: This paper proposes a probabilistic model to evaluate if a proactive TSO that anticipates the connection of new generators with short construction duration compared to the time needed to reinforce the network is more efficient than a reactive TSO that does not make any anticipation but that may then face higher congestion while the network is being reinforced. This evaluation is made in presence of anticipation costs both related to the study of the project of network investment and to the administrative procedures needed to obtain the building agreement. Our results in terms of social costs clearly show a limit of probability for the connection of generators beyond which a proactive TSO is more efficient than a reactive TSO. Evaluated on realistic cases of connection, this limit of probability is found quite low, which indicates that the proactive behaviour for a TSO shall generally be the optimal one.

Abstract: How do changes in the market architecture affect the dynamics of deregulated electricity prices? We investigate this issue in the context of the Italian Power Exchange (IPEX), using data on the daily average day-ahead price (PUN) between April 2004 and December 2008. Estimates of baseline time series models (ARMAX and ARMAX-EGARCH) and their forecasting performances suggest that the trend in natural gas prices, deterministic weekly patterns, the impact of perceived temperatures, persistence in conditional volatility and the inverse leverage effect are essential features of the PUN dynamics. We then augment the best-performing models with dummies that account for changes in the market architecture, such as the introduction of contracts for differences (CfDs) to support renewables, trading of white certificates for energy efficiency, and the demandside liberalization. The findings show that changes in the market architecture have only affected the PUN volatility. Specifically, CfDs have mitigated volatility, while white certificates and demand liberalization have increased it. Moreover, after controlling for reforms the inverse leverage effect vanishes, and the persistence in volatility is lower than in the baseline estimates.

Abstract: The creation of competitive wholesale electricity markets allows to evaluate the “arbitrage value” of an electricity storage unit, which stems from buying and storing electricity when prices are low, and selling it when prices are high. The focus of this paper is to demonstrate that the arbitrage value can be highly sensitive with respect to the dimensioning of an electricity storage unit. A simulation model is explored to calculate the arbitrage value of different storage units by finding the optimal hourly operating strategy during one-year period. The results of simulation show that optimizing the dimensioning of a storage unit is as important as choosing the fittest technology. Furthermore we provide evidence that the optimal set-up of a storage unit can adapt to exogenous factors such as grid tariff and local electricity price characteristics. These findings suggest that the maximisation of market value of electricity storage should be based on the optimisation of the dimensioning of the storage unit in specific economic and regulatory environment.

Abstract: This chapter aims to analysis the new dynamics at work in EU energy regulation. Since the publication of the European Commission’s ‘Sector Inquiry Report’ in January 2007, European energy companies have felt the cold wind of competition law - many for the first time. In addition, national competition authorities (NCAs) have been actively pursuing abusive market practices - sometimes making innovative use of competition law in the process. Certain energy giants have agreed to unbundle their transmission networks - even when their national governments opposed the inclusion of ownership unbundling in the draft ‘Third Package’ of electricity and gas legislation. In parallel, the Third Package envisages the creation of a new regulatory agency - ACER - to co-ordinate technical crossborder regulatory issues in the internal market. So who will be in the driving seat in the next decade - and will co-ordinated regulatory powers be the preferred approach to market design? Will regulatory rules co-exist alongside competition based controls or will the latter gradually supersede the former? This chapter will examine these critical issues.