Assessment of menu of contracts' incentive properties under different designs of sharing factor functions
Abstract
Incentive regulation has become challenging due to the increased information asymmetries and
uncertainties driven by the diffusion of distributed energy resources (DER) and smart grid
technologies. A combination of a Reference Network Model (RNM) and a menu of profit-sharing
contracts has been used in this thesis to address these problems in electricity distribution. RNM
is a tool which can be used by regulator to estimate the investment cost needed by distribution
system operators (DSOs) and thus, the problem of information asymmetries between regulator
and DSOs can be mitigated.
Menu of contracts, as defined in this thesis, is a regulatory scheme with the revenue determined
ex-ante and reviewed ex-post, albeit based on some pre-defined rules. It ensures DSO to receive
the greatest reward when the forecast investment cost coincides with the true expenditure in
that regulatory period. Therefore, the use of menu of contracts can encourage truth-telling and
hence avoid strategic behaviour of DSOs. Consequently, this regulatory mechanism has drawn
some attention from regulators as a mean to tackle the aforementioned increasing uncertainties.
The sharing factor is a key parameter that is needed to build a menu of contracts. It determines
the strength of the incentive given to the DSO, i.e. how much network companies would benefit
from cost reductions or how much they would be penalized for an increase in costs as compared
to allowances. In a conventional profit-sharing contract, the sharing factor is a constant value.
However, under the menu regulation considered in this thesis, this parameter is obtained as a
function of the ex-ante investment cost estimation submitted by the DSO.
Four sharing factor functions have been designed: two functions with a different rate of change
when the DSO/regulator ratio increases (increasing and decreasing rate of change respectively)
and two functions with an asymmetric sharing factor dependent on whether the difference
between actual expenditure and allowed revenue is positive or negative. These sharing factor
functions are applied in the menus of contracts, together with the network expansion cost
estimated by RNM at different levels of PV penetration to assume different realizations for
regulator’s forecast cost, DSO’s forecast cost and actual expenditure in menu of contracts.
Sharing factor functions with different rate of change across DSO/regulator ratio provide the
regulator with higher flexibility in setting incentive strength of the menu. The analyses show that,
when the regulator has a high level of confidence with the benchmark cost, a sharing factor
function with increasing rate of change when DSO/regulator ratio increases can be particularly
useful, and vice versa. While for a sharing factor function which varies with actual expenditure, it
is possible for the regulator to reward outperformance and penalize underperformance at a
different rate, especially when one outcome is more desirable than the other. In case the
regulator wishes to deter overspending over cost-saving, a sharing factor function which
increases with the actual expenditure can be used. On the other hand, when the regulator wishes
to have the investment projects completed rather than to avoid overspending, a sharing factor
function which decreases with actual expenditure can be used.
All in all, these sharing factor functional forms can be used to achieve different requirements
desired in the remuneration scheme. Careful tuning of the parameters used in these functions
makes the menu of contracts more flexible in term of having different rate of change of sharing
factor with DSO’s estimated cost and with actual expenditure.
Trabajo Fin de Máster
Assessment of menu of contracts' incentive properties under different designs of sharing factor functionsTitulación / Programa
Master in the Electric Power IndustryMaterias/ UNESCO
33 Ciencias tecnológicas3306 Ingeniería y tecnología eléctrica
330609 Transmisión y distribución
53 Ciencias económicas
5312 Economía sectorial
531205 Energía
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