Transforming the European Energy System

An Exploration of the Relationship between Smart Grids, Energy Market Liberalisation and European Energy Market Integration


Master's Thesis, 2012
166 Pages, Grade: 1,0

Excerpt

TABLE OF CONTENTS

ABSTRACT

INHALTSANGABE

ACKNOWLEDGEMENTS

RESEARCH CONTEXT

LIST OF FIGURES & TABLES

LIST OF APPENDICES

GLOSSARY OF TERMS

CHAPTER I - INTRODUCTION
1. SETTING THE SCENE
TODAY'S GRID
FROM A DUMB GRID TO A SMART GRID
THE SMART GRID
2. SMART GRID DEFINITION
THE CONCEPT OF A SMART GRID
THE CONCEPT OF A SUPER GRID
SMART GRID, SUPER GRID, SUPER SMART GRIDS
3. PROBLEM FORMULATION
RESEARCH QUESTION
MORE LIBERALISATION, MORE DEPLOYMENT, MORE INTEGRATION
RELEVANCE
READER GUIDANCE
4. METHODOLOGY
HERMENEUTIC APPROACH
QUALITATIVE APPROACH
CASE STUDIES
INTERVIEWS
RESEARCH STRUCTURE
RELIABILITY AND VALIDITY
DELIMITATIONS

CHAPTER II - THEORY OF REGULATION
1. INTRODUCTION
2. REGULATION IN THE EUROPEAN UNION
3. THEORY OF REGULATION
4. THE ECONOMICS OF NATURAL MONOPOLIES AND THEIR REGULATION

CHAPTER III - THE EUROPEAN LEGAL FRAMEWORK
1. THE EVOLUTION OF EUROPEAN ENERGY POLICY
FROM A PIECEMEAL APPROACH TO AN INTEGRATED STRATEGY
2. THE CREATION OF AN INTERNAL ENERGY MARKET
THE LONG AND WINDING ROAD TO THE FIRST ENERGY PACKAGE
SEVERE DEFICIENCIES CALL FOR A SECOND LEGISLATIVE PACKAGE
THE THIRD LIBERALISATION PACKAGE AND THE CURRENT STATE OF AFFAIRS.
LIBERALISATION: AN INCREMENTAL YET INCOMPLETE PROCESS
EU MEMBER STATES DIVIDED ON HOW TO SKIN THE CAT
3. THE EUROPEAN LEGAL AND REGULATORY REGIME FOR SMART GRIDS
EU PRIMARY LEGISLATION
EU SECONDARY LEGISLATION ON SMART GRIDS
SOFT LAW AND OTHER POLICY INITIATIVES ON SMART GRIDS
FINAL REMARKS ON THE SMART GRID REGULATORY FRAMEWORK

CHAPTER IV - CASE STUDIES
THE LEGAL AND MARKET ENVIRONMENT FOR SMART GRIDS IN GERMANY AND
DENMARK
INTRODUCTION
1. SMART GRIDS IN GERMANY
THE GERMAN CONTEXT
THE GERMAN ENERGY MARKET AND REGULATION
IMPORTANT REGULATORY CONCEPTS
SMART GRID REGULATION IN GERMANY
2. SMART GRIDS IN DENMARK
THE DANISH CONTEXT
THE DANISH ENERGY MARKET AND REGULATION
IMPORTANT REGULATORY CONCEPTS
SMART GRID REGULATION IN DENMARK

CHAPTER V - TRANSFORMING THE EUROPEAN ENERGY SYSTEM
1. A DEFICIENT DEFINITION
2. MORE LIBERALISATION
LIBERALISATION - A CATALYST FOR INNOVATION
LIBERALISATION - A STIMULUS FOR COMPETITION
LIBERALISATION - AN OBSTACLE TO EFFECTIVE COORDINATION
UNBUNDLING - A DRIVER FOR CONSOLIDATION IN TRANSMISSION AND
DISTRIBUTION
LIBERALISATION - NEXT STEP, EFFECTIVE DSO UNBUNDLING
BREAKDOWN
3. MORE DEPLOYMENT
A GAME-CHANGING PLATFORM
ENABLING COMPETITION
COMPETITION AS AN INDICATOR FOR LIBERALISATION
BREAKDOWN
4. MORE INTEGRATION
ENERGY MARKET LIBERALISATION IS THE CORNERSTONE OF ENERGY MARKET
INTEGRATION
DO SMART GRIDS REALLY MATTER FOR EUROPEAN ENERGY MARKET
INTEGRATION?
BREAKDOWN
5. SMART GRID INVESTMENTS
6. TRANSFORMING EUROPE'S ENERGY SYSTEM

CHAPTER VI - CONCLUSION
1. REINSERTING THE RESEARCH RESULTS INTO ITS CONTEXT
AN EXPLORATION OF THE RELATIONSHIP OF SMART GRIDS, ENERGY MARKET
LIBERALISATION AND EUROPEAN ENERGY MARKET INTEGRATION
2. BEST PRACTICE REGULATORY FRAMEWORK FOR SMART GRID DEPLOYMENT
GUIDING PRINCIPLES
REGULATORY MEASURES
3. PERSPECTIVES
FURTHER RESEARCH
LIMITATIONS
BIBLIOGRAPHY

LIST OF FIGURES & TABLES

Figure 1.1. SMART GRID INVESTMENTS AND IMPLEMENTATION ACROSS THE EU

Figure 1.2. A MODEL SETUP OF A SMART GRID

Figure 1.3. HVDC CONNECTIONS IN EUROPE

Figure 1.4. VERTICALLY INTEGRATED AND UNBUNDLED ELECTRICITY MARKETS

Figure 1.5. SMARTER ELECTRICITY SYSTEMS

Figure 1.6. RESEARCH CYCLE

Figure 2.1. VALUE CHAIN IN THE ELECTRICITY MARKET

Figure 3.1. IMPLEMENTATION OF INTERNAL ELECTRICITY AND GAS MEASURES BY 2002

Figure 3.2. EU MEMBER STATES POSITION ON OWNERSHIP UNBUNDLING

Figure 3.3. ELECTRICITY RETAIL MARKET CONCENTRATION 2010

Figure 3.4. SMART GRID INVESTMENTS AND IMPLEMENTATION ACROSS THE EU

Figure 4.1. THE GERMAN ELECTRICITY NETWORK

Figure 4.2. NUMBER OF CUSTOMERS SWITCHING SUPPLIERS 2006-2010

Figure 4.3. ELECTRICITY PRICE COMPOSITION OF PRIVATE HOUSEHOLDS IN GERMANY .

Figure 4.4. YEARLY NETWORK INVESTMENTS IN GERMANY IN BILLION €

Figure 4.5. SMART METER PROJECTS IN GERMANY WITH MORE THAN 1,000 METERS

Figure 4.6. DENMARK'S ELECTRIC POWER INFRASTRUCTURE 1985 TO 2009

Figure 4.7. EFFICIENCY DIFFERENCES OF ELECTRICITY GRID COMPANIES 2010

Figure 4.8. ELECTRICITY PRICE COMPOSITION: WHOLESALE-RETAIL 2011

Figure 4.9. SMART GRIDS OPTIMIZE INVESTMENTS IN CAPACITY EXPANSION

Figure 5.1. SMART ENERGY DEFINITION

Figure 5.2. SMART GRID OPTIMISES INVESTMENTS IN CAPACITY EXPANSION

Figure 5.3. ELECTRICTY GENERATION MARKET CONCENTRATION 2010

Figure 5.4. ELECTRICTY RETAIL MARKET CONCENTRATION 2010

Table 5.5. SMART GRIDS AND THEIR IMPACT ON COMPETITON IN SELECTED PARTS OF THE VALUE CHAIN

Figure 5.6. ASSESSMENT OF MEMBER STATE STATUS CONCERNING REGULATED PRICES, MARKET CONCENTRATION AND UNBUNDLING

Figure 5.7. INTERCONNECTION CAPACITY REQUIREMENTS 2020 IN MW

LIST OF APPENDICES

Appendix 1 - INTERVIEW GUIDE

Appendix 2 - STAKEHOLDERS INTERVIEW REQUEST MAIL

Appendix 3 - INTERVIEW REFERENCE LIST

Appendix 4 - INTERVIEW DK1

Appendix 5 - INTERVIEW DK2

Appendix 6 - INTERVIEW DK3

Appendix 7 - INTERVIEW DK4

Appendix 8 - INTERVIEW DE1

Appendix 9 - INTERVIEW DE2

Appendix 10 - INTERVIEW DE3

Appendix 11 - INTERVIEW DE4

Appendix 12 - INTERVIEW DE5

Appendix 13 - INTERVIEW DE6

Appendix 14 - INTERVIEW DE7

Appendix 15 - INTERVIEW EU1

GLOSSARY OF TERMS

Abbildung in dieser Leseprobe nicht enthalten

ABSTRACT

The European Union aspires to be a frontrunner in the transition towards a low-carbon economy. Its energy policy aims at reconciling climate and environmental objectives, with concerns over security of supply and competitive markets. The restructuring and modernisation of the European energy system is driven by a continuous liberalisation regime in conjunction with the promotion of renewable energy sources and energy efficiency.

The implications of this strategy are manifold, whereof the modernisation and upgrade of the electricity grid is increasingly recognized to be the quintessential prerequisite to meet tomorrow's energy challenges.

The emergence of the Smart Grid has enthused industry and policy makers alike, as it has the potential to be the enabler for a future low-carbon electricity system by facilitating demand-side efficiency, increasing the shares of renewables and distributed energy generation, and enabling electrification of transport. The European Commission views the Smart Grid as the backbone of Europe's future energy infrastructure advancing the development of green energy, while making the system more stable through information and communication technologies. The deployment of Smart Grid implies a technological transformation that will have a deep impact on the whole electricity value chain.

The thesis explores the effects of this transition process with regard to energy market liberalisation, Smart Grid deployment and energy market integration. We scrutinize the relationship of these three variables, by considering Smart Grids as a function of liberalisation, liberalisation as a function of Smart Grid deployment and last but not least market integration as a function of liberalisation and Smart Grid deployment.

The chosen qualitative approach to the research puzzle is justified by the triangulation of the analysed data through the exercise of an extensive legal review, the implementation of two cases studies and the execution of stakeholder interviews.

By testing of the core variables, we were able to establish that liberalisation has been a precondition for the development of Smart Grids and that Smart Grids will have a dynamic effect on the competitive parts of the value chain, furthering energy market liberalisation. Finally, the thesis rationalizes how sustained liberalisation and the deployment of high- voltage cross-border transmission lines will contribute to the deeper integration of the European electricity markets.

The research concludes by offering a set of recommendations for a best practice regulatory framework that shall improve the current situation and inform future policy- making.

INHALTSANGABE

Die Europäische Union verfolgt das Ziel eine führende Rolle beim Übergang zu einem CO2-armen Wirtschaftssystem zu spielen. Das Ziel der EU Energiepolitik ist es daher Klima- und Umweltziele mit Versorgungssicherheit und wettbewerbsfähigen Märkten in Einklang zu bringen. Der Wandel des Europäischen Energiesystems wird durch ein sich stets weiterentwickelndes Liberalisierungsregime, sowie ambitionierten Nachhaltigkeitszielen vorangetrieben.

Die Folgen dieser Strategie sind vielfältig, wobei immer ersichtlicher wird, dass der Modernisierung und Aufrüstung der Stromnetze eine tragende Rolle zukommt. Politik und Industrie sind daher gleichermaßen vom Aufstieg der Smart Grids begeistert da diese das Potential eines Prozessaktivierers einer zukünftigen CO2-armen Energieversorgung haben. Als Türöffner für nachfragegesteuerte Effizienzsteigerungen, verbesserte Integration von erneuerbarer und dezentraler Energie, sowie Elektromobilität, ist es daher nicht überraschend, dass die Europäische Kommission die Smart Grids als Rückgrat des zukünftigen Energieversorgungssystems betrachtet. Zudem wird das System durch die Aufrüstung der Netze mir Informations- und Kommunikationstechnologie stabiler und effizienter. Der durch die Verbreitung der Smart Grids ausgelöste technologische Wandel wird tiefgreifende Auswirkungen auf die gesamte Stromwertschöpfungskette haben.

Diese Masterarbeit untersucht die Auswirkungen dieses Transformationsprozesses anhand von folgenden drei Variablen, Marktliberalisierung, Smart Grid Verbreitung und Marktintegration. Indem wir Smart Grids als Funktion von Liberalisierung, Liberalisierung als Funktion von Smart Grid Verbreitung und schließlich Marktintegration als Funktion von Liberalisierung und Smart Grid Verbreitung betrachten, leiten wir Beziehungen zwischen den drei Variablen ab, die folgend beschrieben und bewertet werden. Der zugrunde liegende qualitative Forschungsansatz zur Beantwortung der Problemstellung beruht auf der Triangulation verschiedenartiger und Datensätze. Die Datenanalyse setzt sich aus der Analyse der rechtlichen Rahmenbedingungen, der Durchführung von zwei Fallstudien, sowie der Ausführung von Stakeholderinterviews zusammen.

Anhand unserer Forschungsergebnisse können wir belegen, dass erstens Marktliberalisierung eine fundamentale Voraussetzung für die Entwicklung der Smart Grids war, und zweitens dass Smart Grids einen starken Stimulus auf die wettbewerblichen Teile der Wertschöpfungskette ausüben werden, und somit die Liberalisierung des Strommarkts vorantreiben werden. Schließlich werden fortschreitende Liberalisierung sowie der Ausbau von grenzüberschreitenden Hochspannungsleitungen zu einer tieferen Integration des Europäischen Energiebinnenmarkts führen. Die Forschungsarbeit schließt mit einer Reihe von rechtlichen Empfehlungen für die Verbreitung von Smart Grids.

ACKNOWLEDGEMENTS

Foremost, we would like to express our sincere gratitude to our thesis supervisors Prof. Anita Rønne, Associate Professor in Energy Law at the Faculty of Law at KU and Prof. Manuele Citi, Assistant Professor at the Department of Business and Politics at CBS for their encouragement, enthusiasm and guidance. Their immense knowledge, intellectual rigor, and high standards were extremely valuable, and have helped us to continuously maintain high ambitions for the research and writing of this thesis. We could not have imagined having better supervisors to guide us through the demanding stages of the thesis process.

Secondly, we would like to thank the many participants that have contributed to the stakeholder interviews conducted in the framework of the thesis. In particular, we shall acknowledge Andreas Kießling - MVV Energie, Claude Turmes - Member of the European Parliament, Finn Dehlbæk - Energitilsynet, Frauke Rogalla - Verbraucherzentrale Bundesverband, Kai Paulssen - Bundesnetzagentur, Kim Behnke - EnergiNet.dk, Klaus Fest - RWE, Lise Lotte Lyck - DONG, Martin Salamon - Forbrugerrådet, Tanja Schmedes - EWE, Ulf Häger - TU Dortmund, and Werner Kremer - Deutsche Telekom for their support, openness and genuine interest in our research work. Their contributions have been a source of perspective and enabled us to gain deeper insight at a critical phase of the research.

Further, we would like to express our gratefulness to the University of Copenhagen and Copenhagen Business School for granting us the privilege to participate in the Elite Master of Sciences in International Law, Economics and Management programme. This master of excellence programme has empowered us to grow in our academic endeavour and on a personal level.

Last but not the least, we shall thank our friends and families for their moral support, affection and understanding.

RESEARCH CONTEXT

The present master thesis is written within the framework of the Elite Master of Sciences in International Law, Economics and Management programme (ILECMA) offered by the University of Copenhagen (KU) and the Copenhagen Business School (CBS) and requires an interdisciplinary approach to the investigated thesis theme drawing on elements from law, economics and/or management. The research is conducted by Jean-Luc Frast and Leonard Coen both students in the ILECMA programme, holding an undergraduate degree in Business and Economics from Copenhagen Business School and the University of Mannheim respectively.

The research has been conducted between February 15 and August 15, 2012 and has been supervised by Prof. Anita Rønne, Associate Professor in Energy Law at the Faculty of Law at KU and Prof. Manuele Citi, Assistant Professor at the Department of Business and Politics at CBS.

The research focuses on the legal framework for the deployment of Smart Grids in Europe and is perfectly aligned with the programme's academic requirements as the subject is situated at the very intersection of law and economics. Following the ILECMA programme regulations, the dissertation provides a comprehensive account regarding the research structure, theories and methods chosen to conduct an in-depth analysis of the European regulatory framework and the economic environment for the Smart Grid deployment. Within the given limitation of 280.800 characters excluding spaces, the present dissertation seeks to contribute a new perspective to the pertinent literature concerned with the interaction of energy law and energy business by fostering a combination of law and political science approaches to a rather novel field of study.

CHAPTER I - INTRODUCTION

1. SETTING THE SCENE

The world's current energy system was developed in the 1950s during a period when energy was relatively inexpensive and fossil energy sources seemed to be abundantly available. This belief proved to be wrong as the oil crisis of the 1970s illustrated, exposing the systemic threat of a strong increase in energy demand driven by rapid economic growth in conjunction with supply restrictions.

Today's energy system is still heavily based on fossil energy resources and the competition for energy sources has intensified with high-growth economies such as China and India operating more aggressively in the global energy markets.1 The International Monetary Fund notes that the age of cheap and abundant fossil energy has come to an end and affirms that global oil markets have entered a period of increased scarcity and that a return to abundance is unlikely in the near term.2 The global energy challenge becomes even more alarming when considering a projected energy demand increase of 40% by 20353, implying a desideratum of effective measures that foster the convergence of long-term climate change objectives and the short-term requirements of economic growth, private sector competitiveness and national energy security. Hence, business as usual is no longer possible and the quest for new energy systems that combine energy security and climate protection has begun, heralding the transition towards a decarbonised economy.

The growing awareness of the limitations of our current energy system has produced a multitude of initiatives fostering the production of renewable energy among which we can list the development of biofuels, thermo and hydro power, wind and solar power as much as biomass and waste-to-energy generation. As diverse as the means of production, are also the benefits and the shortcomings of these technologies, which have been discussed by numerous scholars, see Kowalski for a comprehensive assessment.4 Nonetheless, it has emerged that it is not one single technology that will pave the way towards the age of renewable energy, but rather the combination of various technologies and energy generation processes that are adapted to varying geographical situations, climatic conditions and local needs. Yet, the success of renewable energy production is manifestly dependent on a large range of variables, such as maturity of the technology, profitability, financial market liquidity, and political will, to name only a few.

In the preparation of the present master thesis it struck us that the actual electricity network set-up and configuration, in other words the grid, plays an eminent role for this development, as it determines the possible level of renewable energy inputs and the potential for energy savings. Indeed, the central role of the grid with regard to enabling solutions to the present energy challenge has lately sparked a lot of debate, both in politics and business, and we are about to witness a major change in the energy sector stimulated by the renewal of the grid. We are still in the early stages of the actual deployment of a smarter grid and the economic as much as the environmental impact and the related allocation of benefits and losses have still to be defined. This intriguing moment of opportunity coupled with the undetermined development of the energy sector has captivated our interest and motivated the present research, dedicated to the deployment of Smart Grids across Europe.

TODAY'S GRID

Our current power system is mainly built of centralised high-volume generation from mainly fossil sources connected by a high voltage network to local electric distribution systems, which in turn, serve homes, businesses, and industry. Presently, electricity flows are largely one-directional. The grid was initially designed to meet the needs of large and vertically integrated utilities operating their networks largely in isolation. Economic globalisation and in particular the European integration process have considerably reduced the barriers to international trade, whereof the European Commission has been the driving force behind energy market liberalisation in the Member States of the European Union. Today, organized wholesale markets, third-party generators, and increased penetration of renewable energy generation are gaining momentum, and these recent developments are severely challenging the capacity of the current grid. Its original design did simply not foresee these developments and was based on the out-dated premise that customer load is given, requiring routinely adjustments on the supply side.5 As a result, environment and input management, influencing or controlling customer demand is actually highly problematic or simply impossible due to the limitations of the installed technology, especially when considering primitive mechanical controls, electromechanical meters and the lack of communication and coordination between the supplier and the end-users. In so far, the current grid is a relic of the past, incapable of meeting today's requirements concerning energy efficiency, energy security, sustainability and consumer or industry requirements, let alone those of the future.

FROM A DUMB GRID TO A SMART GRID

The energy challenge that Europe faces is multifaceted, including increasing energy prices, the increased need for renewable energy production, energy efficiency, weighty environmental concerns over the effect of greenhouse gas emissions and sustainability. Therefore, it is of great importance to prioritize measures that enable all EU Member States to enter a competitive and reliable decarbonised power system as fast as possible. The Commission’s Communication Roadmap for moving to a competitive low-carbon economy in 2050 6 identifies Smart Grids as a key enabler for a future low-carbon electricity system, facilitating demand-side efficiency, increasing the shares of renewables and distributed generation, and enabling electrification of transport. The Commission views the Smart Grid as the backbone of Europe's future energy infrastructure, while emphasising that without a serious upgrade of existing grids and metering, 'renewable energy generation will be put on hold, security of the networks will be compromised, opportunities for energy saving and energy efficiency will be missed, and the internal energy market will develop at a much slower pace.'7

From the above statement it becomes clear that the expectations towards Smart Grid technology are immensely high, as the prospect of reconciling economic growth, sustainability, energy security, and competitiveness inspires a new economic paradigm and an optimistic vision of a third industrial revolution8.

THE SMART GRID

But what exactly do we mean by a Smart Grid? We can refer to Smart grid by different names including Smart Electric Grid, Smart Power Grid, Intelligrid, or Future Grid 9 , and it can be adapted contextually when discussing electricity, gas, water or heat. Smart Grid is a catch-all term and according to Vijayapriya it:

'covers modernization of both the transmission and distribution grids. The concept of a smart grid is that of a 'digital upgrade' of distribution and long distance transmission grids to both optimize current operations by reducing the losses, as well as open up new markets for alternative energy production.' 10

This very broad definition implies that the Smart Grid cannot be viewed as a product of its own but rather as combination of enabling technologies, hardware, software, or practices that 'collectively make the grid more reliable, more versatile, more secure, more accommodating, more resilient, and ultimately more useful to consumers'.11

In the short and medium term the Smart Grid will remain heavily dependent on large central-station generation, but it will include a considerable plug-in of installations that support and facilitate the generation and storage of renewable energy, both at the bulk power systems level and distributed throughout the whole network. Some of the key features of the grid include enhanced sensory and control capacities, the integration of electric vehicles, direct consumer participation in energy management and efficient digital communication appliances. A recently released report of the European Union's Joint Research Centre (JRC) established that over €5.5 billion have been invested in about 300 Smart Grid projects during the last decade12, whereof approximately €300 million has come from the EU budget. Figure 1.1. illustrates the nature and the geographic distribution of the early stage investments.

Figure 1.1. SMART GRID INVESTMENTS AND IMPLEMENTATION ACROSS THE EU

Abbildung in dieser Leseprobe nicht enthalten

While we can in some respect identify a consensus in the pertinent Smart Grid literature regarding the above-described effects of the Smart Grid implementation, there is still a vivid debate about its exact definition. We will return to this matter in the following section, where we provide a clear-cut characterisation of the Smart Grid, taking into account the European specificities of the grid.

2. SMART GRID DEFINITION

In the light of the many expectations and functions that are attributed to the update of the electricity grid, it is important to differentiate between a number of coexisting definitions and concepts that are often interchangeably used, resulting in a certain confusion among energy sector stakeholders. It is our aspiration to provide a comprehensive overview of the most eminent concepts and definition in this section, as we will return to an in-depth discussion of the definitional discrepancies and related problems in the analysis presented in Chapter V.

THE CONCEPT OF A SMART GRID

The European Technology Platform for Electricity Networks of the Future (SmartGrids ETP), a key European forum for the crystallisation of policy, research and development pathways, defines the Smart Grid as 'electricity networks that can intelligently integrate the behaviour and actions of all users connected to it - generators, consumers and those that do both - in order to efficiently deliver sustainable, economic and secure electricity supplies.'13

In doing so the Smart Grid utilizes innovative products and services together with intelligent monitoring, control, communication, and self-healing technologies in order to:

- better facilitate the connection and operation of generators of all sizes and technologies;
- allow consumers to play a part in optimising the operation of the system;
- provide consumers with greater information and options for choice of supply;
- significantly reduce the environmental impact of the whole electricity supply system;
- maintain or even improve the existing high levels of system reliability, quality and security of supply;
- maintain and improve the existing services efficiently;
- foster market integration towards a European integrated market.

In its position paper on Smart Grids14 the European Regulators’ Group for Electricity and Gas (ERGEG) representing the interests of the national regulators at EU level, under the Council of European Energy Regulators (CEER) principally agrees with the definition provided by SmartGrids ETP, while emphasizing cost efficiency, economic efficiency and low network losses.

Elaborating on the above definition, which is widely utilized in a European context, it is vital to describe some key features and characteristics of the Smart Grid in order to fully grasp the extent of the implications it is expected to have. In his landmark publication Sioshansi provides an all-encompassing list of applications, benefits and key features that he deems essential for a useful definition. According to Sioshansi, the Smart Grid shall:

- facilitate the integration of diverse supply-side resources including increasing levels of intermittent and non-dispatchable renewable resources;
- facilitate and support the integration of distributed and on-site-generation on the customer side of the meter;
- allow and promote more active engagement of demand side resources and participation of the customer load in the operations of the grid and electricity market operators;
- allow and facilitate the prices-to-devices revolution that consists of allowing widespread permeation of dynamic pricing to beyond-the-meter applications, enabling intelligent devices to adjust usage based on variable prices and other signals and/or incentives;
- turn the grid from a historically one-way conduit system to a two-way intelligent conduit, allowing power flows in different directions, at different times, from different sources, to different sinks;
- allow a broader participation of energy storage devices on customers' premises or centralized devices to store increasing levels of energy when it is plentiful and inexpensive, to be used during times when the reverse is true;
- allow distributed generation as well as distributed storage to actively participate in balancing generation and load;
- encourage more efficient utilization of the supply-side and the delivery network through efficient and cost-effective implementation of dynamic pricing and similar concepts;
- allow storage devices on customer side of the meter, including electric batteries and similar devices, to feed the stored energy back into the grid when it makes economic sense to do so;
- facilitate any and all concepts and theories that encourage greater participation by the customer and loads in balancing supply and demand in real time through Demand Response;
- make the 'grid' (the vast generation, transmission and distribution network) more robust, more reliable, and more secure to interruptions, and less prone to accidents or attacks of any kind,
- accomplish all the above while reducing the cost of the operation and maintenance of the network, with commensurate savings to ultimate consumers.15

Subsuming, we shall state that the Smart Grid will improve the interaction between generation, transmission, distribution, retail units, by means of innovative censoring and communication technologies, and bi-directional power flow networks. In doing so, the Smart Grid will facilitate the integration of decentralized power generation, increase consumer participation in the energy market, reduce environmental impacts, and increase economic and security efficiency. Figure 1.2. depicts a model of a Smart Grid network set-up comprising main actors and technologies affected by the grid update.

Figure 1.2. A MODEL SETUP OF A SMART GRID

Abbildung in dieser Leseprobe nicht enthalten

THE CONCEPT OF A SUPER GRID

Many of the Smart Grid characteristics and functions described above refer indeed to electricity distribution network and the end consumer, whereof many scholars including the earlier cited Vijayapriya also consider the transmission grid to be part of the Smart Grid. Nevertheless, other transmission specific concepts have emerged in the periphery of the Smart Grid debate and we shall briefly introduce the most predominant ones to carve out differences and prepare the grounds for the later analysis.

The Super Grid is a wide area transmission network that makes it possible to trade high volumes of electricity across great distances using high voltage direct current (HVDC) technology. The business association Friends of the Supergrid, defines it as:

‘ an electricity transmission system, mainly based on direct current, designed to facilitate large-scale sustainable power generation in remote areas for transmission to centres of consumption, one of whose fundamental attributes will be the enhancement of the market in electricity ’ .16

The Super Grid concept is also referred to as a ‘ mega grid ’ and originated in the 1960s to describe the increasing unification of the grid in Great Britain thanks to high voltage interconnection lines in excess of 200kV.17 Over the last 50 years the concept has evolved to denoting electricity transmission that covers large distances usually spanning across different countries, continents and time zones.

The European Super Grid is a potential future Super Grid that will ultimately interconnect the various European countries and the regions around Europe's borders, including North Africa, the Middle East, Kazakhstan, Ukraine, etc. with a HVDC power grid. The concept was coined by Dr. Gregor Czisch from the University of Kassel after having conducted a series of detailed modelling studies, which looked at the European wide adoption of renewable energy and interlinking power grids using HVDC cables.18 His results indicated that the entire European power usage could come from renewables, if the grid permitted frictionless European-wide transmission. The most important benefits of a European Super Grid include:

- allowing the entire region to share the most efficient power plants thereby lowering the costs of power in all participating countries;
- pooling load variability and power station unreliability, in order to reduce the margin of inefficient spinning reserve and standby that have to be supplied;
- allowing for wider use of renewable energy, particularly wind and solar energy, from the concept that 'it is always windy or sunny somewhere', by smoothing intermittency;
- allowing wide sharing of electricity storage facilities such as European hydropower, thereby further reducing volatility.19

The idea of a European Super Grid enjoys high priority with the European legislator, who sees it as a vital tool for the creation of an internal electricity market. The concept is furthermore popular among business representatives due to its significant economic potential. Albeit the many benefits of a European Super Grid, huge costs, national concerns and a lack of clear leadership are considerably slowing down its development. Against this backdrop a number of regional Super Grid initiatives have evolved, which are gradually being implemented. Here we shall mention projects such as the Baltic Energy Market Interconnection Plan, the North Sea Offshore Grid, and the Europagrid as examples. Yet another visionary Super Grid project that gained significant public attention is the DESERTEC project, which intends to build Concentrating Solar Power stations in North Africa and the Middle East and to export the power to Europe by HVDC lines. Figure 1.3. provides an overview of the Super Grid status in Europe.

Figure 1.3. HVDC CONNECTIONS IN EUROPE

Abbildung in dieser Leseprobe nicht enthalten

SMART GRID, SUPER GRID, SUPER SMART GRIDS

While there seems to be little or no overlap between the Smart Grid and the Super Grid at first sight, the emergence of a Super Smart Grid concept that tries to unify the two, indicates that they might be more connected than often assumed.20 The proposal for Super Smart Grid was initiated by the European Climate Forum and the Potsdam Institute for Climate Impact Research and presented for the first time at the Lund climate conference in 2007. The concept of a wide area Super Grid with centralized control and the concept of small-scale, local and decentralized Smart Grid are two approaches that are often perceived as being mutually exclusive alternatives. The Super Smart Grid aims at reconciling the two approaches and considers them complementary and necessary to realize a transition towards a fully decarbonized electricity system.

Although it is a relatively recent concept and there are no explicit infrastructure plans for the Super Smart Grid yet, the term is increasingly employed to discuss the economic and technological feasibility of such a network and ways to secure political support. The complementarity of the Super Grid and the Smart Grid in view of the transformation of the European electricity system will become apparent in Chapter V when we discuss how Smart Grid deployment and energy market liberalisation affect the transformation of the European energy system.

3. PROBLEM FORMULATION

With the adoption of the Single European Act (SEA) in 1986 fostering the creation of a single European market, European Member States transferred a great deal of competences and power to the European Community. This new legal basis entitled the European Commission to forge policies furthering the creation of an internal energy market on the basis of the fundamental principles of the SEA. The Commission's early regulatory attempts in the late 1980s were met by great opposition from Member States and it was only in 1997 that the first liberalisation package for the energy market was eventually adopted. Since the adoption of the United Nations Framework Convention on Climate Change, the so called Kyoto Protocol in December 1997, environmental and climate issues rapidly climbed the political agenda and provided a strong mandate to the European Union to establish a strategy for the reduction of greenhouse gases entailing important implications for the energy sector in areas such as CO2 reduction, energy efficiency and promotion of renewable energy sources. Ever since, the European energy policy has been extensively widened and deepened by substantive binding legislation such as the 2003 directives regarding the opening of the electricity and gas markets through unbundling of the value chain, the promotion of renewable energy sources, and energy efficiency. In 2007, the European Council adopted a detailed action plan on energy policy and quantitative targets for a reduction of greenhouse gas emissions, involving an increase of renewable energy in the EU’s overall energy mix, and a reduction of overall energy use in the EU all by 20% by 2020.21 Further noteworthy legislation that has been passed includes the revision of the European Trading System (ETS), a third energy liberalisation package, the European Strategic Energy Technology Plan (SET-Plan), the Commission's Energy 2020 publication, and the aforementioned Roadmap 2050.

While we will discuss the above legislative acts in greater detail in Chapter III dedicated to the legal review of the EU's energy policy framework, we shall stress that today energy policy has become one of the essential competences of the European Union and is widely recognised as a policy matter best handled at European rather than at national level. This position has been consolidated through the introduction of an energy chapter (chapter XXI) of the Lisbon Treaty.22

The predominant position of the European Union is critical with regard to the deployment of Smart Grids, as a competitive European environment will be highly dependent on a common set of rules, standards and market mechanisms. The challenge to the legislator and the electricity sector will be to enable the transition from a largely out-dated analogue grid to a grid that embraces technological advancements of the information age. The deployment of Smart Grids is likely to become a game changer for the electricity market that will not be easy to achieve, neither will it come free of cost.

The challenges to be tackled are manifold and we can anticipate a number of battles that need to be fought, including the challenge of network operators to transform their business models from a volume-based models to a quality- and efficiency-based models; the threat of large central-station generators to loose market shares due to increased decentralized energy inputs and energy savings; the battle over common network, information and communication standards; the burden of investments with regard to the modernisation of the network; the need for close collaboration between distribution and transmission operators to ensure end-to-end electricity delivery; data protection; and the intensified involvement of the consumer in the energy market, to name only a few.

Thus, the European Union and its Member States are confronted with the complex task of providing a comprehensive regulatory framework for the Smart Grid deployment striking the right balance between efficient market mechanisms, command and control rule, incentive based regulation, while providing flexibility and promoting guidance and coordination. The liberalisation process of the energy market has not necessarily made this task easier, as we have moved over the past fifteen years from large vertically integrated entities operating as state monopolies to a fragmented and decoupled market structure, which today involves a large number of actors and stakeholders.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1.4. VERTICALLY INTEGRATED AND UNBUNDLED ELECTRICITY MARKETS

A smarter electricity system therefore requires a smart and dynamic energy policy that brings the needs of these different actors into convergence. Figure 1.5. illustrates the gradual transformation of the electricity system and the increasing complexity in networking all stakeholders in the value chain.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1.5. SMARTER ELECTRICITY SYSTEMS

The present research will investigate this complex construct located at the intersection of politics and economics on the basis of the existing legal framework, while highlighting its potential and the legislative gaps that need to be overcome. However, a pure legal review will merely permit a one-dimensional view of the problem, whereas we might miss out on other crucial aspects of the Smart Grid puzzle, such as the formation of a fair cost sharing model that strikes the right balance between short-term investment costs and long-term profits. It is therefore our ambition to expand the analysis to a proper understanding of regulation23 spanning from an extensive legal review to an analysis of market economics and the exploration of stakeholder views. This will allow us to look beyond the existing regulatory framework and incorporate insight from market actors, decision makers, and existing Smart Grid projects in order to grasp the full extent of the implications of the Smart Grid deployment.

RESEARCH QUESTION

The European Union is still in the early stages of the actual deployment of Smart Grids and we can only draw on preliminary findings from pilot projects and research that have been implemented across Europe. Throughout the past fifteen years we have witnessed a gradual liberalisation of the European energy market, politically driven by the European institutions motivated by the establishment of an internal market. Domanico describes the liberalisation process as incomplete, arguing that in spite of the great amount of legislative measures taken at EU level, the results are far from satisfactory.24 The Commission confirms this view in its latest benchmarking report identifying high electricity market concentrations in 15 out of 27 Member States.25 With a new wave of energy market regulation underway, and the impetus given by the prospect of an updated grid, the central question put forward by the present dissertation is:

'How is Smart Grid deployment and energy market liberalisation affecting the transformation of the European energy system?'

MORE LIBERALISATION, MORE DEPLOYMENT, MORE INTEGRATION Inspired by the Latin maxim omne trium perfectum the research is divided in three subsequent postulations that will assist answering the above research question in a systematic manner. The subsequent hypotheses are the result of an abductive reasoning process built on a preliminary exploration of Smart Grids and enable us to scrutinize the effects of different variables, such as market liberalisation, grid deployment, and economic integration. The hypotheses are ultimately used as the conceptual framework of the present dissertation, as they determine the structure of the analysis presented in Chapter V.

1. More liberalisation - The liberalisation of the energy market furthers the Smart Grid deployment.
2. More deployment - Smart Grid deployment furthers the liberalisation of the energy market.
3. More integration - Smart Grid deployment and market liberalisation will further the economic integration of the European energy market.

RELEVANCE

After fifteen years of energy market liberalisation in the European Union, we still identify high levels of market concentration in most EU Member States. The political decision to move towards a decarbonized economy requiring an update and upgrade of the existing grid infrastructure throughout Europe will potentially have tremendous implications for the future configuration of a European energy system. The President of the European Commission José Manuel Barroso declared that EU's growth strategy for the coming decade must be built on a smart, sustainable and inclusive economy. He stressed that smart, sustainable and fully interconnected transport, energy and digital networks are a necessary condition for the completion of the European single market in general, and for the completion of a genuine internal market for energy in particular.26 We are currently in a crucial phase with regard to the formation of a European policy framework for Smart Grids and the present research seeks to uncover possible paths of development along the value chain.

READER GUIDANCE

The dissertation is divided into six main chapters that will iteratively lead to a precise understanding, assessment and validation of a European legal framework for the Smart Grid deployment. Chapter I introduces the research framework and provides the reader with a concise overview of the technological, legal and economic context. Chapter II is dedicated to succinct literature review focused on regulation theory serving as an adequate analytical framework to the later discussion. In Chapter III we present a legal review of the past and present European energy policy and open up for a discussion on the existing legal framework. Chapter IV exhibits two national case studies, namely Germany and Denmark, fostering deeper insights on implementation. Chapter V presents the core analysis of findings and progressively tests the research's postulation regarding more liberalisation, more deployment, and more integration leading to a comprehensive answer of the research question. In Chapter VI we sum-up the key conclusions of the dissertation and offer our own recommendations for a best practice regulatory framework for the Smart Grid deployment in the EU.

4. METHODOLOGY

The boundaries between scientific research and a report can be blurry. However, the more systematic one deals with a problem, the greater the scientific value of the findings. Consequently, it is our ambition to transparently lay down the applied research method and process, so that the findings can be understood and assessed in relation to the methods employed. The investigation of Smart Grids as determinative variable for the transformation of the energy system is situated at the complex intersection of multiple academic disciplines including political science, law and economics. We reckon that the complexity of the observed phenomenon can best be disentangled through a holistic approach that supports a combination of the above disciplines, whilst providing a comprehensive, qualitative, hermeneutic research framework.

HERMENEUTIC APPROACH

Social science is to a great extent build on the interpretation of social phenomena. A science that works with empathic interpretation theory is called hermeneutic. The central principle of hermeneutics is that it is only possible to grasp the meaning of an action or statement by relating it to the whole discourse or world-view from which it originates.27 The key difference between positivism and hermeneutics is that positivism aims to describe and explain a phenomenon using quantitative methods, whereas hermeneutics seek to understand the wider picture and gain insight into the investigated phenomenon. Hermeneutics build on a constructivist paradigm, implying that there is no clear-cut objectivity or reality28, acknowledging a permanent evolution of the state of truth, which does not provide static grounds of absolute certainty or truth. Thereby scientific truth is to be understood as provisional and preliminary. Clarke and Dawson point out that the development of insight and understanding through observation and descriptions is the tasks of a hermeneutic researcher.29

QUALITATIVE APPROACH

The data processed in the dissertation is mainly of descriptive nature encompassing legislative acts, case studies featuring stakeholder interviews, and market literature, favouring a qualitative approach. Qualitative research methods differ from quantitative methods, as they do generally not rely on statistics or other methods of quantification often employed in natural sciences, but rather on one or more observations of different aspects of a problem area. Qualitative methods mainly adopt a smaller number of observations that can be justified by the fact that these methods provide an explicit description of a problem that would not be possible to execute in the case of large sets of observations. When trying to understand and uncover a phenomenon that one does not know so much about, a qualitative method is useful as it focuses on observations and measurements in the natural setting and provides a subjective ‘ insider view ’ and closeness to the data30. Contrarily to quantitative methods, this entails that greater importance is assigned to particular events and observations, and consequently we shall be aware of the possibility of differing interpretations of the study object and/or of its findings.

CASE STUDIES

The dissertation investigates how the Smart Grid deployment will influence the transformation of the European energy system. In order to comprehensively study the distinctive angles of the matter, we expand the research systematically from analysing the legal framework to assessing field evidence. Suitably, we have chosen to conduct two case studies featuring Germany and Denmark respectively, as they will enable us ' to answer how and why type questions, while taking into consideration how a phenomenon is influenced by the context within which it is situated'.31 The case studies will allow us to gain deeper insight into the challenges and opportunities that stakeholders in the two selected countries face and they will facilitate the collection of data from a variety of sources in order to illuminate the case. This ensures that the issue is not explored through a single lens, but rather a variety of lenses that allows for multiple facets of the phenomenon to be revealed and understood. We consider this proceeding to be useful, as it will permit us to balance the insights from economic theory and law, with inputs from practitioners. The case study approach and the related interviews will enable us to cooperate closely with the main Smart Grid stakeholders and have them ' describe their views of reality' 32 leading us to a better understanding of participants’ actions.

Yin underlines that ' as comparisons will be drawn, it is imperative that the cases are chosen carefully so that the researcher can predict similar results across cases, or predict contrasting results based on a theory '.33 We chose to investigate a Danish and a German case study in order to explore the differences within and between cases and possibly replicate findings across cases. Overall, the evidence produced from this type of study is considered robust and reliable.

INTERVIEWS

As mentioned above, one part of the empirical findings of the thesis is built on expert and stakeholder interviews, including key players from the electricity industry reaching from power producers, to regulators, grid operators and consumer interest groups from both Germany and Denmark. Interviewing in qualitative research is typically of unstructured or semi-structured nature and commonly ' coupled with other forms of data collection in order to provide the researcher with a well-rounded collection of information for analysis.'34

There are various forms of interview design that can be developed to obtain thick and rich data 35, whereof Gall, Gall, and Borg defined three main types, namely, (a) informal conversational interview, (b) general interview guide approach, and (c) standardized open- ended interview.36 It is our ambition to collect interview data that permits a high degree of convergence with regard to the field of investigation and we have therefore opted for the general interview guide approach. This interview type is ' more structured than the informal conversational interview although there is still quite a bit of flexibility in its composition '. Turner underlines that the advantage of the general interview guide approach is the ability ' to ensure that the same general areas of information are collected from each interviewee ', as the researcher can adjust interview questions and ask follow-up questions in order to achieve a more complete coverage of the area under investigation. However, we shall consider one of the potential shortcomings of the method, namely the fact that findings can be relatively unstable as they much depend on the researcher's ability to pose or follow-up questions.

Finally, we would like to underline our determination to achieve reliable interview findings through careful preparation and interview implementation. Some of the key safeguards that we put in place are the due preparation of the interview partners informing about the setting, and scope of the interviews; a neutral questioning approach based on tested interview questions making no assumption and providing the necessary openness to explore the topic; the preparation of follow-up questions and prompts in order to obtain optimal responses; a diligent interpretation of the collected data37. In order to mitigate the researcher bias problem, the German case interviews were conducted by Coen, whereas the Danish case interviews were conducted by Frast. This process was followed-up by an iterative review, where the non-participating person will respectively provide constructive feedback to the one in charge of the interviews.

The developed interview guide consists of ten open questions and three multiple choice scaling questions. The guide starts with a few general inquiries about Smart Grids and key stakeholders in order to examine how interviewees perceive the Smart Grid sector. The core of the interview guide consists of a series of questions that seek to gather critical data for the analysis and discussion of the three hypotheses and ultimately the research question. Last but not least, the guide encompasses questions fostering deeper insights and recommendations regarding a best practice regulatory framework for Smart Grids. The complete interview guide is included in the Appendix 1 of the thesis.

Following our objective to engage with well-prepared interview partners, interview questions were sent to the interviewees prior to the interview together with a brief description of our research subject and context (see Appendix 2). In the subsequent telephone interviews, follow-up questions and refined questions were asked to complement the questions of the interview guide, in order to mediate incomplete answers and hence guarantee consistency of the data set. The conducted telephone interviews were recorded to ensure an in-depth analysis and a high degree of transparency, whereof a summary of each interview is attached to the thesis (see Appendix 4-15). The full list of interviewed stakeholders can be found in Appendix 3.

RESEARCH STRUCTURE

The dissertation structure is based on a qualified research cycle that transparently lays down the different phases of the research and facilitates the processing and interpretation of the injected data. We will now succinctly introduce the central steps, while justifying their function and relevance for the progress of the study.

Firstly, we laid down the research topic in order to provide an initial understanding of the subject matter and of the interests at stake. Based on this incipient exploration that encompassed the study of a sensible amount of literature available within the research area, we have formulated a clear, explorative, and answerable research question. Through the use of abductive reasoning we have subsequently generated three hypotheses that iteratively guide the research process and conclusively lead to the answering of the research question. We acknowledge that generating hypotheses on the basis of abductive reasoning is not uncontroversial, but we identified this process to be legitimate in qualitative research and to be close to the nature of this research endeavour, due to the lack of informational completeness common to relatively new phenomena. Data collection is organised through the review of current European and national regulation and policy with regard to Smart Grids, opening up for the investigation and discussion of two case studies. The case studies are alimented with publicly accessible data about the respective Smart Grid deployment combined with stakeholder interviews that provide a deeper and thicker insight on the matter.

The collected data flows into the core analysis of findings, where we progressively test the research's postulation concerning more liberalisation, more deployment, and more integration. The research concludes with the synthesis of the findings providing an answer to how Smart Grid deployment and energy market liberalisation affect the transformation of the European energy system. Ultimately, we provide some perspectives on an adequate future European regulatory framework for Smart Grids and provide some reflexive comments with regard to the research cycle and process. Figure 1.6. illustrates the flows of the chosen research cycle.

Figure 1.6. RESEARCH CYCLE

Abbildung in dieser Leseprobe nicht enthalten

RELIABILITY AND VALIDITY

First of all, we shall acknowledge that social science is largely built on a constructivist paradigm embracing the concepts of a permanent evolution of the state of truth, which implies that there is no static ground of 100% certainty or truth. The scientific truth is thereby provisional, preliminary. There is an important divide in the scientific community regarding the question of reliability and validity, opposing qualitative researchers to quantitative researchers. Kirk and Miller identify three types of reliability referred to in quantitative research, namely: ' (1) the degree to which a measurement, given repeatedly, remains the same

(2) the stability of a measurement over time; and (3) the similarity of measurements within a given time period.'38 Joppe complements that ' validity determines whether the research truly measures that which it was intended to measure or how truthful the research results are.'39

However, we shall recall that the subject of the present dissertation favours a qualitative approach and that the concepts of reliability and validity as described above are considered inadequate by qualitative researchers.

In a qualitative paradigm reliability and validity are conceptualized as trustworthiness, rigor and quality, which is achieved through a clear announcement of methods and rules that regulate the findings. Rules and methods must be laid down transparently so that anyone else can replicate the study and conclude on the same level results. Patton states that reliability is a consequence of the validity in a study 40 and advocates the use of triangulation by asserting that ' triangulation strengthens a study by combining methods. This can mean using several kinds of methods or data, including using both quantitative and qualitative approaches '.

Creswell & Miller define triangulation as ' a validity procedure where researchers search for convergence among multiple and different sources of information to form themes or categories in a study '.41 As scrutinized in the above section the present master thesis seeks to achieve validity and reliability through a meticulous and transparent research structure that draws on different academic fields and combines a solid set of qualitative methods in the analysis of the different types of data used. We believe that the outlined procedure presents a compelling research framework that eliminates the researcher's bias and increases the accuracy of the findings.

The scope of the thesis allows for generalisation of the findings, especially with regard to the analysis conducted at a European level, whereas the findings of the two national case studies allow the derivation of a general trend, without claiming full representativeness as the scope of the case studies is nonetheless limited.

DELIMITATIONS

First of all, we shall recall that the scope of the present dissertation is limited to the exploration of how Smart Grid deployment and energy market liberalisation impact the transformation of the European energy system. In doing so, we consider the pertinent legal framework for Smart Grids and the practical implications on the basis of national case studies. We acknowledge that there are multiple challenges that need to be tackled in order to accelerate the Smart Grid deployment, whereof we shall mention some of the central challenges exposed by the European Commission42, namely to

a) develop common European technical standards;
b) ensure data protection for consumers;
c) establish a regulatory framework to provide incentives for Smart Grid deployment;
d) guarantee an open and competitive retail market in the interest of consumers;
e) provide continued support to innovation for technology and systems

The dissertation will address the question of an adequate regulatory framework for the Smart Grid deployment and tackle the issue of competitive retail markets, whereas the challenges mentioned under point a), b) and e) will only be discussed peripherally.

As mentioned in the very introduction, the means of energy production are as diverse as the benefits and the shortcomings of the employed technologies, whereof we will not discuss in detail the potential of one technology over another. Further, we will not elaborate on any technical engineering aspects, nor will we deal with the issue of gas, even though the challenges are similar and the proposed solutions are comparable.

Further, it is imperative to point to some of the limitations of the study that are contingent upon the characteristics of design and methodology chosen to generate the results of the study. As mentioned earlier we acknowledge certain constraints with regard to the generalizability of the findings, especially with respect to the case studies as they have a limited geographic and political scope. We shall further notice that the European Smart Grid legislative framework is fairly recent and constantly developing, whereof we aspire to make a vital contribution to the shaping of such a framework. Nonetheless, we shall note that this is work in progress and that the political decisions taken in the next months might alter the findings of the thesis. Also the lack of actual Smart Grid deployment required a largely theoretical investigation of the second hypothesis, which we acknowledge in Chapter V.

Finally, we recognise the bias of self-reported data, especially with regard to the conducted stakeholder interviews, as they have not been independently verified by external sources. In other words, we have to take what people say during the interviews at face value acknowledging the risks of selective memory, telescoping, attribution, and exaggeration.

With regard to the circumstantial conditions, we shall note that the research has been conducted within a six-month period, which obviously entails some longitudinal effects, notably the stability of the case study samples with regard to the due delivery date of the thesis. Last but not least, it seems natural to mention a potential cultural bias, inflicted by a societal climate and political quest to find compelling solutions to the contemporary energy challenges and the pursuit of a sustainable energy policy.

CHAPTER II - THEORY OF REGULATION

1. INTRODUCTION

In this chapter, we will provide a frame of reference for regulation, including a terminological review allowing an exploratory definition. We will further review the dominant approaches to regulation theory by contrasting public interest theory of regulation with the Chicago theory of regulation. In addition, the chapter presents a brief review of the economics of natural monopolies such as utilities, and their regulation.

Acknowledging the magnitude of definitions for regulation and the even greater amount of diverging stances on regulation, we assert that regulation is a distinct form of government intervention setting rules for a certain area of society. We certainly recognize the capacity of social or business environments to enact values and norms that have regulatory effects, whereas for the purpose of this dissertation we will focus on state driven efforts to control or guide society and markets. Accordingly, regulation is to be considered as a tool of governance embracing a wide range of instruments including legislation and bureaucratic and administrative rule making. When regulation restricts behaviour and prevents the occurrence of undesirable activities we refer to the red-light concept, whereas when it enables or promotes a certain behaviour we talk of the green light concept.43

Baldwin, Cave and Lodge define regulation as:

1. a specific set of commands, fostering the idea of the promulgation of a binding set of rules that are exercised by a competent agency in the regulated field.
2. deliberate state influence, referring to all state actions that are enacted to control a social or business environment or behaviour, through command-based regimes, economic incentive regimes or market-based mechanisms.
3. all forms of social or economic influence, addressing the above-mentioned coercive or regulating effects arising from both state-based intervention and norms or morals of a given social or business environment.

Adding to this all-encompassing definition, we differentiate between social and economic regulation as proposed by Viscusi, Vernon and Harrington44, whereof social regulation mainly addresses matters related to the environment, labor conditions, consumer protection, and economic regulation is mainly concerned with the market structure and the behaviour in the market. For the present dissertation we will leave social regulation aside and further explore economic regulation, as it is most applicable for the field of energy market liberalisation, due to its focus on natural monopolies and market structures with limited or excessive competition. Within the area of economic regulation, we refer to structural regulation in cases where the legislator seeks to regulate the market structure through the application of e.g. entry and exit rules, whereas regulative efforts to control behaviour in a market through e.g. price controls, rules against advertising or minimum quality standards are characterised as conduct regulations.

2. REGULATION IN THE EUROPEAN UNION

Regulation lies indeed at the very heart of the European Union that since its creation has developed a sophisticated body of legislation fostering economic development, environmental protection and the improvement of social standards, notably through the completion of the internal market.45 The supranational character of the European Union is indeed a showcase of a regulatory state that acts across various levels of government, with standard-setting, behaviour-modification and information-gathering separated between different organizations at different levels of government.46 Law making at the European level is a rather complex endeavour as the European treaties offer multiple options of legal instruments, which on one hand provides flexibility for governance, but on the other hand lacks a clear order or structure indicating the superiority of one instrument over the other. We will briefly recall the main legal instruments that are at the disposal of the European legislator:

- Directives constitute the major share of European law. Directives define results to be achieved, but leave Member States the choice of methods on how to transpose a given act into national law. Directives thereby provide flexibility to take national particularities and contexts into account, yet their defined results are binding. We shall note that the use of directives as a legal instrument has been criticized due to a number of shortcomings, such as gold-plating, the late and/or incorrect implementation by Member States to name only a few.
- Regulations can be passed by the European legislator and are directly applicable in all EU Member States. Regulations have the advantage that they guarantee the same rules across all Member States and as they require no transposition, there is no problem of e.g. gold-plating. Some scholar argue that in some cases the replacement of directives with regulations can simplify European legislation, whereof critics complain about the lack of flexibility and the emergence of a European super-state.
- Soft Law. Beyond the above-mentioned legal instruments the European Union produces a wide range of soft law devices including policy papers, white papers, recommendations, opinions etc. that are not of binding character. Yet, they function as guidelines and orientation for Member States.
- Alternative instruments have been developed by the EU in the pursuit of tools to encourage 'better regulation'. These instruments include the use of impact assessments, administrative simplifications measures, reviews, revisions or sunset clauses in the legislative proposal, self-regulation of private parties, co-regulation entrusting competent private parties the attainment of policy objectives, monitoring and evaluating reinforcing credibility of self-regulation practices and co-regulation mechanisms.

As a response to the complex and lengthy legislative process, we observe since the beginning of the century a growing emergence of soft law in particular through the use of the so-called Open Method of Coordination (OMC). The OMC accommodates the varieties of national institutional frameworks, while exercising a certain benchmarking pressure on Member States. Although the OMC’s effectiveness has been questioned, its processes including common objective and goal setting, national action plans, peer reviews among Member States and the re-evaluation of national policy-experiences, have emerged as a practical alternative to hard law.

Hence, the EU regulatory state relies increasingly on its capacity of coordination, accommodation, and toleration across all levels of national and European government. This development has principally been assisted by a growing institutionalization of EU-level agencies and regulatory networks that support the coordination of national regulatory agencies and shape EU-level decision-making.47 The dynamic nature of such a multi-level European regulatory framework has nevertheless inherent limitations that are exposed by the increasing tensions between the accommodation of national diversity and demands for consistency across borders, especially in industries that have witnessed growing cross-border ownership.

[...]


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47 Baldwin R., Cave M., Lodge M. 2012. Understanding Regulation: Theory, Strategy and Practice, Oxford University Press, 2nd edition, New York, p.407

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Details

Title
Transforming the European Energy System
Subtitle
An Exploration of the Relationship between Smart Grids, Energy Market Liberalisation and European Energy Market Integration
College
University of Copenhagen
Course
International Law & Economics
Grade
1,0
Authors
Year
2012
Pages
166
Catalog Number
V338084
ISBN (eBook)
9783668297661
File size
3128 KB
Language
English
Notes
Note 12 (dänisches Notensystem) = 1,0 (deutsches Notensystem)
Tags
Smart grids, european energy market, european law, energy market liberalisation, energy efficiency, e-mobility, energy infrastructure, smart living, smart home, dynamic pricing, energy transformation, energy market transformation, renewable energy
Quote paper
Leonard Coen (Author)Jean-Luc Frast (Author), 2012, Transforming the European Energy System, Munich, GRIN Verlag, https://www.grin.com/document/338084

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