Keywords

1 Background and Benefits of Incentives to Improve the Efficiency of Energy Transmission

1.1 Significance of Energy Transmission for Manufacturing Processes

The economic well-being of nations can be traced back, among other things, either to a wealth of raw materials or to technologically sophisticated value creation. The former source of wealth can only be used sustainably in a few cases due to territorial conditions, which is one reason why industrial value creation has a high status. For a century now, this value creation has increasingly been carried out with the help of processes that use electrical energy as their main source [1]. The importance of electrical energy for value creation and the associated prosperity in industrial nations is thus elementary. This is one of the reasons why the correlation between the demand for electrical energy and economic growth (Gross Domestic Product growth) cannot be empirically proven since 1979 [2]. Due to the high importance of electrical energy, it is treated as a scarce resource [3] which ultimately leads to an increase in efficiency in the use of electrical energy. Despite or precisely because of this high efficiency, the reliability of supply with electrical energy has a particularly high weighting. Despite the high importance of the efficient and reliable supply of electrical energy, a gap exists in metrics for evaluating and incentivizing improvements in the efficiency of energy transmission.

1.2 Detecting and Avoiding Preventable Losses

In almost all manufacturing processes, quite a lot of effort is put into minimizing losses. For this purpose, there is a quite comprehensive set of methods. In addition to flow cost accounting [4], there are methods that provide for an analysis of the entire life cycle. These include, above all, the LCA (Life Cycle Assessment or Life Cycle Analysis) method standardized in accordance with DIN EN ISO 14040/14044. These methods are difficult to apply to electrical energy. This is mainly due to the fact that transmission losses are determined by a large number of technical and infrastructural parameters. Furthermore, the value chain or better the value network is divided into several, separate companies, so it is necessary to stimulate the avoidance of losses where they occur. One example of preventable losses is the transmission losses due to harmonics. Harmonics are a parameter of power quality. The concept of power quality encompasses a portfolio of grid voltage characteristics. At present, there is no way to define power quality as a single indicator [5]. From the various factors of power quality, according to DIN EN 50160, the harmonic content is singled out. Because the harmonic content in the power grid will expected to increase, which is due to the increase in power electronics [6]. The increase in harmonics reduces the efficiency of electric power transmission by causing avoidable energy losses (caused by harmonic currents) in the grid and has a negative impact on the overall efficiency of the power system. These additional losses cause equipment to heat up, which can lead to increased aging and failures. Furthermore, losses during transmission and distribution are largely influenced by the grid load itself, i.e. by the energy transmitted with the help of the power supply grid. There is a quadratic relationship between power loss and transmitted current. This means that grid users have quite a strong leverage in influencing transmission losses. However, under current legislation, grid operators are responsible for grid losses and there is only a disproportionately small incentive to reduce grid losses [7], so there is no incentive to improve the distribution of costs so that grid users have an incentive to use energy in manufacturing processes in a way that benefits the grid.

1.3 Use of Incentive Regulation as a Leverage Mechanism

Due to its technical and economic specifications, electrical grids are a natural monopoly [8] - also referred as an unavoidable monopoly [9]. Furthermore, the high investment costs in connection with regulated revenues - resulting from the efficiency comparison according to the German incentive regulation ordinance (German: Anreizregulierungsverordnung – short: ARegV) [10] – and thus a long-term capital commitment lead to a secured revenue structure for grid operators. This long capital commitment is also underlined by the long service life of electrical operating resources [11], most of which are irreversible due to the high installation costs [12] and shows the need for a high level of long-term revenue security, which can usually only be realized through a regulated market [13]. In addition, the incentive regulation ordinance offers the possibility to contribute to the avoidance of possible inefficiencies through incentives. This makes it possible to use this tool directly, to expand it and to reduce preventable transmission losses. The advantage of this approach is that, on the one hand, a permanent success control is carried out. As in the current incentive regulation, the losses can be set in relation to those of the base year.

2 State of the Art

2.1 Incentive Regulation Widely Used

The present study refers to the Federal Republic of Germany. The statements and results can be applied to a large number of other countries, but it must be clarified in each case how transmission losses are considered in the respective system. Incentive regulation is the linchpin of the concept of regulating natural monopolies. Furthermore, one reason for regulation is the high importance of electrical energy as a fuel for a large number of manufacturing processes. In a paper on the regulation of the German power grid, diekman et al. compiled a list of foreign regulatory systems of the electric power transmission and distribution system. The result shows that incentive-regulated systems are widely used [14]. The advantage of incentive-based revenue regulation over cost-based revenue regulation is that it creates incentives to reduce inefficiencies. The disadvantage, however, is that the incentive must be high enough so that the benefits from reducing inefficiencies outweigh the lower revenues from maintaining them.

2.2 Necessity Recognized - Implementation in Need of Improvement

The introduction of incentive regulation based on the amendment to the German Energy Act of 2005 [15] shows that the need to reduce inefficiencies has been recognized. One of the core elements of regulation is the efficiency comparison of grid operators, which creates comparability between grid operators in an elaborate procedure. Efficiency is ultimately calculated as the quotient of the performance provided by the grid operators and the effort required to achieve it. The output is determined by a number of comparative parameters, such as the length of the grid or the maximum output as well as the transmitted energy. The effort is reflected by the costs incurred for this. The current approach thus tends to lead to a comparison of performance. The term efficiency comparison is misleading in the sense that energetic aspects, which are today rather associated with the term efficiency, are not taken into account. An approach for improving this weakness will be presented in the further course of the paper.

2.3 Incentives for New Technologies to Reduce Losses Better Considered

The reduction of transmission losses is not directly considered in the current German incentive regulation. The importance of the efficient use of electrical energy is currently primarily seen at the ends of the value chain. A prominent example is the demand side management applied in many manufacturing processes. Ultimately, this measure is currently generally aimed at limiting the grid load and thus the losses (which lead to heating of the conductors and, in the case of overload, to thermal destruction) to a maximum value. Particularly in the case of new technologies, attention is paid to how the energy losses in the grid can be limited by the use of the technology even before it is deployed across the board. jurado et al. describe how the grid-side use of electric vehicles in Argentina can be designed in such a way that losses are reduced [16]. Similarly, studies on smart grids are usually guided not only by intelligent control with good integration of renewable generators, which considers possibilities to reduce transmission losses. There are various approaches to this. zhong et al. describe a coupon system [17], which in principle can be compared with certificate trading, except that the coupon is a bonus for participation, whereas the emission certificate is more of a malus for the company. There are other incentive systems that are based on the bonus-malus principle and are intended to encourage participation in the smart grid in such a way that losses are reduced. Unfortunately, the regulatory framework that provides an incentive to implement measures is lacking for the possibilities to implement and exploit the potentials to increase transmission efficiency. jacobsen has already discussed that a variant would be to expand the German Incentive Regulation Ordinance with an extension factor to include preventable loss energy [7].

3 Approach

3.1 Adaptation of the Clearly Outlined Methodological Framework

Incentive regulation is already a powerful method. The challenge is to include key figures in incentive regulation that are aimed at higher transmission efficiency. A clear possibility for this is the introduction of an additional parameter in the regulation formula of the incentive regulation. This approach makes it possible to fall back on an established procedure whose suitability has already been tested and which is accepted by the grid operators. The adaptation of the regulation formula offers the possibility to give an incentive to increase the sustainability of the supply with electrical energy and thus every downstream manufacturing process. Two advantages are created by the inclusion in the regulatory formula. On the one hand, the technical or ecological transmission efficiency has a direct impact on the revenues of the grid operators. Furthermore, an extension parameter in the sense of a transmission efficiency parameter creates a basis to make the technical and ecological efficiency of electrical energy transmission and distribution visible in a key figure for the first time [7]. This key figure can be introduced into the regulatory formula as follows.

$$ \begin{array}{*{20}l} {EO_{t} = KA_{{dnb,t}} + \left( {KA_{{vnb,t}} + \left( {1 - V_{t} } \right) \cdot KA_{{b,t}} + \frac{{B_{0} }}{T}} \right) \cdot \left( {\frac{{VPI_{t} }}{{VPI_{0} }} - PF_{t} } \right) \cdot EF_{t} } \hfill \\ { + Q_{t} + \left( {VK_{t} - VK_{0} } \right) + S_{t} } \hfill \\ \end{array} $$
(1)

The individual parameters of this extensive formula are not to be described and discussed further. This is already sufficiently done in Annex 1 to Section 7 German incentive regulation ordinance and in works based on it. The linchpin of the procedure examined in this paper is the expansion factor within the time period t \({EF}_{t}\) with its influence on the revenue cap within the time period t \({EO}_{t}\). This factor is already anchored in the regulatory formula. § 10 of the German incentive regulation ordinance states that the expansion factor is currently applied if the comparative parameters defined by the regulatory authority change by a significant amount (at least 0.5%) during the regulatory period. Extension factors for other factors have already been considered. One of the most recent proposals was an expansion factor to reflect the digitization of grid operators. The extension factor for measuring the degree of digitization would provide a direct incentive to increase digitization by influencing the revenue cap. This extension factor has not been implemented. However, it provides a good basis for arguing that it is possible to set expansion factors in such a way that they measure and compare parameters and thus encourage improvements. According to the German incentive regulation, the incentive should always refer to a comparison in the sense of a benchmark.

3.2 Linking to Efficiency Parameters of Manufacturing Processes

In manufacturing processes, there is a broad spectrum of methods for assessing the efficiency and sustainability of the processes. Especially in the field of eco-efficiency, there are approaches that can also be applied to the transmission and distribution of electrical energy. However, the goal is first to introduce a key figure that is as simple as possible. The elaboration of a sophisticated indicator should be done at a later stage. As a first step, complicated metrics for evaluating environmental and technical efficiency should be avoided. It is important that grid operators have an obvious incentive to reduce transmission and distribution losses. Therefore, it is useful to start with a comparison of the relative grid losses. The proposal initially involves four steps. The first step is the determination of the relative grid losses.

$${E}_{V, rel, t, i}= \frac{{E}_{V, t, i}}{{E}_{t, i}} \cdot 100$$
(2)

  • \({E}_{V, rel, t, i}\) - \(relative\, loss\, energy\, within\, the\, time\, period \,t \,in \, \% \, of\, the\, grid\, operator \,i\)

  • \({E}_{V, t, i}\) - \(loss\, energy \,within\, the\, time\, period\, t\, in\, kWh \,of \,the\, grid\, operator\, i\)

  • \({E}_{t}\) - \(amount\, of \,energy\, transmitted\, within\, the\, time\, period\, t\, in\, kWh\, by\, the\, grid \,operator\, i\)

The second step involves benchmarking the results of all participating grid operators. The results of the relative loss energy of the grid operators are sorted by size.

3.3 Integration into the Regulatory Formula

The two steps just described for the formation of the enhancement factor for the evaluation of the technical ecological efficiency of the grid operators can still be followed by a scaling. It is to be expected that the mere use of the enhancement factor shown in Eq. (2) in Eq. (1) will lead to an over- or under-influence of the revenue cap. For this reason, scaling according to the benchmark may occur, similar to the efficiency value determination in the course of the efficiency value comparison. According to the efficiency value comparison, the grid operator with the lowest \({E}_{V, rel, t, i}\) could be assigned a \({EF}_{t}=1\) and the grid operator with the highest \({E}_{V, rel, t, i}\) could be assigned a \({EF}_{t}=0.6\). All other grid operators would be assigned a \({EF}_{t}\) linearly ordered according to their \({E}_{V, rel, t, i}\).

4 Results and Discussion

4.1 Very High Potential for Energy Savings

Previous studies and research have shown that there is a high potential in mitigating transmission losses. Germany alone, transmission losses amount to 27.2 TWh in 2020 [18]. With the current energy mix, this corresponds to emissions of 9.8 megatons of CO2. As CO2 emissions are mitigated to full decarbonization, there will likely be a widespread shift to electric power. It is obvious that this is a high ecological potential, which exceeds the effect of many efficiency measures in industrial manufacturing processes. It can be assumed that without an intervention in the current grid structures and a continuation of the current feed-in and demand structure, an increase in losses can be expected. These large amounts of energy make it clear that electrical energy as a production factor has great potential for overall economic savings in energy, environmentally and climate-damaging emissions, and ultimately high costs. As described, the potential for the individual manufacturing process (depending on the demand for electrical energy) is not high or not high enough to be considered at present, but it is a universal production factor with enormous economic significance and high potential for reducing emissions and energy demand in the economy as a whole.

4.2 Transfer of Efficiency Parameters of Manufacturing Processes Difficult

However, adaptations of the energy system with its operating resources must be considered, because the German energy market is not a complete liberalized market. This factor is an obstacle to free pricing, as investors need a security for revenues to invest. Such guarantees can be provided by a (partially) regulated market. This particularity presents both opportunities and challenges for the integration of efficiency improving methods into the energy grid regulation. The basis for this long-term assurance of supply reliability with innovative technologies while guaranteeing secure revenue structures is provided by the German Energy Act (German: Energiewirtschaftsgesetz – EnWG) [19]. Ultimately, this means that the same methods cannot be used to evaluate and influence efficiency in manufacturing processes without further adaptions. The methods and tools used must be aligned in their effect with the goals of the German Energy Act §1 and equally stimulate a reliability of supply, environmental competitiveness, acceptance, value for money and efficiency [20].

4.3 Precise Definition And Shaping of the Factor - A Long-Term Process

In the introduction to this paper, it was described that the incentive for more grid-efficient energy procurement in manufacturing processes must come from the grid operators. To achieve this, the grid operators themselves must have a higher incentive to reduce grid losses. For the creation of such an incentive, an objective key figure is required. In Sect. 3, it became clear that a direct incentive, as it exists in industrial companies for increasing the efficiency of manufacturing processes, cannot be implemented when influencing transmission losses within the electric power supply grid. Rather, a factor must be found that attacks the current regulatory methodology. The factor presented here is certainly capable of generating a corresponding incentive. For the actual implementation, further analyses and simulations regarding the effect of the factor are important. Especially with regard to the background of the smart grid approach and an increasing digitalization of the energy grid for a target-oriented monitoring of the operating parameters, a breeding ground for efforts to increase the efficiency of energy transmission and distribution can be seen. Ultimately, electrical energy is a universal production factor whose importance for most manufacturing processes will increase. Thus, increasing the efficiency of energy transmission has a direct positive impact on the footprint of most manufacturing processes. This paper shows a potential method for the use of an efficiency indicator for energy transmission. Future research questions need to clarify how this indicator should be designed in detail.