Raphael Sauter and Dierk Bauknecht

An increased share of distributed electricity generation could contribute substantially to lower carbon emissions, simultaneously improving energy security. Despite increasing interest in distributed generation (DG) its deployment has been slow so far in many industrialised countries, with some notable exceptions such as Denmark and the Netherlands. In most industrialised countries DG is seen, at best, as a complement to frameworks of centralised electricity generation. Low growth rates for DG are the consequence. This chapter argues that substantially increasing the share of DG requires a fundamental change in how we conceive the electricity system, guided by a more encompassing 'system transformation' perspective that recognises DG as a real alternative to centralised electricity generation. This perspective draws attention to necessary changes in the electricity infrastructure, including its technical and institutional components. The electricity network is one important part of the electricity infrastructure, and is the focus in this chapter.

As the share of DG grows, it will not be sufficient to 'simply' connect the new generation capacity to the existing system. Rather, the network itself needs to adapt to be able to accommodate these generators. This is likely to require significant network innovations, especially if DG is to be integrated in an efficient way without affecting system reliability. Eventually, a more thorough transformation of the overall network structure may be required, based on various innovations in the network. These technical network innovations will need to be stimulated and guided by institutional innovations. In liberalised electricity markets the standard model of network regulation through independent, sector-specific regulatory authorities needs to adapt in order to address these challenges. This leads to the main question of this chapter: how does network regulation need to evolve to support such a technical transformation?

This chapter argues that the objective of regulation now needs to be expanded, going beyond a simple cost-reduction objective interested in short-term efficiency and the promotion of competition. It needs to actively promote the development and transformation of the network towards a higher share of DG. This has repercussions for the objectives, processes and the instruments of network regulation. Network regulation in the standard model used in liberalised markets aims to mimic a competitive market and increase efficiency. While other objectives can to some extent be integrated into this framework, the price signal given by incentive regulation needs to be complemented by other mechanisms to promote long-term structural change.

This is reflected in the term electricity 'network governance' used in this chapter. It broadens the perspective that dominates mainstream debates about network regulation and network specific policies, in that it refers to accompanying longer-term steering processes and mechanisms. The arguments here are relevant to many industrialised countries where the electricity market has been liberalised, and standard network regulation introduced. Examples in this chapter are largely taken from Denmark, which has rapidly achieved a high share of DG, and the UK. The latter can be seen as a pioneer in network regulation that aims at short-term efficiency and the promotion of competition while at the same time implementing new initiatives to promote DG and innovation.

The chapter comprises three main parts. Section 9.1 introduces DG and discusses the potential benefits and costs of increasing its share of total capacity. Section 9.2 then explores how, in the context of DG, energy policy will need to become strongly focused on infrastructure. This discussion, nonetheless, highlights the socio-technical dimension of the electricity system, and the governance challenges that we need to face for successful transformation. Section 9.3 then focuses on the governance of electricity networks, which are a major part of wider electricity infrastructures.

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