EDI Quarterly Vol. 3 No. 3

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EDI Quarterly Volume 3, No. 3, September 2011

Editor’s Note

Q

by Jacob Huber

A Few Changes Welcome to the third edition of the 2011 EDI Quarterly! This version includes diverse contributions on natural gas market models and

Contents

their implications, trade-offs between outages and investments in the electricity grid, smart grids and electric vehicles, and CCS. The discussion of CCS includes an article on issues of public acceptance and one related to the potential of its coupling with biomass. Enjoy these pieces and do not hesitate to contact the respective authors or myself should any additional information be required.

Additionally, we would like to use this space to announce that future issues of the Quarterly will be themed, in order to make its contents more coherent. One topic will be chosen for the Quarterly itself, and another will be chosen from those included under the umbrella of the EDIAAL programme (EDI’s project on energy transition). For the next edition of the Quarterly (to be published in December 2011), unconventional gas is chosen as the theme. As a complement, green gas has been chosen as the EDIAAL topic. Should any of our readers be interested in making a contribution in either of these areas please contact us at the address you can find below. quarterly@energydelta.nl

1 Editor’s Note: A Few Changes 2 Large Potential for

Negative CO2 Emissions

Through Biomass Linked

with Carbon Capture and Storage 4 Public Acceptance A Reality Check for CCS Projects 7 The Role of Electric

Vehicles in Future

Electricity Systems

9 Social Optimal

Investment in Reliability:

Dealing With the

Social Costs of Electricity Outages 11

Quantitative Natural Gas Market Models: No Story Without Numbers and No Numbers Without a Story

15 Books, Reports, and Conferences 1

Large Potential for Negative CO2 Emissions Through Biomass Linked with CCS Combining biomass with Carbon Dioxide Capture & Storage could result in an annual global potential of up to 10 gigatonnes of negative CO2 emissions in the year 2050. This is one of the main findings of a study commissioned by the IEA Greenhouse Gas R&D Programme. This paper discusses the basic methodology and main results of that study.

Carbon Dioxide Capture, Transport and Storage (CCS) can potentially reduce emissions of CO2 considerably over the next few decades.

It is considered a key technology, amongst many other greenhouse gas (GHG) emission abatement options (such as energy savings and renewable energy technologies), enabling the achievement of stringent climate targets.

Biomass combined with CCS is one of few options that may achieve ‘negative’ greenhouse gas emissions CCS is often associated with fossil energy conversion, but can also be combined with bio-energy conversion, dubbed Bio-CCS. Short-cycle carbon is then harvested and stored deep underground. Effectively, this suggests that carbon dioxide is removed from the atmosphere leading potentially to negative GHG emissions (see Figure 1). This brings BioCCS into a select group of technologies that make an actual reduction of global CO2 concentration in the atmosphere possible. In fact, several mitigation scenarios show that biomass, in combination with CCS, is likely to be required to achieve a low (i.e. 350 ppm) atmospheric concentration of CO2. It is thus of eminent interest to create a good understanding of global and regional potential of biomass and CO2 storage capacity. In addition, it is important to assess the manner in which that potential may be utilized in Bio-CCS technologies.

Figure 1 - Feeding biomass to energy conversion processes for electricity or biofuel production with subsequent capture and storage of CO2 from these sources may result in a negative greenhouse gas balance. The combination actually removes CO2 from the atmosphere as the biomass extracts CO2 from the atmosphere during its growth and the CCS removes and stores the CO2 that is formed in the energy conversion process.

Joris Koornneef Energy and Climate Consultant, Ecofys

Ameena Camps Senior Project Officer, IEA GHG

There is currently no comprehensive overview available of the technical and economic differences between fossil fuel and biomass-based energy conversion technologies in combination with CCS. Moreover, an overview of global and regional biomass potential matched with global and regional CCS storage potential has not yet been published.

This study aims to fill these knowledge gaps and provides a first order assessment of the potential for Bio-CCS technologies for the years 2030 and 2050.

Six Bio-CCS technologies for the power and transport sector Multiple sectors and technologies have been proposed where biomass conversion and CCS can be combined. The two major sectors we focus on here are large-scale electricity generation and biofuel production.

We identified six promising technology routes in these sectors. This includes biomass (co-)combustion and (co-)gasification for power production, and biomass conversion to bio-ethanol and biodiesel: 1.

Pulverized Coal fired power plant with post-combustion capture (PC-CCS) and with direct biomass co-firing of 30% in 2030 and 50% in 2050; 2.

Circulating Fluidised Bed combustion power plant with post-combustion capture (CFB-CCS). 100% biomass fired; 3.

Integrated Gasification Combined Cycle with co-gasification of biomass (30% in 2030 and 50% in 2050) and pre-combustion capture (IGCC-CCS); 4.

Biomass Integrated Gasification Combined Cycle with 100% biomass feed and pre-combustion capture (BIGCC-CCS); 5.

Advanced production of bio-ethanol from lignocellulosic biomass through hydrolysis and fermentation. The fermentation step yields a high purity CO2 stream which can be made available for transport and storage through drying and compression; 6.

Biodiesel based on gasification and Fischer Tropschsynthesis (FT biodiesel). Combining CCS with biodiesel production is interesting because pre-combustion CO2 removal is already part of the production process.

Figure 2 - Steps in the six Bio-CCS routes. Per step, the options researched in this study are indicated.

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In Figure 2, we show the steps in the full chain of the Bio-CCS routes that are analysed in detail. We have analysed the technical, realisable and economic potential for each of these routes.

There is a large technical potential for Bio-CCS, but is this realistic and economically viable?

To determine the technical potential, we combine existing studies on biomass potentials (in EJ/yr primary energy) and CO2 storage potentials (in total Gt CO2), see Figure 3. The net energy conversion efficiency (including the energy penalty for capturing the CO2) and the carbon removal efficiency of the Bio-CCS route then determine the technical potential for biomass CCS in terms of primary energy converted, final energy and net (negative) GHG emissions. The global potential is determined by the global storage and biomass potential assuming that inter-regional transport of biomass and CO2 is allowed.

We then assess per region whether CO2 storage capacity or availability of sustainable biomass is the limiting factor.

AFME, 1117

OEU, 102

ASIA, 640 OCEA, 33

Figure 4 -Global technical, realisable and economic energy potential (in EJ/yr) per Bio-CCS route for the year 2030 and 2050. Note that potentials are assessed on a route-by-route basis and cannot simply be added, as they may compete and substitute each other. ‘Coal’ is only applicable for the co-firing routes.

The net greenhouse gas balance is calculated by the sum of direct and indirect non-biogenic GHG emissions and the amount of biogenic CO2 stored, which counts as negative emissions.

Results for the technical, realisable and economic potentials expressed in energy (primary and final) and net greenhouse gas emissions are provided in Figure 4 and Figure 5.

LAAM, 212 NOEU, 714 NOAM, 8332 Figure 5 - Greenhouse gas emission balance (in Gt CO2 eq./yr) for the global technical, realisable and economic potential per Bio-CCS route for the year 2030 and 2050. Note that potentials are assessed on a route-by-route basis and cannot simply be added, as they may compete and substitute each other.

OEU

Primary potential (in EJ/yr)

140 120

NOAM

100 NOEU

80 60

LAAM

40

OCEA

20

ASIA

0 2030

2050

AFME

Biomass potential

Figure 3 - Regional breakdown total CO2 storage potential (top) in Gt CO2 and annual technical biomass potential (bottom) in primary energy. Africa & Middle East (AFME), Asia (ASIA), Oceania (OCEA), Latin America (LAAM), Non-OECD Europe & the Former Soviet Union (NOEU), North America (NOAM) and OECD Europe (OEU).

Deploying the full technical biomass and storage potential equates to up to 59 EJ (16 PWh) of bio-electricity or 47 EJ (1.1 Gtoe) of biofuels.

This is about 90% or 25% of the global production of electricity and liquids fuels in 2007, respectively. This potential is greatest for the IGCC co-firing route and the lowest for the advanced generation of ethanol.

The technical Bio-CCS potential is limited in most regions by the supply of sustainable biomass. For most regions there is likely to be enough storage capacity to store the captured CO2, with the exception of Oceania.

The potential for negative GHG emissions increases towards 2050, as both biomass supply and capture efficiency is estimated to increase.

The coal co-firing rate is also an important factor. This affects the net GHG balance (in CO2 eq.) for the co-firing routes as more emissions from fossil origin are emitted in the Bio-CCS chain deteriorating the GHG balance. The negative emissions are the largest, up to 10.4 Gt of CO2 eq. annually in 2050, for the 100% biomass routes: BIGCC and CFB with CCS. The negative emissions up to 5.8 Gt of CO2 eq. for the biofuel routes with CCS are lower because a smaller fraction of the CO2 is captured and stored.

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Early implementation of Bio-CCS technologies and retrofitting existing plants is integral to the achievement of negative emissions.

The realisable potential is factually a limitation applied to the technical potential by including the demand for final energy, capital stock turnover and possible deployment rate. The deployment rate over time is constrained by the possibility of applying Bio-CCS to existing energy conversion technologies and the retirement rate of installed capacity.

The realisable potential for the Bio-CCS routes producing bioelectricity ranges between 4 and 20 EJ/yr in 2050. Negative GHG emissions associated with these potentials range between 0.8 and 3.2 Gt CO2 eq./yr in 2050. The largest realisable potential for the medium and long term is found in the scenario for the PC-CCS co-firing route.

In this route, all new power plants are assumed as being equipped with CCS after 2020, while existing power plants and newly added power plants without CCS may be equipped with CCS at a later date. This advantage over, for instance, the dedicated and gasification routes explains why the realisable potential is considerably higher for this route.

The realisable potential for both biofuel routes is equal at 2 EJ/yr in 2030 and 8 EJ/yr in 2050, which is a small fraction of the technical potential and is likely to be a conservative estimate. In 2050, the potential in annual negative emissions is between 0.2 and 1 Gt CO2 eq.

It is important to note that both extending the lifetime of already installed capacity and extending the implementation date of CCS will have negative influence on the (annual and cumulative) potential for Bio-CCS technologies.

A high CO2 price in combination with low cost biomass is a key driver for Bio-CCS technologies.

The economic potential is determined by combining the price of biomass resources with the costs for biomass conversion and CCS and comparing the production costs with those of fossil references. The economic Bio-CCS potential is then the total amount of final energy that can be produced at lower cost than the selected fossil reference technologies. The cost of producing electricity and biofuels increases when adding CO2 capture. This is due to the increase in capital cost and energy requirement for capturing CO2. Transport and storage cost also add to the production cost. The CO2 price may offset this higher production cost.

With a CO2 price of 50 â‚Ź/tonne, the economic potential for Bio-CCS technologies is up to 20 EJ (5 PWh) for bio-electricity routes (IGCC and BIGCC) or up to 26 EJ (610 Mtoe) for the Fischer-Tropsch biodiesel route. The greatest economic potential is found in the gasification-based routes. The smallest economic potential is found in the PC and CFB routes; about 1 EJ/yr for the year 2030. One third to half of the technical potential can be considered economically attractive, yielding a potential of up to 3.5 Gt of negative GHG emissions for the bio-electricity routes or up to 3.1 Gt for the biofuel routes. The bio-ethanol route shows a low economic potential in 2030 of 1.2 EJ/yr, but grows significantly to about 13 EJ/yr in 2050. This equates to 0.4 Gt of net negative GHG emissions, which is the lowest economic potential for all six routes in the year 2050. Although the overall potential is estimated to be relatively low, bio-ethanol with CO2 capture is found to be most promising for the short term as it allows capturing CO2 at relatively low costs.

Conclusion and outlook Bio-CCS technologies may play a considerable role in the future of a low-carbon energy supply. Its technical potential in 2050 is estimated to be large; up to 10 Gt annually compared to 31 Gt of global energyrelated CO2 emissions in 2010. However, this potential will certainly be a complex task to deploy in reality. The analysis also makes clear that this potential for negative emissions will not be deployed without a clear economic incentive, i.e. a stable CO2 price higher than the current levels.

This study is now being complemented by adding two routes for the production of biogas combined with CCS. Gasification combined with methanation and anaerobic digestion seems to be promising technologies that also can be combined with CO2 capture. Biogas can be produced to meet current natural gas specifications via upgrading.

In both routes, a final step to meeting specifications is the removal of CO2, which would then be available for geological storage. The produced biogas can be transported using the existing natural gas infrastructure. Both routes will be analysed following a similar methodology as described here.

Any questions or comments are welcome. j.koornneef@ecofys.com

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Public Acceptance - A Reality Check for Carbon Capture and Storage Projects Carbon capture and storage (CCS) technology is increasingly recognized around the world as a potential means for climate change mitigation. However, in line with all new and large-scale technologies, CCS is no exception in that it is often met with public scepticism.

Most scientists agree that worldwide CO2 emissions have to be reduced at least by half by 2050 in order to stabilize the CO2 concentration at acceptable level to address climate change issue. In order to make this a reality, the energy sector in particular needs to be largely decarbonised. In this, CCS could play a significant role.

CCS is not a single technology, but refers to a range of technologies that aim to capture CO2 emissions from fossil fuels either before or after fuel combustion in power stations, or from heavy industrial processes (steel, cement, etc.). Afterwards this captured CO2 is compressed, transported and permanently stored in underground geological formations (typically more than 800m deep), such as empty oil and gas fields or saline aquifers . Besides the storage option, captured CO2 can also be used as a feedstock in the chemical industry, or as a fertilizer for green-house agriculture and other applications (e.g. algae cultivation).

Due to many uncertainties, particularly regarding the safety of CO2 transportation and storage, CCS does not always seem to be trusted fully by the public. Public acceptance of CCS currently represents one of the major challenges for the further deployment of this technology. CCS does not have a long-lasting implementation history, nor a representative data set which can be used to demonstrate the potential risks posed by underground storage of CO2 to the public.

Various studies have been conducted on public perception of CCS, recently also by the European Commission. The results of these studies reveal that public awareness of CCS and its climate policy context needs to be significantly raised. However, the questions of how to best address the local population facing nearby CCS activity, and how to reach compromises between the local public, the public authorities involved, green NGOs, and companies who plan to deploy CCS in a particular area quite often remain very difficult to answer. These and other issues related to public awareness of CCS technology are discussed in this paper.

Nadja Kogdenko Junior Energy Analyst, Energy Delta Institute

In total, around 13,000 persons participated in this survey. The results revealed that current public awareness of CCS technology is low, only 10% of the respondents had heard of CCS and knew what it was (see Figure 1). The highest level of awareness was among respondents from the Netherlands (54%), which could partly be explained by the Barendrecht CCS case (discussed later in the article). The survey also revealed that citizens of the six countries where CCS demonstration projects are planned have higher levels of awareness regarding CCS technology than people from the others.

Figure1. Respondent’s awareness of CO2 (EC, 2011)

Another interesting result from this survey was that almost half of the respondents did not know what CO2 is. 50% of respondents were able to indicate correctly that it is carbon dioxide. However, 11% indicated that it is a highly toxic gas. The biggest part of respondents (85%) also indicated that they would be rather worried if CCS technology and the underground storage site of CO2 would be located within 5km of their home (EC, 2011).

Regarding people’s trust in sources of information, respondents were sceptical of information that they considered originating from industry or government; universities and research institutions were mentioned as the most trusted parties (see Figure 2).

Public awareness of CCS technology in European context Since 2004 various studies have been performed in Europe, including the Netherlands , in order to estimate the level of public awareness of CCS technology. The most recent survey (Special Eurobarometer 364) was performed by the European Commission in March 2011, in 12 Member States: Bulgaria, Czech Republic, Germany, Finland, France, Greece, Italy, The Netherlands, Poland, Romania, Spain, and the UK. It is important to mention that several CCS demonstration projects co-financed by the European Union are currently underway in six of these 12 Member States (The Netherlands, the UK, Italy, Spain, Germany and Poland). Questions about: the benefits of CCS, trust in different information sources, the location of storage sites, and other issues were asked to the audience.

Figure 2. Public trust in information sources (EC, 2011)

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This survey represents a remarkable information source for policy makers with regard to the communication aspect of CCS technology to the public. It shows that the level of people’s awareness needs to be raised and more information from trusted sources on CCS technology, particularly about the risks and safety precautions associated with CCS storage, needs to be communicated in order to move forward with CCS deployment.

caused much debate between several parties, who were against (mainly municipal government) and in favour of the project (project developers and national government). This eventually delayed (possibly indefinitely) the entire project. These debates began immediately after the project was presented to the local community in early 2008. Until present ( July 2011), this project is officially still on-hold due to a strong public opposition.

In order to understand which factors play an important role in shaping public perception and attitude towards new technologies, several other studies were performed by various European researchers. The research of Pitzner et al. (2011), based on a survey conducted in six European countries: Germany, Greece, The Netherlands, Norway, Romania and the UK with more than 6000 participants, shows interesting results.

The authors conclude that socio-demographic characteristics (gender, age, level of education), type of information provided, and pre-existing attitudes to energy source for power generation (e.g. coal, nuclear energy, etc.) are the main factors responsible for creation of a particular public awareness and perception of CCS. Their study concludes that women, younger and also older people, and those without a higher education in general show lower levels of knowledge and awareness of CCS than others.

Feenstra et al. (2010) performed detailed research on what actually happened in the Barendrecht CCS case, indicating key issues and drawing lessons to be taken into consideration in future planning of other CCS projects. According to the results of this study, there were several characteristics of the communication between the stakeholders which increased opposition to the project. First, there was a grant allocated by the national government via a tender procedure for the project to take place in Barendecht. However, this procedure did not incorporate consultation of local stakeholders or examination of their opinions of a CCS demonstration project in their community. The project was presented by Shell to the local people as a final plan. In addition, in the initial stage of the project, no open dialogue existed between the project developers (Shell and national government) except from the formal tender procedure. This led to a situation in which the entire project was interpreted by many as Shell’s project and not as a mutual project of different stakeholders. In this way, the feeling of “us and them” increased, making Shell an easy target for opposition.

Various experiments conducted during that study also revealed that people who have very little information about CCS, can be strongly influenced by new (even limited) information. More specifically, initial perception of people about a particular technology can change in a negative direction in case they are faced with new negative information about the CCS technology, but it also can change into a more positive direction after being presented with positive information. That study concludes that information and education strategies regarding CCS should be distinctively tailored to the content of a particular audience and target groups.

When local opposition to the project became clear, a BCO2 (administrative consultation group) was established in order to set up dialogues between various project stakeholders. However, the members of this group were only representatives of the public parties, not of Shell, other industrial parties, research institutes or NGO’s. This made it hard to reconcile the various viewpoints of each stakeholder. Debates between the stakeholders were organized via formal procedures, the BCO2, press releases, and through the media. However, little informal contact existed between the project developers and opponents, making it difficult to reconsider or reassess public opinions expressed earlier.

Terwel et al. (2011) found that beside the factors described above, public acceptance of CCS depends on people’s sense of trust in CCS stakeholders and not solely on the properties of CCS technology itself.

Therefore, public trust in CCS stakeholders is also a crucial factor to take into account in order to understand public attitude towards CCS. That research, however, shows that industrial organizations cannot engender public trust by simply claiming public interests. The authors argue that the information provided by industrial organizations, which emphasizes the environmental benefits associated with CCS (e.g. by communicating that CCS contributes to the climate issue), can cause suspicion of ‘greenwashing’ in the public’s eyes, resulting in public distrust in the entire organization rather than creating trust. Corporate communication and acknowledgment of organization’s motives are found to be more effective ways to facilitate public trust, since this type of information suggests honesty and transparency. Frequently, lack of communication, as happened in the case of the Barendrecht CCS project, can cause public distrust in project developers and eventually lead to a large public opposition towards project implementation.

When the project was introduced to the local community, several issues, such as: the reasons why CCS is needed, the effect of CO2 emissions on climate change, the choice for CCS location in Barendrecht, and other similar issues, were not explained well enough to local people. It was difficult for the public to understand why CCS should take place and why it should be located in their community. The entire project was perceived as an idea from Shell with a profit-making motive. Information about the project provided to the public was too difficult to understand (people considered it too technical). Besides, the research performed by Shell (and other parties funded by Shell) on the risks for public health and the effects of the new CCS plant to the environment was not trusted by public. According to Feenstra et al. (2010), the project developers should have shared their ideas, uncertainties, reasons and values with the public and communicated their plans about this project at the early stages of project planning, prior to the submission of the project in the tender procedure. This could have created more trust in the true motives of project developers and information provided.

The case of Barendrecht CCS demonstration project

The central lesson to be learned from the Barendrecht project is that it is important to create an open dialogue and mutual trust between stakeholders already at the early beginning of project development.

During the project process, the needs, demands and interests of the different stakeholders should be identified and included into the project design, communicating the entire project process to the local

Factors affecting public perception of CCS

The project of establishing an onshore CCS demonstration project in the Dutch town Barendrecht was initiated by Shell in 2007. It aimed to store CO2 captured from the nearby oil refinery in Pernis in two depleted gas fields located underneath Barendrecht. This project

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community in a transparent way. This lesson, however, appears to be rather obvious and it is unexpected to realize that industrial companies repeat similar mistakes.

Discussion and concluding remarks CCS is currently considered by many an indispensible technology for realizing climate change targets. The International Energy Agency has estimated that, in case CCS is not available and widely deployed after 2020, costs for realizing the desired climate stabilisation will be 70% higher. CCS technology itself therefore seems very promising.

However, the progress of its development is slightly disappointing.

Despite growing international interest in CCS, no commercial fullyintegrated power plant with CCS has yet been built and, besides this, several CCS demonstration projects have been terminated, mainly due to insufficient incentives and lack of public acceptance.

As previously illustrated, a number of research projects on public acceptance of CCS has been performed recently. These studies were, however, mainly focused on the determination of a general level of public awareness of CCS in Europe and identification of the main factors, which influence public opinion of this technology. All of these studies failed to address the issue of compensation as a means to find compromise, as one can find in other public services. This issue, if and how compensation can be introduced in the discussion on CCS and other large energy projects, needs to be developed soon in order to address public opposition of the implementation of these projects.

Such smart compensation could, for instance, involve adoption of effective public consultation programs, environmental monitoring and safety audits, nature programmes, introduction of renewables, new infrastructure, improvement of the living environment, etc. It seems important to learn the lessons from other cases of introducing new technologies or infrastructure, where compensation worked to change the public’s attitude, and eventually create acceptance.

The analysis of various scientific research and publications on public

acceptance of CCS discussed in this paper demonstrate that public perception plays a vital role in CCS technology development and deployment, and therefore has to be addressed at the same level as technological and economical challenges of CCS. Miscommunication and/or lack of communication of CCS project plans to the public can lead to project delay or even termination. Further research is required to address the main public concerns about CCS. This research should include design of smart compensation mechanisms that could be applied to make the deployment of CCS technology work for all stakeholders.

Any questions or comments are welcome. kogdenko@energydelta.nl

Sources Best-Waldhober, M., de, & Daamen, D. (2008). Development of CCS awareness and knowledge of the general public between 2004 and 2008.

Brunsting, S., Desbarats, J., de Best-Ealdhober, M., et al. (2011). The public and CCS: the importance of communication and participation in the context of local realities. Energy Procedia 4, 6241.

CATO2 project: CO2 capture, transport and storage in the Netherlands: http://www. co2-cato.nl/about-ccs/why-ccs EC (2011). Special Eurobarometer 364. Public Awareness and Acceptance of CO2 capture and storage.

Feenstra, C.F.J., Mikunda, T., Brunsting, S. (2010). What happened in Barendrecht? Case study on the planned onshore carbon dioxide storage in Barendrecht, the Netherlands.

Global CCS Institute (2011). The global status of CCS: 2010.

IEA (2010). Energy Technology Perspectives (BLUE Map Scenario). Scenarios & strategies to 2050.

Pitzner, K., Schumann, D., Tvedt, S.D., et al. (2011). Public awareness and perceptions of CCS: insights from surveys administrated to representative samples in six European countries. Energy Procedia 4, 6300-6306.

Terwel, B.W., Harinck, F., Ellemers, N., et al. (2011). Going beyond the properties of CO2 capture and storage (CCS) technology: How trust in stakeholders affects public acceptance of CCS. International Journal of Greenhouse Gas Control, 5, 181-188.

The Role of Electric Vehicles in Future Electricity Systems Environmental, economic and geopolitical forces drive the transition towards a world with more renewable energy sources. Two major technological trends that shape this transition are the greening of the power sector and electrification of the transport sector. These trends are not only complementary, but electric vehicles (EVs) have the potential to be pivot elements in the entire future energy system. Key for this essential role is the flexibility electric vehicles can offer to the power system.

EVs offer both opportunities and threats to the power system.

The fact that a large fleet of EVs can provide a storage mechanism

Remco Verzijlbergh PhD Student, Delft University of Technology

to deal with intermittent wind and solar generation has been recognized widely among the scientific community by now. In an already famous article by Kempton and Tomic , the term Vehicleto-Grid (V2G) was coined: electric vehicles that deliver power back to the grid in times of need and, by doing so, earn thousands of dollars per year.

In the mean time, many articles dealing with the grid impacts of EVs appeared. Here the tone was not all too enthusiastic. Most studies showed that major grid reinforcements would be needed if the number of EVs would increase significantly. Although both views deserve (and indeed received) some refining, an important insight presents itself here: there is a tension between the role of EVs on different levels in the power system for different stakeholders. That is why it is argued in this article that a successful deployment of EVs in future power systems can only be accomplished by recognizing this dilemma and treating it as a multi-level, multi-actor, multi-objective problem.

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One system, multiple levels, various actors, different objectives The power system can be seen as a (socio-)technical system consisting of multiple levels. Traditionally, power was generated at large power plants, fed in to the high voltage network, transmitted to the load centers and distributed among the end-consumers.

With liberalization, the introduction of markets for energy and balancing capacity and the decoupling of production and distribution, the technical operation of the system did not change significantly, but more complex economic structures emerged that changed the flows of money and information. Nowadays, even the technical operation is changing due to the introduction of intermittent renewables, distributed generators and adaptive loads.

This new electricity system is often referred to as a ‘smart grid’, although there is no consensus on what this exactly means.

What, in any case, seems to be an important aspect of a smart grid is to apply some form of control on the demand side. This is where the role of EVs becomes prominent. They are the ideal controllable loads because they have a large energy consumption that can be shifted in time, are numerous and are on many locations, so control can be applied where and when it is needed. Of course, the number of EVs is still modest, but there are good reasons to believe their massive adoption is a likely scenario.

Consider a situation in which some electric vehicles in a residential area are connected to the grid if the drivers are at home. The EVs can be charged according to different strategies. First of all, there can be no control at all; the vehicles will simply start charging once they are plugged in until their batteries are full. Secondly, more sophisticated charge strategies can be considered that are aimed at optimizing some objective function. What the objective function is depends on the stakeholder that has control of the charging process. A distribution system operator, for example, operates in a regulated environment and has a strong incentive to reduce costs.

He would therefore like to minimize the network load in order to avoid having to replace network components such as transformers and cables. In this control strategy, the EV load is spread out as much as possible throughout the night, when the household load is low.

The objective function from the perspective of the consumer, or a third party that represents him, is different. He wants to minimize his charge costs, or his total energy costs. If, in the future there will be a real time electricity price, it will be determined by supply and demand of electricity, so prices could be low when there is much wind power produced. In the control strategy that minimizes charge costs, this means that EVs will effectively wait until prices are low and then start charging with the highest possible speed.

Figure 2 shows the simulation results of these two charge strategies in a small network with 100 households, where 50% of the houses have one EV. It is clear that the network constraint dictated by the transformer capacity threatens to be violated if charging is done on the basis of price. Although it seems that in the price-controlled scenario the energy demand of the EVs is much greater, this is only the case for this particular day and, in fact, this illustrates the problem precisely. Some EVs have postponed charging until the price was low, which happened to be the case in these hours. The total yearly energy demand of the EVs will be equal in all scenarios, it is only the time and rate of energy transfer that differs.

Figure 1: Multi-level, multi-actor perspective on the role of EVs in the future power system

The emerging picture of the future electricity grid is depicted schematically in Figure 1. The key elements in this diagram are multiple levels, two way flows of power and information and different stakeholders acting on different levels of the grid. The electric vehicle is sitting there modestly in the bottom of this picture, but in fact, all the stakeholders listed on the right would like to control this EV to meet their own objectives. Unfortunately, these objectives are not always aligned, as the following example will illustrate.

Figure 2: Simulation results of two charge strategies

A challenging problem This example demonstrates the need for a control philosophy that takes objectives of all the actors involved into account and somehow maximizes total social welfare. The issue is complicated further by aspects such as a possible lock-in situation related to the

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unequal distribution of costs and benefits between stakeholders.

The first important steps towards a comprehensive approach are to identify and quantify the conflicts. Next, new, innovative control strategies must be developed and analyzed in order to formulate the most desirable options. Then, the hardest and perhaps the most important question arises: which policy options give the right incentives to the various players so that a socially optimal system can emerge? If satisfactory answers to these challenges can be found, the electric vehicle has the potential to fundamentally alter our energy system and could prove the cornerstone of a sustainable society.

Any questions or comments are welcome. r.a.verzijlbergh@tudelft.nl

Social Optimal Investment in Reliability:Dealing with the Social Costs of Electricity Outages In my research I focus on the trade-off between the costs of the electricity grid and its reliability. The cost of supply interruptions should be taken into account to make decisions that maximize social welfare.

Because there is no market for this external effect, other techniques have to be used. In my thesis I use the production function method and apply this in several cases.

Motivation Power outages are inconvenient and costly. Firms loose production, and face material damage and restart costs. Households lose leisure time and may experience stress. Public services might break down.

Therefore, reducing the number of electricity interruptions seems attractive. However, doing so creates costs that eventually are borne by electricity users. Solving this trade-off in a socially optimal manner requires information on the value of the electricity outages.

A substantial part of my PhD thesis focuses on valuing supply interruptions and how this value can be used to optimise decisions in the electricity sector. The calculations shown here are for the Netherlands but the method can be applied elsewhere.

The complete thesis is about cost benefit analysis and energy markets, including an ex ante cost benefit analysis of ownership unbundling of the distribution grids in the Netherlands and an analysis of the cost benefit analyses underlying two investments in electricity interconnectors (the NorNed cable between the Netherlands and Norway, and the EastWest Interconnector between Ireland and England).

Michiel de Nooij PhD Candidate/Independent Research, Tilburg University

Valuing supply security of electricity1 Because there is no market where electricity interruptions are traded, there is no market price that shows the marginal cost (i.e. per minute) of supply interruption and other techniques must be used to derive this value. In economics, especially in environmental economics, many techniques have been developed to value non-market goods.

Three of these techniques are useful to value supply interruptions.

One technique attempts to derive the value of a non-market good from revealed preferences (behaviour) because this is more reliable than stated preferences. For electricity outages, using information on investment in back-up generators and interruptible contracts are suggested, however both do not work in practice. A second technique uses surveys in which respondents are asked directly or indirectly how much damage they have from an outage or how much they are willing to pay for more reliability. Surveys are often applied, but have drawbacks as well.

Here a third technique is used: the production-function approach.

The production-function approach estimates the costs of outages by estimating (i) how much value added companies cannot produce due to downtime from lack of electricity, and (ii) the value of the leisure households would enjoy during an outage but which is lost during the outage. Leisure is valued at the net marginal wage (following a classic paper of Nobel laureate Gary Becker). This approach uses quantitative statistical information. In the estimation we took into account how much companies and households are active at different moments in time: companies are most active during weekdays at daytime and households consume most leisure during weekends at daytime. A drawback is that some aspects – such as restart time in businesses and stress in households – are difficult to include. The method is simple, grounded in the academic tradition, the data requirements are manageable and the results are straightforward to interpret. A drawback is that this method requires simplifying assumptions. The main assumptions are (i) that all production and leisure is lost. Most 1 For more details see Michiel de Nooij, Carl Koopmans Carlijn Bijvoet (2007)

The Value of Supply Security, The Costs of Power Interruptions: Economic Input for Damage Reduction and Investment in Networks, Energy Economic, 29 (2), 277-295.

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likely the direct loss is smaller, but on the other hand there are other costs (e.g stress, start-up costs) which are not included. (ii) the damage of an outage is proportional to the length of the outage. This seems reasonable within parts of the day. In general the method seems to give a reasonable first order approximation of the costs.

Main results Table 1 Key figures for the main sectors, The Netherlands (2001)

Figure 1: Value of Lost Load during workdays, daytime, 2001 (€/kWh)

Applications Source: Netherlands Central Bureau of Statistics (CBS), Netherlands Bureau for Economic Policy Analysis (CPB); own calculations. based on electricity demanded from the grid.

Table 1 presents the main results for the Netherlands. The first column shows how much electricity each sector uses, with manufacturing using the most. The second column shows (for companies) the value added and (for households) the value of their leisure. The value added of the services sector exceeds that of manufacturing. The value of leisure and value added in companies are about equally important for welfare. The third column shows the cost of a one hour interruption during weekdays at daytime. The damage in services is more than half the damage of the damage for companies. The damage for households is relatively small because households consume most leisure at other times (evenings and weekends). The last column shows the Value of Lost Load ( VoLL), which is the damage of an electricity interruption expressed per unit electricity use. The VoLL is highest for government and construction (respectively 33.5 and 33.1 €/kWh). The VoLL is lowest in manufacturing (1.9 €/kWh), while agriculture, transport and the service sector take an intermediate position (3.9; 12.4; 7.6 €/ kWh respectively). For households we find a VoLL of 16.4 €/kWh. For the economy as a whole the VoLL is 8.6 €/kWh. These differences are caused by differences in value added (the value added of the manufacturing is higher than that of construction) and differences in electricity use (manufacturing uses more electricity than construction, and this effect dominates).

Since economic activity of the different sectors is not uniformly distributed in time, the VoLL varies substantially in time. It is highest on weekend evenings (€12.5 €/kWh) and lowest during weekday nights (2.7 €/kWh).

Because economic structure differs between regions, the damage of an interruption varies between regions. Figure 1 shows for workdays during daytime the differences between 40 COROP regions. The variation between regions is already substantial, and if a more detailed geographical breakdown is studied (such as municipalities) the differences become larger.

Valuing supply interruptions in themselves is not the aim. This is interesting because it can be used to improve decisions where a trade-off exists between the costs and the benefits of less supply interruptions. I focus on economic optimality, that is minimizing the total social costs of the grid and supply interruptions. In practice, other arguments like justice might play a role (as well). Roughly speaking two kinds of decisions can be studied: the distribution of scarce power, and investment decisions. Several versions of investment decisions can be studied, such as incentive regulation including a quality reward, the manner in which grid companies make the internal trade-off between their costs and the quality reward given by the regulator, costs and benefits of specific investments, and design criteria for the grid.

Application 1: distribution of scarce power 2 When markets cannot react in time or quantity to electricity scarcity, the Transmission System Operator (TSO) has to distribute electricity and blackout some users to prevent the whole system from collapsing.

This can be necessary if wholesale markets fail (like they did in California in 2000 and 2001), if the grid fails (like on 4th November 2006 when a power line was out of operation to let the Norwegian vessel Pearl pass on the Ems, triggering an interruption that was felt in Spain and caused automated load shedding in several countries). It may also be required if all generation of one type is suddenly interrupted (for example if wind power is suddenly interrupted, or all nuclear power stations have to be closed at once).

If the TSO must blackout some users, it may do so in a way that minimizes the costs; in that case manufacturing will be the first sector that gets no electricity (lowest VoLL). On the other hand, the government should definitively get electricity. In reality (in the Netherlands), manufacturing has a high priority, while services are less likely to get electricity in the case of scarcity. Households have least priority.

Rationing will often be done by curtailing whole areas, not individual users or users of one type because that would cost too much time.

Municipalities are approximately the areas TSOs can black out quickly.

For this I compare two ways of rationing: (i) efficient regional rationing in which the municipalities with the lowest VoLL are rationed first, 2 See Michiel de Nooij, Rogier Lieshout, Carl Koopmans (2009). Optimal blackouts: Empirical results on reducing the social cost of electricity outages through efficient regional rationing. Energy Economics, 31, (3), 342-347.

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(ii) random rationing in which the system operator does not take into account the costs of supply interruptions. The social costs of these rationing schemes are compared for a 1 GW shortage lasting 4 hours.

After this time more market based mechanisms can likely be used to solve the shortage, and 1 GW is about 6 percent of Dutch electricity use and the size of large generation unit. With efficient rationing the costs of an interrupted municipality are calculated using the VOLL of that municipality based on the sectoral structure in that municipality. The costs of random rationing are based on the national VOLL. Depending on the day and time, efficient regional rationing might reduce the social costs of blackout by 42 to 93 percent compared to random rationing. The savings of efficient rationing are between 10 and 34 million euro’s, depending on the timing. On average, the social costs of efficient rationing are only 12 percent of random rationing. A sensitivity analysis in which we varied a number of assumptions behind the VOLL calculations showed different numbers, but the conclusion that efficient rationing is substantially cheaper than random rationing was unchanged.

Application 2: Regulation and optimal investment 3 Not only quality regulation determines grid companies’ behaviour, other forms of regulation have an impact as well. These regulations often have a more technical background, for example the N-1 principle that says that if one component fails, the electricity supply should continue. Here I study a specific regulation that is part of the Dutch grid code, i.e. N-1 during maintenance. The grid code specifies that “[…] by law a grid with a voltage of 220 kV or more must be designed and operated in such a way that a single interruption has no impact on the transport of electricity. This rule also applies to the grids with a voltage between 110 kV and 220 kV, however the rule may be ignored if the costs exceed the benefits (MEA 2005, art 13; own translation and italics)”.

of an outage due to an investment times the costs of an outage. This requires the VOLL, the estimated load lost, fail and maintenance frequency per unit, time necessary to repair a failure and time necessary to abort maintenance. We collected all this information for the grid in the vicinity of Zwolle (see figure 2) and calculated the costs and benefits of making it satisfy N-1 during maintenance. Vollenhoven – Zwartsluis and Kampen – Frankhuis are two single connections.

If one of these is in maintenance the system no longer satisfies N-1 during maintenance. If an outage occurs, the load centers Kampen, Emmeloord, Voorsterweg and Vollenhoven (120 MW) are lost.

The difference in expected probability of a system satisfying N-1 during maintenance and an N-1 proof system are: (i) the interruptions due to the failure of one component while another component is out of operation for maintenance (ii) interruptions due to the failure of two components. Without replicating the calculations, we found that together the higher expected frequency for an outage for a grid that does not satisfy N-1 during maintenance compared to a grid that does satisfy N-1 during maintenance is 4.663E-04/yr, or once every 2144 years.

The expected electricity not supplied is 120.23 kWh/yr. At 9 €/kWh this is worth 1082 €/Year. With a 50 year life time and a 5.5 percent discount rate, the present value is € 18,321. The investment costs are € 9,450,000, and ignoring the maintenance costs, it is clear that the benefits are less than 0.2% of the investment costs.

This shows that N-1 during maintenance is not (always) a sensible rule, and that the change of the grid regulation was an improvement. So while outage costs are substantial, investments and maintenance costs needed to improve reliability are substantial as well. Overinvestment might be a serious problem.

Conclusions so far As discussed, the Value of Lost load (VoLL) can be calculated. This shows that the differences in costs vary substantially between sectors, and that the costs for households are substantial. Because of differences in sectoral structure, the VoLL differs between regions.

The two applications studied show that (i) distributing scarce power in a fair or ignorant way can be costly. (ii) Some standard investment rules and procedures have costs that exceed the benefits by far. Reliability is important and can have substantial value, but the cost of reliability is huge as well. Calculating this trade-off can help to improve policy and thus increase welfare.

I am currently looking for further interesting applications and cases where this approach can be applied.

Figure 2: Grid in the vicinity of Zwolle

Any questions, ideas or comments are welcome.

Contact: Michiel.denooij@hotmail.com

The ‘however the rule may be ignored if the costs exceed the benefits’ was a new addition to an existing rule. Applying this addition requires calculating the costs and benefits of investing. We set up a cost benefit method and calculated this for a specific investment. The costs of the investments are relatively straightforward and follow from standard stylized facts. The benefits require calculating the change in probability 3 Michiel de Nooij, Barbara Baarsma, Gabriël Bloemhof, Han Slootweg, Harold

Dijk (2010). Development and application of a cost-benefit framework for energy reliability Using probabilistic methods in network planning and regulation to enhance social welfare: the N-1 rule. Energy Economics. Volume 32, Issue 6. 1277-1282.

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Quantitative Natural Gas Market Models: No Story Without Numbers Dr. Ruud Egging No Numbers Without a Story Postdoc, NTNU

Computerized quantitative models are useful tools for gaining insight into the complex reality of the present day natural gas market. They do not replace the knowledge of business experts, but are rather complementary to it. The expert aids in how the model should represent reality; the model aids the expert in analyzing the reality.

Modeling capabilities have been greatly enhanced in the last two decades.

This article aims to increase the awareness about the features and possibilities of quantitative models in supporting analysis and assessments of the natural gas market.

The first part of this article describes some recent developments with a large impact on the Dutch and European natural gas markets. Qualitative assessments have limitations when coping with the uncertainty of developments or estimating the magnitude of the impact of each single development, let alone the aggregate. Next, some quantitative model types are addressed, ranging from the widely known linear programs to the less known mixed complementarity problems. The following section presents results of various market and case studies performed for organizations such as the European Commission, commercial companies and in academic papers. At the end some challenges are mentioned that have a focus in current research. Lastly, the readers with a business background are invited to help postulate interesting research questions that could be picked up by the academic community.

The world we live in I am writing this introduction mid September 2011. Just over a month ago a Raad van State ruling postponed the construction of Bergermeer Gas Storage – which should have added four bcm to the aggregate Dutch working gas capacity by 2013. Another ruling, late August, postponed the construction of a coal power plant by Essent near the Eemshaven.

Next week Queen Beatrix will officially open the GATE regasification terminal on the Maasvlakte. Just a few weeks later the first Nordstream pipeline is expected to commence operation and in another year the second pipe should be on stream. A few months ago, in the aftermath of the nuclear meltdown in Fukushima, Japan announced a radical shift towards renewables and Germany, among other countries, ruled on a complete nuclear phase-out by 2022.

In the past twelve months the price differential between the Henry Hub and the National Balancing Point has been at least $3 per mmBtu, with spikes over $5, more than enough to make a handsome profit arbitraging between the two hubs, if only the infrastructure were in place... By 2015, it should be, with 9 billion cubic meters per annum of liquefaction capacity in the US Gulf of Mexico and more in the pipeline for the years after.

How will all this affect the Dutch/European/global natural gas markets?

The qualitative analysis Clearly, each of the previously mentioned developments has large implications for the global natural gas markets. For instance, the pipelines from Russia will provide additional supply to Western Europe, but how much depends on what happens to the pipelines through the Ukraine. Postponing the Bergermeer storage may result in larger seasonal price differences than previously anticipated. This might be an opportunity for market players that booked capacity at the GATE terminal. But maybe that capacity will be designated to long-term baseload contracts, to meet additional gas demand for power generation resulting from an unfinished coal-fired power plant in Groningen and the phasing out of German nuclear capacity. No one can predict how all these factors will play out against each other, given the respective likelihoods of occurrence.

Ongoing increasing complexity The manner in which developments affect the market was relatively transparent twenty years ago. Before liberalization of the European energy markets, the factors impacting the natural gas market were relatively clear. In the last two decades, many more players entered the market in all levels of the supply chain. Technological progress has drastically reduced the costs of liquefied natural gas infrastructure, which has facilitated an increased integration of formerly geographically separate continental markets into a global gas market.

To analyze market developments and evaluate investment plans in such a dynamic and complex environment, companies and regulators need quantitative tools.

Quantitative and qualitative analysis: hand in hand A quantitative model is quite powerless in isolation, as is - when the system complexity is as large as in the energy market of the 21st century – a business expert just by him/herself.

When it comes to analyzing a situation computerized models and human brains each have their respective strengths and weaknesses.

Ideally, we use the best of both worlds. Computers have great calculation power and subject matter experts have expertise, intuition and gut feeling. When it comes to analyzing large amounts of data in a structured and integrated way, computers can’t be beaten by humans. However, there is only so much that a spreadsheet can do for you when the interactions among many factors must be evaluated. A well-specified model can quickly provide insights into situations too complex for the human mind. This is especially the case for performing various what-if analyses from a given starting situation.

The results of computer model runs must be interpreted, for which business knowledge is a prerequisite. It is not often that the model outcomes can (or should) be implemented in their literal form. Models are necessarily simplified representations of the real world, and when interpreting model results, the unrepresented characteristics important to the situation at hand must be accounted for. Often, model results

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will align with intuition, and merely be a quantitative confirmation of intuition. In other occasions, a model may provide counter-intuitive results. Assuming that the model is well-specified and implemented, it is the subject matter expert or business analyst who is in charge of coming up with a good story. Is the counter-intuitive result a perfectly new insight, or merely a glitch of the model, not being representative for this particular business case?

Business expertise is important in every stage of model development and usage. What are the important aspects and relationships that need to be represented? And, since computers do not have unlimited computational power as of yet, not even all that we would want to represent can be fitted into one model and solved within a desired time window. Hence, what is represented must be tuned to what questions need to be addressed and what answers we are looking for. And, dependent on the questions, there are different model types that should be used to address them.

Development in model types To represent a market where gas supply costs and demand volumes are given and costs must merely be minimized to satisfy supply obligations subject to pipeline and storage capacity limitations, all relevant factors can be expressed as linear terms.

Nowadays, linear programming models can process enormous amounts of data in relatively short times. But in what market are purchase and sales prices a given? To incorporate some kind of demand response to changing prices, for example using a simple linear inverse demand curve, we would need a quadratic program.

In perfectly competitive markets equilibrium can be found by maximizing the social welfare, which in turn can be expressed as one objective function, regardless of the number of players.

with multiple objectives is the result, which cannot be captured using a linear or quadratic program. So if a regulator would want to analyze developments under different assumptions for market power exertion, more advanced models are required. Equilibrium models, cast as mixed complementarity problems (MCP) allow every player in the market to optimize their own profit function and to separately enforce the equilibrium in every market (final consumption, infrastructure, upstream).

Very intuitive indeed, albeit that the mathematical specification is not straightforward and very specialized solution algorithms are needed for solving MCP’s.

If you are one of those who believe that market power can be addressed by adding profit mark-ups to the supply cost curves, I have to disappoint you. Ultimately, such a model is minimizing (adjusted) costs, and missing an important feature of a market with gaming aspects. In such markets, the agents have an incentive to diversify their supplies and as a result, there will be more trade flows and over longer distances compared to a (cost minimizing) perfectly competitive equilibrium. (Egging and Gabriel 2006, Egging 2010).

MCP’s are not the panacea. For instance, the so-called integer variables needed to represent the yes/no investment decisions can easily be incorporated in linear or quadratic programs. Commercial solvers are available for solving them, however at the expense of longer calculation times. Unfortunately, including integer variables in MCP creates very difficult mathematical problems, investigation into which academics have just begun.

Market and operations analyses have different foci. Operational models with a granularity of hours or minutes rather than days, seasons or years must account for the complex nonlinear flow and pressure characteristics in the gas pipelines. Unfortunately, models with nonlinear equations can be very hard to solve. Sometimes good linear approximations can be made, but at the expensive of many additional variables, what usually means longer times needed for finding solutions.

Clearly, there are many more real world features that one might want to represent in a model. The truth is, present day state of the art software cannot deal with everything. Equilibrium models have clear advantages over optimization models when it comes to representing market power, but there are still situations where optimization models should be applied.

Next, some market insights gained from applications of mixed complementarity problems in various academic and other studies.

Lessons learned

Figure 1 Schematic overview of trade relations in the natural gas market

Supposedly, at present there are no market agents in the downstream Dutch or European gas markets exerting or even attempting to exert market power. However, in the aforementioned linear and quadratic programming models no game-theoretic aspects can be represented beyond a pure monopoly market. When game-theoretic aspects need to be accounted for, market players behavior will not result in maximized social welfare anymore. Instead, the profit function of gaming market players must be represented separately. A problem

During my time at the Energy Research Centre of the Netherlands (ECN) we were involved in a project in the Fifth Framework research Programme of the European Commission regarding security of gas supply in Europe in 2020 after the accession of the new member states.

ECN had (and has) the GASTALE model, representing gas supply, demand, storage and the transmission network within Europe and surrounding regions as well as LNG infrastructure and trade flows. We analyzed the impact of the disruption of gas supply from four external regions: Russian supplies through the Ukraine, the Middle East through Turkey, Algeria, and Norway. We learned that Europe consists of various, not very closely connected, gas market regions.

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When Ukrainian transits were disrupted, Eastern European countries would suffer the most, due to the lack of West-East connections.

They simply had no alternative supply source to revert to. When Algerian supplies were disrupted, mostly Italy and Spain were harmed.

However, in contrast to the Eastern European countries, these could revert to increased LNG imports, reducing the impact to some extent.

Disruption of Middle Eastern supplies via Turkey would have a small impact due to the fact that these supplies were modest to begin with.

Disruption of Norwegian supply was most severely felt in Western Europe (but implicitly considered to be the least likely event).

The recommendations included increasing the supply options for Eastern Europe from the west and south of Europe through additional pipelines, more LNG import capacity in Spain and additional transit capacity through Turkey for supplies from the Caspian region. These recommendations seem to have been followed when establishing priorities in the updated Trans European Networks lists, including strong support for projects such as the Nabucco pipeline. (Van Oostvoorn et al. 2003) Another study executed for Gas Transport Services addressed how the tariff regime for the Dutch transmission system might affect the routing of gas from northern Germany destined for the south. (Lise et al. 2005). GTS was considering filing a complaint against the imposed tariff reductions and needed some ammunition for making a case. The results indicated that there was strong potential for such a rerouting effect.

A third study with the GASTALE model investigated the impact of additional infrastructure on market power exertion. The results showed that the exertion of market power by suppliers could be partially undercut by additional infrastructure: additional pipelines or storage capacity. An alternative interpretation of the result is that the huge potential losses due to imperfect competition in social welfare and the objectives of the ‘Lisbon 2010 Agenda’ warrant competition enhancing policy regimes and support for infrastructure investments (Egging and Gabriel 2006).

During my PhD in Maryland between 2005 and 2010 we developed an alternative model for the European gas market (Egging et al. 2006), which was extended to a multi-period model with global coverage.

The latter model, the World Gas Model (WGM), has been used for various studies in organizations such as Gaz De France, Resources For the Future (a think-tank in Washington D.C.), the US Department of Energy and Statistics Norway.

The WGM has been used to study the potential impact of a cartelization of the global natural gas market in the coming decades along the lines of the Gas Exporting Countries Forum and other groups of countries. Somewhat surprisingly we found that European countries would be hurt the most, relative to the USA, Japan and South Korea. However, in previous studies the picture was much different.

In the pre-unconventional gas era, US LNG imports were projected to dramatically increase until 2030 and a gas cartel withholding LNG supplies would have had harsh impact on US prices and consumption (Egging et al. 2009). However, due to increased unconventional gas production, the USA will not rely on LNG imports for many years, and would hardly be affected by a cartelization. (Gabriel et al. 2011).

In contrast, Japan and South Korea rely completely on LNG supplies to meet domestic gas demand and pay dearly for it. A cartel would cut supplies much less to them than to the European countries with

much lower prices in the reference scenario. In the future, Europe with dwindling domestic reserves will rely even more on imported supplies from North African countries, Russia and the Middle East as well as LNG imports. The large import dependency is not a problem given abundant diversity in supply sources in a competitive market. But, if all neighboring regions and most of the global liquefaction capacity would collaborate in one cartel, no alternative supply sources would be available or would be limited and very far away (e.g., Australia).

A study for the natural gas market of the United Kingdom showed the impact of varying scenarios in combination with declining domestic production in case of supply disruptions. Of particular interest to the client were the subtleties in trade flow changes that would not have shown in a less sophisticated model (Gabriel et al. 2008).

Another study compared the impact of a new liquefaction terminal in Alaska versus building a pipeline into Western Canada to bring the natural gas from the North Slope to consumer markets in the USA. The results favored pipeline construction over the liquefaction terminal, even considering the phasing out of the Kenai liquefaction terminal in the near future.

In all models developed and studies performed, business knowledge was critical in deciding how to represent interaction among market players, defining the research questions and interpreting the results.

Qualitative assessments could have provided some insights, but would not have been able to so systematically assess and compare the consequences of various what-if scenarios as the quantitative models could.

Uncertainty A factor of often underestimated or even ignored impact is uncertainty, and how to model it. There is extensive literature showing that ignoring uncertainty in modeling approaches leads to suboptimal or even infeasible results. Managing daily operations when the strategic plan provided such a bad starting point would undoubtedly prove difficult.

Accounting for uncertainty using what-if analysis may provide some insight, but can provide ambiguous results. What would be optimal if in scenario A it is wise to invest in a small pipeline, in scenario B it should be a large pipeline, and in scenario C we go bankrupt if we take up any more loans than we currently have.

When operating in a market, decisions are hedged to maximize expected profits given a desired risk-profile. A problem with scenario/ what-if analysis is that each situation is analyzed out of context, and the model is myopically optimized for that one situation, ignoring the risks of other possible outcomes. Models should represent the hedging options and decisions of market players to support making viable and beneficial business decisions.

Multi-fuel vs. sector models Many mid and long-term questions and developments for natural gas markets do actually have a broader scope. It is not just the natural gas market providing the context of our actions, but the energy market.

Sector models, looking into one fuel market only, clearly lack the critical interactions between the fuel markets. One consequence of this is that the price impact of events in what-if analyses will be overestimated if fuel substitution effects are not taken into account.

In the short term fuel-substitution options are very limited (except

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in power generation) and this may not be too big of a problem. In the longer term substitution can be significant and should be addressed.

Ultimately, addressing the impact of CO2 reduction policies is only meaningful when all fossil fuels are accounted for. Reducing the allowed CO2 emission levels in a gas only model, will reduce gas consumption. In contrast, in a model allowing coal and oil to be replaced by gas, gas consumption might increase. Such a result is more representative of what happens in reality, and provides support for the broadly carried perception that gas can be the bridging fuel to a sustainable energy supply.

Work in progress and research challenges Academics looking for inspiration can refer to Smeers 2008: gas models and three difficult objectives. In this paper Smeers lists many more challenges than the three referred to in the title. However, as a researcher I like to be inspired by the questions of businesses operating in real gas markets, not just theoretical considerations, as justified as they may be.

With colleagues in Berlin and Norway I am working on multi-fuel market models, looking into the incorporation of risk attitudes in MCP, trying to accommodate integer capacity expansions and looking into time-efficient solution algorithms for large-scale stochastic MCP. In just a few decades the results of all these efforts will be available in commercial software packages. But if you don’t want to wait so long, please share your expertise with us academics, helping us to ask the right questions and set the right priorities for interesting research with practical relevance. If you provide the story, we will come up with the numbers.

References Boots, M.G., Rijkers, F.A.M., Hobbs, B.F., 2004. Trading in the Downstream European Gas Market: A Successive Oligopoly Approach. The Energy Journal 25 Van Oostvoorn, F., Boots, M.G., Cross, E., Egging, R., Wals, A.F., 2003. Longterm gas supply security in an enlarged Europe. Final report ENGAGED project (ECN-C--03-122)

Egging, R.G., Gabriel, S.A., 2006. Examining market power in the European natural gas market. Energy Policy 34, 2762-2778.

Egging, R., Gabriel, S.A., Holz, F., Zhuang, J., 2008. A complementarity model for the European natural gas market. Energy Policy 36, 2385-2414.

Egging, R., Holz, F., Gabriel, S.A., 2010. The World Gas Model - A multi-period mixed complementarity model for the global natural gas market. Energy 35, 40164029.

Egging, R., Holz, F., von Hirschhausen, C., Gabriel, S.A., 2009. Representing Gaspec with the World Gas Model. The Energy Journal 30, 97-117.

Egging, R.G., 2010 Multi-Period Natural Gas Market Modeling - Applications, Stochastic Extensions and Solution Approaches. PhD Thesis, University of Maryland, CP, USA Gabriel, S.A., Egging, R., Holz, F., 2008. Final Report for GDF-SUEZ. Study of the United Kingdom Natural Gas Market in 2015. A Model-Based Analysis Using the World Gas Model (WGM).

Gabriel, S.A., Rosendahl, K.E., Egging, R., Avetisyan, H., Siddiqui, S., 2011.

Cartelization in Gas Markets: Studying the Potential for a “Gas OPEC”. Energy Economics, Article in press Lise, W., De Joode, J., Boots, M.G., 2005, Druk in de gasleiding. Verband tussen tarieven voor gastransport, omleidingsstromen en congestie in Nederland, ECN-C--05-098 Smeers, Y., 2008. Gas models and Three Difficult Objectives. CORE Discussion Paper 2008/13, Catholic University Leuven, Belgium.

Brief biography Dr. Ruud Egging is a post-doc in the Industrial Economics and Technology Management Department of the Norwegian University of Science and Technology (NTNU). He has a part-time affiliation with the Applied Economics and Operations Research group of research institute SINTEF in Trondheim. He holds a masters degree in business econometrics from the Free University in Amsterdam and a PhD in Civil and Environmental Engineering from the University of Maryland, College Park, USA. Previously, he has worked as an operations research consultant with ORTEC and as a scientific researcher at the Energy Research Center of the Netherlands (ECN). His research field covers energy markets and systems, with a focus on natural gas markets and the liquefied natural gas supply chain. Email address: ruud.egging-atiot.ntnu.no

Books, reports and conferences Anastasios Giamouridis and Spiros Paleoyannis, July 2011. Security of Gas Supply in South Eastern Europe: Potential Contribution of Planned Pipelines, LNG and Storage. Oxford Institute for Energy Studies.

Security of supply has been defined as the ability of an energy system (national or regional) to meet demand in events of supply disruption, as well as to cope with normal fluctuations in demand patterns. Based on this definition it is evident that security of supply has a larger scope than the need to achieve a diversified supply portfolio. It also includes aspects such as switchability to other fuels (electricity, biomass, oil, etc.), efficiency gains and interruptible contracts. This study aims to contextualize the concept of gas supply security and how it fits into the broader energy security debate in South Eastern Europe (SEE).

It includes a broad discussion on various topics, such as gas demand

trends in SEE and how market evolution may affect security of supply in this region. The author provides the evaluation of existing pipeline interconnections, LNG terminals, gas storage facilities, as well as the examination of other important factors, such as immediate and longer term policy responses, limitations of state and commercial actors, and access to funding.

This paper is available at: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2011/07/ NG_52.pdf

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Bassam Fattouh and Laura El-Katiri, August 2011. Energy poverty in the Arab world: The case of Yemen. The Oxford Institute for Energy Studies.

This paper is available at: http://www.ecofys.com/com/publications/documents/Brochure_Rural_ Energy_09_2011.pdf

This article is about general poverty and energy poverty in Yemen. Energy poverty is defined as a lack of access to energy or having only access to non-commercial and out-dated forms of energy, such as wood, dung or agricultural residues. Yemen’s energy poverty is quite severe, in particular in the rural parts of the country. According to the authors, the causes for this energy poverty are complex. The most critical cause, however, is the general poverty level in Yemen. Other factors that determine access to energy include household income, availability of necessary infrastructure, other incentive structures to make use of more costly forms of energy, fuel price and the necessary equipment to use the fuel. But the relation goes in a twoway direction. Energy access must also be seen as a precondition for human development, according to the authors. Investing in energy access is thus a form of poverty alleviation. Next to this, the article also deals with existing energy subsidy regulation in Yemen and its effect on energy availability.

Howard V. Rogers, August 2011. The impact of Import Dependency and Wind Generation on UK Gas Demand and Security of Supply to 2025. Oxford Institute for Energy Studies.

This paper is available at: http://www.oxfordenergy.org/2011/08/energy-poverty-in-the-arab-world-the-case-ofyemen/

David Buchan, July 2011. Applying belt and braces to EU energy policy. The Oxford Institute for Energy Studies.

In this article, Buchan comments on the European Union’s energy policy.

Recently, the European Union developed new policies in order to meet the target of 20% energy saving compared to a projection of business-as-usual in 2020. These new policies, Buchan argues, further undermine the Emissions Trading Scheme (ETS) that is in place to limit CO2-emissions of selected industries. Together with the ‘renewable target’ (i.e. 20% of renewables in the energy mix), the new energy efficiency directive leads to a 25% reduction in emissions, which in turn results to downward pressure on the ETS carbon price. Buchan analyses the issue of market mechanism versus regulation in the European energy market in a concise way, including the role and behaviour of politicians.

This paper is available at: http://www.oxfordenergy.org/2011/07/applying-belt-and-braces-to-eu-energy-policy/

Heleen Groenenberg, Pieter van Breevoort, Yvonne Deng, Paul Noothout and Arno van den Bos, September 2011.

Rural energy in Europe – country studies for France, Germany, Italy, Poland and the UK. Ecofys.

Sustainable energy has attained a firm position on the agendas of policy makers in the European Union. It has been widely recognised as the key to reducing greenhouse gas emissions, and governments and industries have acknowledged the need for a transition to a sustainable energy system by the middle of this century. At the same time, rural development is an important part of EU policies, since rural regions tend to be economically less advanced than urban regions. Energy can play a part here. Surprisingly, the role of sustainable energy for the development of rural areas in the EU has received little attention from policy makers so far. In this report, much information on energy demand in a variety of economic sectors in France, Germany, Italy, Poland and the United Kingdom is provided.

These countries make up 61% of total final energy consumption in the EU. Through a careful analysis, the authors show a.o. that in rural areas energy consumption relies less on natural gas.

The UK energy market has experienced a rapid transition from a selfsufficient gas exporter (with significant seasonal flexibility from indigenous gas fields) to significant net gas importer status. Almost unnoticed in this transition, much of the UK’s seasonal flexibility is now supplied by Norway and the Netherlands. The aim of this study is to address the uncertainties of the future UK’s gas sector, particularly giving attention to an increasing share of wind energy generation. It argues that the maximum feasible limit of „unconstrained” wind generating capacity for the UK is much lower compared to the initial predictions, and natural gas will eventually still play a key role in providing the flexible buffer generation, allowing the power system to cope with varying wind speed and consequently varying power output.

This report is available at: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2011/08/NG-54.pdf

Maasvlakte CCS Project C.V. August 2011. CO2 capture technology selection methodology. Special report to the Global Carbon Capture and Storage Institute In July 2009 Maasvlakte CCS Project C.V. (‘MCP’), The Netherlands, submitted a project proposal to the European Commission, in this way initiating one of the largest integrated demonstration projects in the world for CO2 capture and storage. This is so-called ‘ROAD project’ (‘Rotterdam Opslag en Afvang Demonstratieproject’; Rotterdam Storage and Capture Demonstration project). In this report, a tailor-made selection methodology developed by the ROAD project team is presented and evaluated, starting with the request for proposal for preliminary studies and ending with criteria for the final selection of the capture plant supplier. This report is mainly aimed at providing the guidelines for other CCS projects, which work with post-combustion capture technology, helping them to design their own methodology for the plant supplier selection.

This report is available at: http://cdn.globalccsinstitute.com/sites/default/files/ROAD_ CO2_capture_technology_selection_methodology.pdf

Simon Pirani. July 2011. Elusive Potential: Natural Gas Consumption in the CIS and the Quest for Efficiency. Oxford Institute for Energy Studies.

This study aims to provide an overview of natural gas consumption in Russia and the Commonwealth of Independent States (CIS), and to determine the factors that will shape demand over the next decade. The paper reflects on the substantial demand reduction that could be achieved with efficiency measures, and the reasons why progress towards these has been very slow and the potential largely unrealized. A detailed study on statistical information has been conducted with particular reference to gas consumption by various economic sectors in Russia and CIS. The paper argues that some efficiency gains have already been reached in CIS region and Russia, however, much more could be achieved in the future.

This paper is available at: http://www.oxfordenergy.org/wpcms/wp-content

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Upcoming conferences 14 October, 2011 Tax and Energy Seminar Program Amsterdam, The Netherlands http://www.taxand.com/files/u12/e_14_October_2011_-_Global_ Energy_Tax_Trends.pdf 1 November, 2011 Energy Transition and Reality http://www.energydelta.org/mainmenu/conferences/intro 2 November, 2011 CIS Oil and Gas Transportation Istanbul, Turkey http://www.theenergyexchange.co.uk/3/13/articles/272.php 3 November, 2011 The Geopolics of Energy Transition The Hague, The Netherlands http://www.clingendael.nl/ciep/training/energy/geopolitics/ 8-10 November, 2011 Intelligent Cities Expo Hamburg, Germany http://www.intelligentcitiesexpo.com/ 22 November Young EDC (Young Professionals Event) http://www.energydelta.org/mainmenu/young-energy-professionals/ upcoming-events/young-edc 29 February - 2 March 2012 World Sustainable Energy Days 2012 http://www.wsed.at/en/world-sustainable-energy-days/

EDI Quarterly is published in order to inform our readers not only about what is going on in EDI, but also and in particular to provide information, perspectives and points of view about gas and energy market developments.

Read the latest developments in the energy industry, daily published on the website of EDI. Editor in Chief Catrinus J. Jepma Scientific director EDIAAL* Editors Jacob Huber Steven von Eije Nadja Kogdenko Steven van Eije Klaas Kwakkel EDI Quarterly contact information Energy Delta Institute Laan Corpus den Hoorn 300 P.O. Box 11073 9700 CB GRONINGEN The Netherlands T +31 (0)50 5248337 F +31 (0)50 5248301 E quarterly@energydelta.nl

* The EDIaal project is partly made possible by a subsidy granted by The Northern Netherlands Provinces (SNN).

EDIaal is co-financed by the European Union, European Fund for Regional Development and The Ministry of Economic Affairs, Peaks in the Delta.

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