Abstract
In recent years electricity sectors worldwide have undergone major transformations, referred to as the “energy transition”. This has required energy planning to quickly adapt to provide useful inputs to the regulation activity so that a cost-effective electricity market emerges to facilitate the integration of renewables. This paper analyzes the role of system planning and regulations on two specific elements in the energy market design: the concept of firm capacity and the presence of distributed energy resources, both of which can be influenced by regulation. We assess the total cost of different regulatory mechanisms in the Brazilian and Mexican systems using optimization tools to determine optimal long-term expansion for a given regulatory framework. In particular, we quantitatively analyze the role of the current regulation in the total cost of these two electricity systems when compared to a reference “efficient” energy planning scenario that adopts standard cost-minimization principles and that is well suited to the most relevant features of the new energy transformation scenario. We show that two very common features of regulatory designs that can lead to distortions are: (i) renewables commonly having a lower “perceived cost” under the current regulations, either due to direct incentives such as tax breaks or due to indirect access to more attractive contracts or financing conditions; and (ii) requirements for reliability are often defined more conservatively than they should be, overstating the hardships imposed by renewable generation on the existing system and underestimating their potential to form portfolios.
Highlights
We show that renewables commonly have a lower perceived cost under the current regulations, either due to some direct incentive or due to indirect access to more attractive contracts or financing conditions— in the case of distributed generation and for centralized generation applications
We find that requirements for reliability are often defined more conservatively than they should be, overstating the hardships imposed by renewable generation on the existing system and underestimating their potential to form portfolios
It is worth highlighting that the representation in each of these modules can be affected by regulations—as a country’s policies change the methodology for assessing different technologies’ contribution to system reliability, change incentives that end consumers may perceive for adopting distribution generation, and/or change the “perceived cost” different system expansion candidates by offering preferential tax treatment and/or financing
Summary
Optimization and simulation models are often used in energy policymaking to portray future system scenarios, used as a basis for the definition of long-term policy goals and the most economic investment pathways to them [1]. The idealized optimization and simulation models used by policymakers, system operators and scholars to represent and study the electricity sector tend to agree that the fundamental objective of electricity system planning is to pursue the minimization of the total cost of the system (or, equivalently, maximizing total social welfare)—despite differences in terms of representation and solution strategy. Knowledge of how well each technology’s physical attributes align with those needs is at least in principle sufficient to determine the desirability of investing in that particular technology
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