Smart Grids Roadmap - Smart Grid Sherpa

Status of electricity systemmarkets and regulationCurrent regulatory and market systems, both at theretail and wholesale levels, can present obstaclesto demonstration and deployment of smart grids.It is vital that regulatory and market models – suchas those addressing system investment, prices andcustomer participation – evolve as technologiesoffer new options.Some markets allow vertically integrated utilities,which own and operate infrastructure assets acrossthe generation, distribution and transmissionsectors. This ensures that costs and benefits fromthe deployment of technology are shared andmanaged efficiently across the various sectors.Vertically integrated structures also allow the mostappropriate and fully integrated investment anddevelopment for the power system as a whole,rather than just evaluating costs and benefits inone part of the electricity system. It can be difficultfor competitors to enter such markets and competewith incumbent players, which could hinderinnovation and increase prices for consumers.However, the climate for competitiveness dependslargely on whether the market is governed byappropriate regulatory structures.“Unbundling” of the electricity system, whichis intended to allow increased competition,has required entities that operated across theentire system to divide into market-based andregulated units, either functionally by creatingseparated operating teams within companies orlegally by selling companies or creating new onesto separate activities. Market-based activitiestypically include the generation sector and theretail sector (Figure 10). In the generation sector,markets have developed in which generatorssell electricity within a structure defining prices,time frames and other rules. In the retail sector,sometimes the distribution system operator stillretails the electricity to consumers and sometimesnew participants enter the market that sell onlyelectricity services.The introduction of market-based activities throughunbundling has brought many benefits to theelectricity sector, primarily a continued downwardpressure on prices, but such objectives can alsobe met in vertically integrated markets. Varyingdegrees of unbundling exist around the world.Unbundling also makes it difficult to captureboth costs and benefits of various technologydeployments on a system-wide basis – especiallywith respect to smart grids. Smart grid investmentsare likely to be deployed more rapidly in verticallyintegrated utilities where the business case canmore easily be made. In the many areas where this isnot possible, more strategic co-operation betweendistribution system operators and transmissionsystem operators is needed.Figure 10. Vertically integrated and unbundled electricity marketsVertically integratedelectric utilityUnbundled electricity marketGenerationMarket activitiesG1G2GnTransmissionTransmissionRegulated activitiesDistributionDistributionRetailMarket activitiesR1R2RnSource: Enexis, 2010.KEY POINT: The unbundling of electricity markets has introduced benefits and complexityto the electricity sector.Smart grid deployment23© OECD/IEA, 2010