World Forum of Energy Regulators 2018 Inauguration, Cancún, Mexico. Photo Credits: Mexico Business Publishing For the first time since its inception in 2000, the World Forum of Energy Regulators took place in Mexico, choosing the country’s southern city of Cancun, Quintana Roo for its seventh edition. This critical triennial gathering of energy regulators and experts from around the world was the golden opportunity for the country to highlight both the milestones and prevailing challenges that Mexico’s Energy Reform faces from a regulatory standpoint. Right after the event’s official inauguration by Pedro Joaquín Coldwell, Minister of Energy, experts gathered on March 21 at Cancun’s International Convention Center to tackle how energy regulators can respond to disruptive technologies and policies in the energy sector.
WFER 2018 Panel – Regulators’ Response to Disruptive Technologies and Policies
How do you enact regulations that accommodate disruptive change? Martin Crouch, Senior Partner at UK’s Office of Gas and Electricity Markets (OFGEM), highlighted the “regulatory sandbox” OFGEM developed, which allows for the “trialing of innovative business products, services and business models that cannot currently operate under the existing regulations.”
Trials are run for a set period of time with a limited number of customers to test out their scalability and provide guidance as to how the regulatory framework can adapt, enable and foster these innovations. Crouch stressed the necessity of harnessing the advantages of the internet age to transition from “First Generation Regulation”—restricted access, lack of data—to “Regulation 2.0” for the energy sector—high transparency, high accountability and open data. All this is designed to empower consumers and respond to their needs while at the same time opening the door to new business models and market opportunities. This balances predictability with change, cost and value-reflective pricing, and drafting outcome-centered principles to guarantee consistency.
Tatsuo Hatta, Chairman of Japan’s Electricity and Gas Market Surveillance Commission, shared with the audience Japan’s experience in drafting rules and regulations that promoted fair competition in Japan’s electricity industry. In particular, Hatta shared valuable insights in coping with an increasingly renewable energy mix and providing stable power output and beefing up balancing power capabilities to answer to the inherently intermittent nature of renewable energy. The Asian nation directed its efforts toward developing a three-pronged approach to reach its goals:
Using Demand Response as Balancing Power. Following Japan’s 2011 earthquake, the country realized the importance of demand response, which is used by Transmission System Operators (TSOs) since 2017. Hatta says Japan installed 28GW of capacity using pump-up dams originally intended to support nuclear power that are now being used to balance PV intermittency.
Transmission tariff system reform. On July 1, 2012, Japan enacted a Feed-in Tariff (FIT) scheme for renewable energy, according to which electric utilities are obliged to purchase electricity generated from renewable energy sources through a fixed-period contract at a fixed price. The costs of purchased electricity generated from renewable energy is transferred to electricity customers all over Japan in the form of a nationwide equal surcharge, paid in proportion to electricity usage. In addition, a charge discount is applied in high-demand sites to incentivize power generators to locate in said sites.
Strengthening interconnections. This prong is essential in securing stable supply and absorbing renewable intermittency at a time when the country’s nuclear power plants are being progressively shut down and renewables are set to take the lion’s share of the country’s energy mix.
Dealing with Disruption
Disruptions in the energy sector abound as new technologies are developed at a quicker pace than in the past and the time-lapse between lab testing and applicable scalability shortens. Kevin McIntyre, Chairman of the US’ Federal Energy Regulatory Commission, focused on three of these disruptions, posing major regulatory challenges.
The Revolution in Natural Gas Production Technology. Hydraulic Fracturing (Fracking) and the constant improvement in directional drilling and seismic modelling contributed to significantly increased production of natural gas in recent years, creating a dire need of additional infrastructure to move natural gas from production to consumption points. Gas pipelines-related legal matters have developed a large legal body since the 1930s in the US, making the increase in proposals of innovative natural gas transportation methods and technologies challenging to process dynamically. In addition, making sense of these propositions’ applications and the industry’s response of gearing up toward these project proposals demands equally dynamic, effective and inclusive regulatory responses, as well as establishing proper environment-preservation processes. “These are sensible decisions and we are taking a fresh look at formal policy to effectively assess project needs,” McIntyre says.
Energy Storage and Distributed Generation. These technologies are making their way into the grid, requiring regulators to ensure power coming to the grid complies with statutory requirements.
Cybersecurity. McIntyre insisted on the need of a constant, vigilant oversight. The US’ Federal Energy Regulatory Commission works closely with other government entities both at state and national level, such as the US Department of Energy and is eager to share experiences to foster best practices in cybersecurity.
McIntyre saluted Mexico’s Regulatory Reform, calling it a “bold step, an example of courage and embodying a positive vision of the future.”
CRE: Mexico’s Energy Integrator
What separates good regulation from bad regulation? CRE’s President Commissioner, Guillermo García, stated that energy regulation true to its purpose “corrects market failures, acknowledges risk and uncertainty, is periodically evaluated, can always be challenged under an improvement-based logic, and is independent from special interests.”
García reminded the audience that the energy sector is continuously impacted by disruption, as attested by the US’ transition from coal to oil, the development of pipeline networks to improve transportation inefficiencies as early as 1879, and electricity’s war of currents between Edison’s Direct Current and Tesla’s Alternative Current. Today, the industry is coming to grasps with automatization, blockchain technology, open data applications and artificial intelligence, to name a few. “The aim is to optimize processes and devise new approaches to problem-solving and enhancing user experience. In the future, disruptions will be faster, stronger and bigger,” García added, calling for regulators to evolve toward being capable of efficiently addressing ongoing macro-trends, expand their capabilities and skillsets, become more flexible as organizations, stand ready to address the industry’s black swans and engage with consumers like never before.