IEEE Power & Energy Magazine - May/June 2020 - 27

and central generation stations and suppliers. The unused
network capacity is typically socialized.
Decarbonization and digitalization will fundamentally
disrupt this principle, which has been with the industry for
roughly 30 years. This is because significant demand would
be met by local generation, particularly if demand is of a
flexible nature, leading to significant spare capacity in parts
of the network. If the current pricing principle continues,
spare capacity in the system could become more widespread. Lower power flows would lead to very expensive system charges, which would further discourage network use,
resulting in a high risk of assets being stranded.
We believe that the current pricing and regulatory framework does not account for the long-term uncertainty of the
relationship between energy customers and network investment. The absence of uncertainty in network charges will
pose a serious threat to asset utilization over time. The
incentives provided by network charges do not recognize the
potentially costly investment mistakes arising from future
uncertainty in asset utilization. As a result, network users
will not be rewarded if they can manage their generation
or demand uncertainties nor will they be penalized if they
escalate the uncertainties. Under such a pricing framework,
uncertainty will be allowed to propagate through the system,
potentially leading to costly network investments, which are
highly inefficient with uneven network utilization and would
be prone to additional future uncertainties of asset underutilization. Alternatively, a failure to invest in the system could
compromise the reliability of service to customers and interfere with the integration of flexible low-carbon technologies.
In other sectors, such as manufacturing, when the level of
electricity demand uncertainty becomes excessively large,
the risk of irreversible investment not paying off becomes so
great that it no longer makes sense to invest, but rather wait
until the uncertainty drops below a certain level. In parts
of the power distribution system, the uncertainty in future
generation and demand and their operations is so great that
major capital investment would face a real risk of assets
being underutilized or stranded in the future.
One viable solution to cope with large uncertainties
would be to offer flexible network access to mobilize inherent resources at the customer level, which mitigate short-run
uncertainties and make better use of existing capacity in the
network. As more customers opt for flexible (intermittent
but less expensive) network access, the cost of irreversible
network investment to serve a few inflexible customers will
become excessively expensive, encouraging more customers
to join flexible access. Such a pricing framework would drive
an efficient future-proof network over time, which has less
network investment and relies more on network operation to
reduce congestion and uncertainties.
We highlight the need to establish the link between longterm customer uncertainty and network investment in network
pricing and identify the opportunities for network customers and operators to minimize costly investment mistakes.
may/june 2020

We first examine the revolution in Great Britain in network
pricing and new challenges arising from low-carbon transition, particularly from long-term uncertainties in the energy
landscape, for example, increased unused network capacity
or congestion in parts of the network. We then analyze the
degree of uncertainties from customers to the network and
identify opportunities for managing uncertainties by the network operator and network customers through greater capacity sharing between different types of customers. Finally, we
outline new directions in pricing principles that could relate
network customers' long-term uncertainty to network investment, thus rewarding customers who reduce uncertainties and
network operators who have better skills in managing uncertainties. The new pricing principles would not only influence
the behavior of generation and customers in understanding and
managing their uncertainties but, critically, network operators,
to take the necessary risks to fully utilize network resources
and minimize the risk of costly investment. In doing so, the
new principle aims to optimize generation, networks, and
flexible assets for the benefit of energy consumers and better
facilitate the competition between local and distant generation.

History and New Progress
in Network Pricing
Prior to the deregulation of the U.K.'s power industry in the
early 1990s, transmission and distribution networks were
planned in coordination with anticipated generation and
demand, with the key aim of developing infrastructure networks in an efficient and timely fashion. This centralized
planning practice has since been replaced by uncoordinated,
profit-driven, decision-making processes among network
owners and users. Its limited coordination makes it extremely
challenging to plan the long-term development of electrical
supply systems. Although generators and demand are free to
choose their locations, when to connect, and how to operate, these profit-driven planning activities create huge uncertainties in future network planning. Infrastructure network
investment is very expensive and requires a long lead time
to build. In the absence of certainty in future generation and
demand, uninformed decisions could easily lead to under or
overinvestment in the network. In the former case, the power
network may become congested, leading to high operating
costs or, worse, compromise reliability of service. In the latter case, the network investment may become unnecessarily
excessive when operators expect a much higher volume of
generation and/or demand to connect to the system, leading
to underutilized or stranded assets. In either situation, the end
users, i.e., consumers, have to pick up the extra costs.
Network operators do not have any power to dictate where
new generation and load should be connected or how they
should operate, except for affecting their behaviors through the
use of system charges. The use of network charges are charges
against generators and suppliers for their use of the system
to transport energy over a distance. Through network charges,
network companies are able to recover system investment,
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IEEE Power & Energy Magazine - May/June 2020

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