Transmission network reliability incentives (2)

This entry was added to http://www.reckon.co.uk/headlines-franckblog on 7 December 2004.
Full blog table of contents available at Contents | viewpoint: Franck.

Ofgem has published its final proposals for an "interim" financial incentive scheme for electricity transmission network reliability:

http://www.ofgem.gov.uk/temp/ofgem/cach…cmsattach/9472_tx_incentives.pdf
(51 pages)

Short-term problems

Taking the points of my previous post in turn:

Calibration. Ofgem effectively acknowledges that £39k/MWh is a bit high for a value of lost load parameter. Apparent justifications for using such a figure include that "estimates of the value of lost load would vary according to the time and location of an interruption, and the type of customers affected" and "The range of estimates for the value of lost load is very wide". Sure enough, but does that wide range really include £39k as a realistic estimate or average value? The key point seems to be that the scheme is "designed and calibrated to provide NGC's management with a sufficient incentive to focus their attention on maintaining and improving network reliability". Does this mean that Ofgem thinks that there are such principal-agent problems within NGC's corporate structure that you need to feed a massive financial incentive at the corporate level in order to achieve reasonable effort on the part of managers? I think that the true interpretation remains that Ofgem wants to make sure it does not get blamed if something goes wrong on the network, and that this perception/political objective has outweighed its duties to encourage economy — so that it won't mind a bit of gold-plating so long as it is not too blatant.

Deadband. Someone apparently objected to the asymmetric deadband, so it will be a symmetric one — this is essentially a way of making the target slightly less demanding, without quite saying so (it presumably also affects the incentive rate). It seems no-one seemed to mind the adverse incentive effect of a deadband, or to be concerned about the usefulness of a 10 per cent deadband to reduce risk or whatever when the measure to which the deadband applies has far greater typical volatility.

Cap. The word cap does not appear in the document. Presumably everyone is happy. I suppose that the chance of cancelling out the incentive if something goes seriously wrong sort of makes up for the extreme power of the incentive otherwise...

Weather exclusion. No change. Am I wrong to suggest that the arrangement encourages NGC to "facilitate" a 51st fault on a bad day?

Connections exclusion. No change. Still blunt.

Generation shortage exclusion. No progress. How to measure it is left as a problem for whoever is supposed to implement the licence condition if the issue arises.

Longer-term problems

Ofgem emphasises (although not quite in these words) that this is an interim arrangement to deal with the political flak following the London and Birmingham cuts; and that the 2005 transmission price control review is the real opportunity to design a sustainable scheme. So no progress on future target settings, rolling (or not) retention of improvements, or Scotland.

Transmission network reliability incentives (2)

Short-term problems

Longer-term problems

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