Continental Journey

Work Begins on Sharpening the European Smart Grid

BY PETER MAYER, MARC FORNACCIARI, MICHAà… MOTYLEWSKI, TOMASZ JANAS AND TRACEY SHEEHAN, DENTONS

Operators, regulators and investors increasingly intrigued by smart grids all around the world. This also has led to favorable prospects, as well as challenges, in regards to smart grid funding and regulation in the European Union (EU).

Following the launch of EU initiatives such as Projects of Common Interest (PCI), the Juncker Plan, the Energy Union and the Capital Markets Union, investors are focused on future infrastructure projects at a point when that could include significant progress on smart grids. In particular, the European Commission is releasing funding into the market and there is increased multinational collaboration.

Consumers are demanding better value, regulation is moving in the correct direction and globally there is a move toward understanding key cybersecurity issues.

In November 2016, the commission published its proposal “Clean Energy for all Europeans.” The proposal focuses on regulatory foundations that promote proliferation of smart grid technologies from super-coordinated transnational initiatives to retail and consumer levels.

Smart grid is not clearly defined and has increasingly become a marketing “term of art.” The European Regulators Group for Electricity and Gas stated that a fully-functioning smart grid will exploit communication networks to “cost-efficiently integrate the actions of all users connected to it-generators, consumers and those that do both-in order to ensure an economically efficient, sustainable power system with low losses and high levels of quality and security of supply and safety.”

The main driver for change is the advancement of the EU’s carbon reduction, renewables deployment and energy efficiency targets. The Commission recently proposed a regulatory framework-within the “Clean energy for all Europeans” package-aimed at defining a structure for such advancement in the entire EU in the years to come. Combining the complex goals and policy drivers seems possible only if aided by diverse smart grid technologies and projects.

Traditional electricity networks were built on the assumption that power would be generated in large and often centrally-located coal, gas or nuclear power stations and flow “downhill” from them toward end-users, down a series of progressively narrower channels.

In a world where a much higher proportion of generating plants are small-scale and (in the case of renewables) their output is harder to control. Power is increasingly flowing “uphill” through these networks, from the periphery to the center.

To make this process sustainable and avoid excessive development of new network infrastructure, grid operators need information and communications technology (ICT) to provide real-time information about power flows and demand at a local level and get around the bottlenecks in the physical infrastructure that prevent efficient transmission and distribution. They also need tools to better manage power consumers’ and producers’ various activities envisioned by the commission as part of the future energy market model.

Funding

The availability of funding plays a huge role in any major infrastructure project. It is encouraging to see that funding is already becoming available from a number of different streams specifically for smart grids. This includes both private and public funding for smart grid research and development, and for demonstration and development projects.

Overall, private and public funding each account for about half the total budget, although about 90 percent of projects receive some form of public financial support. Projects in Eastern Europe are particularly reliant on the Commission for their public funding.

Although more than half of the total budget is accounted for by projects in France, Germany, Spain and the UK, on average, 70 percent of the projects in any given country are multinational collaborations of some sort.

The priority given to smart grids is evidenced by their inclusion in the list of PCIs under the Infrastructure Regulation (347/2013). Such projects are given a considerable helping hand through the planning and permit granting process, special treatment in terms of regulatory funding, and the opportunity to apply for financial support from the à¢â€š¬5.85 billion ($6.4 billion) Connecting Europe Facility (CEF).

Although only three projects have so far been included under the “priority thematic area” of “smart grids deployment” in the list of PCIs, it is noticeable that one of them has received the second highest amount of financial assistance of any of the electricity projects among the 60 projects that have so far been allocated CEF funds. At a national level, examples of public support or incentives for smart grids include the UK, with innovation funding awarded to smart grids by the regulator Ofgem, and by Poland.

The commission also has opened a public consultation on four more smart grid projects, involving eight countries, that could be included in the PCI list and receive funding. This consultation process was due to close just after press deadline on June 26.

Regulation

As electricity system decarbonization and decentralization progresses, it is becoming more complex to plan, control and balance the system. Energy regulators must find the most efficient and effective way to deploy technology to make the grid smart while still keeping costs in mind when approving grid connections. This will ensure that all users connected to smart grids are in a more efficient situation.

Collaborating on policies and regulations that supports smart grid investment is perhaps the single most important task for all stakeholders. As with most policy issues, the key is to find the right balance in sharing costs, benefits and risks. The responsibility for achieving this balance lies with regulators and, in some cases, legislators, but it must include input from all stakeholders.

It seems that lately one of the priorities of the Commission is to facilitate availability of smart metering to enable greater participation of businesses and households in electricity markets via demand response solutions, organizing self-consumption and taking advantage of emerging storage solutions. On a larger scale, smart grids would be required if extensive cross-border cooperation between the states and countries, including relying on over-the-border reserve generation sources, is to gain a substantial shape.

Regulation must adapt to support all users connected to a smart grid. In doing so, several key issues must be addressed.

The following are electricity generation related:

“- Mechanisms must be developed to encourage business models and markets that allow the flexibility required by variable generation deployment and ensure reliable system operation;

“- Markets must be transparent to allow asset owners and third parties to enter and offer conventional, as well as innovative, solutions to provide such flexibility;

“- The rise in the number of electricity consumers who produce small amounts of electricity at or near the place of consumption-often referred to as prosumers-must be accommodated and, if possible, turned into an advantage rather than a problem.

The following are transmission network related:

“- Regulatory mechanisms must be refined to deal with transmission capacity and interconnections with other countries. Deploying new transmission is often complicated by the unbundled and liberalized nature of electricity systems and by lengthy approval processes;

“- Policies must allow timely and adequate transmission system investment; inadequate investment brings risks of higher costs in future system failures;

“- With transmission systems forming the backbone of security of supply strategies, balance is needed between the cost of the duties placed on system operators, paid eventually by system users at large, and internalizing costs of participation in the system of variable and dispersed generation sources.

The following are distribution network related:

“- Introducing “smartness” into distribution networks is more challenging than it is for transmission networks because there are typically hundreds of times more nodes to be integrated into the ICT systems than there are in a transmission network.

“- Users-whether businesses or consumers will increasingly have some form of generation or energy storage system; regulation must address supply into the grid as well as safety and security. With proposals of increased obligations of distribution network operators for local balancing of supply and demand, smart grids seem inevitable for achieving such goals.

“- It will be important to adopt regulatory, business and market models that ensure that the costs and benefits of smart grids are shared fairly across the value chain, including system operators, generators, retailers and other intermediaries and end users.

The following are consumer related:

“- Detailed data sets generated by smart grid operation must be considered, maybe by way of license condition.

“- Security of supply in the more complicated/automation-driven networks will be a concern to consumers.

“- Customer vulnerability must be addressed. Should vulnerable customers be protected from the possibility of higher bills? If so, how?

“- Should some customer groups less able to participate in dynamic pricing be excused from bearing the extra costs of smart grids or being subject to new service conditions? If so, what can or should be done for these customers?

“- For consumers, the most obvious manifestation of smart grids will be the presence of smart meters in their homes. The extent to which they feel the full benefits of smart grids will depend, in part, on the choices made at a national level about smart meter rollouts, as well as new choices proposed by the Commission in the November 2016 package.

Some of these issues have been reflected in the commission’s proposal to recast the Internal Electricity Market Directive. The Commission decided to focus on promoting further development of integrated short-term electricity markets, hoping to incentivize consumers to shift their demand behavior, improve short-term backup solutions and increase generation flexibility.

The Commission believes that price signals and their formation should be more directly impacted by scarcity of electricity and grid constraints.

This model increases exposure of off takers, including households, to price variations. It poses new challenges in defining socially and politically acceptable security of supply strategies.

Possibly, the deployment of smart grids will provide more choice in finding the right balance between these principles, as well as the resulting liabilities and benefits for system users.


This article was originally written for Power Engineering International magazine (POWERGIRD International’s sister publication) by lawyers of global law firm Dentons. The authors, Peter Mayer, partner; Marc Fornacciari, partner; Dan Burge, partner; Michaà…‚ Motylewski, counsel; Tomasz Janas, partner; and Tracey Sheehan, partner, work across several of the firm’s European offices. Learn more at www.dentons.com

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