Oxford Energy Podcast – Market-based allocation and differentiation of access rights to network capacity in distribution grids
In this podcast David Ledesma discusses with Christine Brandstätt and Rahmat Poudineh the potential for market-based allocation and differentiation of access rights to network capacity in electricity distribution grids.
Traditionally most electricity distribution systems have been allocating network capacity universally and employing listed prices to finance existing capacity along with regulatory planning based on expert projections to provide future grid capacity. When electricity network access is universal, capacity assigned to one user may be blocked for others, at least to a certain extent, even when it is not used. To facilitate coordination and efficient system development, access rights may vary regarding quantity, direction, location, depth, time, and firmness. Access or use which triggers a lower incremental cost can be cheaper, and thus provide incentives to adjust demand for capacity. This optimizes network cost and maximizes efficiency.
The main strength of regulated pricing is that it protects consumers from paying monopoly prices to the network. Yet, one obvious limitation is the requirement of information on the level and elasticity of demand as well as on network cost specific to the respective type of use. Market mechanisms and particularly auctions are now widely used in the electricity sector yet markets for network capacity are less common. Market mechanisms can be used first to assign access rights and subsequently also to trade those rights. With an adequate auction design it might be possible to balance the benefits of access rights differentiation and market-based allocation against the related complexity, resulting transaction costs and the negative effects of market power.