Innovation in Liberalized Electricity Markets: A Comparison of Regulatory Incentives A Comparison of Regulatory Incentives in California and Germany Mi h Michael Holtermann l H lt European School of Management and Technology Holtermann@esmt.org Dr. Jens Weinmann Berlin School of Economics and Law Weinmann@esmt.org
Reciprocal and multifaceted relationship between innovation and regulation p p g • Majone 1976: Performance of policy instruments depends even more on the institutional framework in which they are used than on their technical characteristics • Kemp 1998, 12: „The topic of regulation, innovation and competitiveness is much discussed, yet little analysed. It gave rise to diametrical views of regulation being a barrier and stimulus to orinary and compliance innovation. The debate has been characterised by a high anecdotal level, little systematic empirical research has been done into the topic, …. t i One reason for this is the lack of a theoretical framework about regulation and innovation which recognices the reciprocal and multifaceted nature of the relationship and the myriard of factors that are influencing innvation decision and output.“ p esmt-Vorlage 1
Research on institutional design is based on personal interviews g p in California and Germany Research methodology • semi-structured interviews with government officials, managers of investor-owned utilities, and regulators • carried out in Summer/Fall 2008 • carried out in Summer/Fall 2008 • part of on-going research on the institutional design of electricity markets Theoretical background • Institutional change, based on the New Institutional Economics literature (North 1990, Roe 1996, special application to electricity markets e.g. Glachant and Finon 2003, Finon 2004) electricity markets e.g. Glachant and Finon 2003, Finon 2004) − Diverging designs lead to different outcomes, institutions matter, path-dependence • Political economy and transnational regulatory networks (Eising 2002, Eberlein and Grande 2005) − ‘incremental negotiation techniques’ in the EU and cross national harmonisation of regulation via information networks − incremental negotiation techniques in the EU and cross-national harmonisation of regulation via information networks • Evolutionary economics (Campbell 1969) − trial and error learning and ‘convergent evolution’ 1) Text Source: esmt esmt-Vorlage 2
California and Germany perceive themselves as leading by example y p g y p towards a sustainable energy transformation • IEKP: 2020 40% less than 1990 levels, if EU reduces • AB 32: 2020 emissions reduced to 1990 levels, a 25% reduction compared to business as usual, to 30% and “other states have comparable ambitious targets” mandatory caps from 2012 on • From 13% to 25-30% Renewables in 2020 • “Load Order”: Efficiency first, then Renewables, then “other” generation • IEKP: KWK, EEG, Biogas, Grid, Metering…. • Renewable Portfolio Standard: 33% i 2020 20% b 10 33% in 2020, 20% by 10 • Lots of proposals… AB 32: – 25% GHG by 2020, mandatory caps from 2012 on Renewable Portfolio Standard: 33% in 2020, 20% by 10 esmt-Vorlage 3
California was the first state in the USA to introduce competition, p , while Germany stuck to the old regulated system California Germany • Before deregulation, California had a power system • Before deregulation, the German ESI consisted of two similar to most other US American states different types of firms • most electricity was served by vertically integrated y y y g • a small number of so-called Verbundunternehmen companies that were completely responsible for owned and operated the High Voltage (HV) network generation, transmission, and distribution of power and the generation plants in the associated control area • Following deregulation, • about 900 mainly municipality-owned distribution b t 900 i l i i lit d di t ib ti • the vertically integrated utilities were split into three companies held franchises for both the distribution parts network and the local retail or supply businesses • independent firms bought and operated the large utilities’ power plants • the state of California operated both the state-wide power grid and the California Power Exchange (CPX) • supply-side of the market was largely deregulated; demand side of the electricity market, however, became more regulated (in 1996, electricity rates were cut by 10% and locked in 1996, electricity rates were cut by 10% and locked in for four years) esmt-Vorlage 4
Two major events triggered fundamental changes in the regulation j gg g g of the systems European European Power Energy California Germany Crisis Liberalisation • • 1996-1999 electricity 1996 1999 electricity • • In 1998 the liberalisation of In 1998, the liberalisation of demand grew by 5500 the German ESI started MW, while supply grew by • Energy Act implemented the only 672 MW EU Electricity Directive of EU Electricity Directive of • System 1996 breakdown, bankrupt utilities and blackouts in 2000 2000 esmt-Vorlage 5
After the crisis, the momentum has reversed , California Germany • Government signs 38 long-term contracts, totaling • EU Electricity Directive of June 2003 imposed nearly $43 billion, to hedge prices additional requirements • The California Public Utilities Commission, Gov. Gray y • First, Germany had to establish a regulator for the y g Davis (D), and other officials petitioned the Federal industry Energy Regulatory Commission (FERC) to reimpose a • Second, negotiated Third Party Access (TPA) is no cap on wholesale electricity prices longer acceptable and had to be replaced by regulated • FERC did so in mid-2001, and in 2003 it ordered FERC did i id 2001 d i 2003 it d d TPA from July 2004 TPA f J l 2004 refunds from the independent power generators • Competitive pressure from abroad is increasing, but • In 2001, the California PUC issued an interim opinion still restricted by the interconnector constraints that suspended retail choice in California that suspended retail choice in California • Monopolkommission still criticises lack of competition • In January 2009, CAISO filed its certification of with four dominant suppliers readiness to implement a Market Redesign and • 18% of German electricity consumers have changed Technology Upgrade, leading eventually to a new gy pg g y their supplier at least once within the last 3 their supplier at least once within the last 3 electricity spot market years, while 43% of all German electricity customers consider a change of the supplier esmt-Vorlage 6
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FERC CAISO EC CARB EC CARB PGE WRB CPUC EPA SCE SDGE esmt-Vorlage 8
What do stakeholders say? y California California The EC perspective: The IOUs perspective: • „we delivered basis for common understanding“ • “Fragmented outcome” Would like overall goals (like fuel diversity, GHG g ( y, reduction, reducing dependency on fossil fuels) The CPUC perspective: • Integrated energy policy report “does not help”, “agencies develop policies independently, not • IEPR „vehicle for integration“, „some degree of well coordinated” ll di t d” coordination, perhaps even collaboration“ di ti h ll b ti “ • Deadlocks tend to be solved on “case by case” basis • Consistent policy „dependant on individual relationships“ and informal personal network on a • “Regulatory and legislatory micromanagement” case by case basis case by case basis • “New plants do not get permits even if they would • „California is good at making goals, not replace older existing plants” implementation“ Wishlist of regulators and firms: The Schwarzenegger perspective: • Energy Department: less friction, more coordinated • Executive orders to speed up things approach – central planning? approach central planning? esmt-Vorlage 9
BMUBMWi VF Grid RWE EEX Grid BNetzA BN A EU E.ON Grid Grid EnBW Grid esmt-Vorlage 10
What do stakeholders say? y Germany Germany The BNetzA perspective: The IOUs perspective: • We make markets work and optimize the regulatory • There is no plan, but “moving targets” triangle g • • “Lack of coordinated energy policy” Lack of coordinated energy policy • We make sure that EU laws will be executed • Pro-competition stance: “Let markets work and do not interfere” • W d l t f i We do a lot for innovation in large scale projects ti i l l j t Th The policy makers perspective li k ti (CCS, Offshore Wind,…) • Digital divide between proponents of “old” and “new” order Wishlist of regulators and firms: • Energy ministry: less friction, more coordinated approach – central planning? esmt-Vorlage 11
Relevant factors for innovation and system transformation y California 1. Stressed system forces innovation (“Flex Alert”) esmt-Vorlage 12
Relevant factors for innovation and system transformation y California 1. Stressed system forces innovation (“Flex Alert”) 2. Framework “Load order” (Efficiency/DR then Ren then “other”) (Efficiency/DR, then Ren, then other ) esmt-Vorlage 13
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