Egeruoh chigoziri

Re-regulating the Dutch
Liberalized electricity
market

Identifying the regulatory challenges to
the Dutch electricity sector for full
decarbonization by 2050

EGERUOH CHIGOZIRI C

Egeruoh Chigoziri Cyrinus 201117663

Introduction

With the EU decarbonization target set for 2050 , all the member states needs a plan for the resultant full
power system decarbonization goal and this does not have to be only state based but include a regional plan.
This report looks at the Dutch electricity sector with its existing peculiar characteristics to design
modifications to the existing regulatory framework based on the 1998 Dutch electricity act so that her
power systems evolves towards meeting the full decarbonization goal. The shortcomings of the current
Dutch regulatory framework was scrutinized and an evaluation into the diverse regulatory changes that
could be implemented was made. This paper is broken into two sections. In section 1, for each of the aspects of
the Dutch power sector value chain that was considered in section 2, an appropriate regulatory response was
identified. These regulations anticipated and is set to encourage faster adoption of more sustainable forms
of production, transport, distribution and consumption of electricity, and remove unnecessary existing
barriers.

The future Dutch power system as a whole was looked into in section 2, considering that the 2050 plan will
experience a strong presence of renewable sources of electricity generation, specifically very large
penetration of intermittent generation ( mostly wind and solar, with or without storage) and carbon capture
and storage plants to take care of Lucrum ceasans that will likely arise from the retirement of less relatively
sustainable and obsolete production technologies to be replaced by “cleaner” ones. Expected large volumes
of new investment will demand favorable investment climate to stimulate the investors in the “right”
technologies. The resultant effect is that it is likely to result in a much higher and, probably, also much more
volatile electricity prices which will drive huge and generalized implementation of energy efficiency and
conservation that will include the output channel in the measures that will directly or indirectly impact on the
consumption of electricity. To achieve this The Dutch plan to introduce the use of enhanced metering of
electricity consumption to facilitate demand response in 2012 is essential and on time. This is because the
enhanced metering and communications is expected to allow increased distribution automation and enhanced
network supervision and control at transmission level and even distribution level. Also the escalating issue of
quality of service in electricity supply was approached using the recent OFGEM model of the UK. Finally it was
justified that it most likely and reasonable to assume that universal access to electricity will be achieved by
2050 although with associated conditions.

Section I

1 Energy legislation
The energy legislation in the Netherlands cannot be discussed without incorporating gas and electricity;
however, most of the recommendation here will be for electricity although gas has to change as well and almost
at the same time. There are selective changes that have to be done if the transition into the renewable energy
dominated regime will come to stay. These will be based on the loopholes that are noticed in the current Dutch
legislations based on electricity act of 1998. Other changes and procedure for these changes are explained
relatively in detail in section 2.

1.1 Regulatory recommendation
It is strongly recommended that a legislation that will grant TenneT the right to siting major transmission
network should be passed, in order to reverse the investment order and time of generators and networks to
enable quick investment and locational signals. These legislations should be an extension of a harmonious law
that permits the building of interconnectors between the countries of which Netherlands is coupled to.
Energiekamer should transit to dynamic pricing regulations and fixed network cost should be recovered
through customer charges. NMa should have a representative that jointly monitors the coupled countries to
avoid price disparity in these countries (Belgium, Norway).
A legislation on how and when to use electricity storage facility is paramount especially when it has to
cross border and this should be an extension of a directive that should be issued on EU level since electricity
does not follow transaction path and integration of EU network is necessary and obvious.
Cyber security is paramount and the power should be given to a branch of the NMa to enable data
protection and security towards transition to smarter networks.
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1.2 Networks
1.2.1 Transmission
There should be legislative changes about the grid spurs in the grid code protecting the affected producers
by humanitarian and universal access law .Gridcode should be modified to include grid spurs in other to
anticipate micro grid solution when need be.
The Dutch congestion management is mostly by implicit auction explained in system code and this needs to
be modified to enable loopholes that can accrue when there is excess renewable to avoid spilling as a strategic
behaviour from non-dispatchable technologies of coupled countries. This will stimulate other countries to
invest in storage. Metering code should be extended to distribution because of the DG’s and mechanism to
separate the thin line between distribution and transmission should be established in the Gridcode. System
code should be modified to take care of the balancing issues that will arise from distributed generations and the
renewable energy sources that are non-dispatchable.
1.2.2 Distribution
Sequel to the issue that could arise from the two major constraints stemming from the high penetration of
Distributed generations (DG)1, the following recommendations is suggested to the Dutch electricity sector and a
reform in her 1998 electricity act. This should be done by the Energiekamer.
DSO unbundling should abide by the provisions stipulated in the European Directive 2003/54/EC. This most
likely may imply a design of measures for achieving a higher level of national compliance with the
requirements of both legal and functional unbundling tailored towards accountability and transparency .A
subsidiary of NMa should conduct frequent benchmarking analysis to measure performance and adjust to
shortcomings arising from existence of entry barriers, network charging methodology and national regulatory
framework (e.g., network regulation and support mechanisms/prioritized access) in place.
The next regulatory challenge which is related with DSO revenues and incentives to integrate DG might point a
finger to the need for incentives that will aid the improvement of network planning taking into account DG, to
design regulatory arrangements for compensating DSO extra costs due to DG, and to improve DSO performance
in quality of service taking into account DG. This may explicitly imply that outside the existence of incentive
based mechanism indexed to inflation, there might be a need to implement use-of-system (UoS) charges for DG
and/or support mechanisms applied to DG, differentiated by time of use (ToU) and voltage levels, together with
economic incentives for the DG to provide ancillary services to help DSOs to operate the network (for instance,
providing voltage control and reactive power support, with a more active management of the network by
DSOs). Efficiency to DSO should include a better optimization of the existing facilities leading to efficient
investment in new installations. However there is a strong requirement for a specific regulatory mechanism to
compensate DSOs for incremental CAPEX & OPEX that will arise due to DG penetration to prevent anti-
competitive behaviour from the DSO.
DG penetration might not be evenly spread, hence the higher the DG penetration and concentration levels in an
area the more the required compensation to the affected DSO for incremental energy losses. The responsibility
should go to those generators connected in those areas that could be charged with an energy fee (€/kWh)
proportional to the value of the incremental losses they produce in the network. This mechanism can be
combined with the implementation of UoS charges for DG and/or support mechanisms applied to DG, with a
voltage levels differentiation, which could incentivize the DG connected in lower voltage networks to reduce
losses at higher voltage levels.
As the DG becomes a significant portion of the generation, there is a need to charge them with the
responsibility to help in the improvement of reliability indices in terms of duration and frequency of supply
interruptions and voltage quality keeping voltage disturbances within defined limits especially when they are
working in is landing mode in case of network outages. Compensations for DG that can provide ancillary
services such as voltage control, frequency reserve, or black start to improve voltage quality is necessary. This
can be encouraged by implementing
-performance based regulation for quality of service targets that provides explicit incentives to DSOs for
improving quality of service levels.
- Dynamic efficiency based incentives for DSO whose innovation programs that aids deep transformation from
passive to active management increasing DG participation in network control and DG contribution in case of
network disturbances.

1 See distribution section
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- incentives to DG for providing ancillary services to relive the TSO’s burden and assist DSOs to in network
operations related to issues of voltage control and reactive power support, frequency reserve, islanding
operation aimed at net improvement in quality of service levels.
Incentives to promote dynamic efficiency for the DSO to integrate DG should be added to the network
regulation. This can be achieved by including R&D investments as a separate item in the Regulated Asset Base
with higher rates of return or with a partial pass-through item. Another approach could be by using identified
network innovation key performance indicators or by involving the regulators in the testing of some of these
methods to confirm efficacy.
Another crucial challenge is the need to send economic signals to DG for their efficient integration are which
indirectly means a need for an efficient and effective design of support mechanism not only for DG connection
charges and UoS charges but also for ancillary services and other network services provided by DG. A support
mechanisms factoring in a significant DG shares should ensure compatibility with energy market prices and
network UoS tariffs that will drive efficient DG operation and network location should be implemented. With
respect to DG operation there is a need to achieve efficient market integration that will improve the net social
value of the MWh to the consumers. RES_E promotion mechanism should be dynamic and have temporal
discrimination to stimulate production during scarcity ( i.e. Implement feed-in tariffs with time discrimination
or feed-in premiums on top of market prices that promote efficient DG operation, i.e. higher production at peak
hours, and storage and controllability capabilities in medium and large size DG installations. )
Ensuring a level playing field for DG integration is necessary in Netherlands and this implies that DG connection
charges should be paid once when the connection is required, regulated, based on simple rules and may or may
not remains the shallow costs, i.e. the direct costs of connection. There should be transparency in calculating
this cost and other associated network reinforcements and upgrades due to DG connections should be
socialized among the network users and paid through the Use of System (UoS) charges. Depending on the
circumstances, DG should pay or receive UoS charges which should be cost reflective accordingly and
differentiated by time of use and voltage levels. DG connections at lower voltage levels and DG production at
load peak hours should be incentivized to discourage instability in transmissions and this can be achieved by
differentiated DG support mechanisms such as feed-in tariffs by voltage levels
1.3 Market power
There should be a law that prohibits the largest share holders in conventional generation to have larger amount
of RES-E to avoid likelihood of abuse. Measurement of market power should not be based only on capacity but
also production. The use of HHI index should be complemented with other methods and monitoring market
power should be controlled both ex ante and ex post.
1.4 Retail
There is a need to redefine and make new legislations that will take care of supplier of last resort and define the
procedures for transfer. Also a regulation needs to be in place to see how DG and RES-E, can be program
responsible or not.

Section II
2 Leaving the EU 2050 decarbonization roadmap for the Netherlands to the “market”
The Dutch electricity regulation of 1998 has been adapted to take care of the turmoil’s that have existed in
the days through the learning by doing (Ajodhia, Franken, & Van der Lippe, June ,2003), but to contribute their
quota in the EU 2050 energy roadmap might mean extra adaptation. The Dutch is a good disciple of the market
only system, however knowing that market is not perfect, one might have to complement this strategy with
other mechanism. This is where regulation can be of help.
On a closer look at the EU 2050 energy roadmap as a country, the first challenge should be to consider
whether it is worth a while to actually venture into this plan ab initio. Considering the fact that all the countries
have their plan, meeting or even exceeding this target depends on variables like the cost of the technology that
will be viable in the country in question because of lack of generosity and equality in the availability of primary
source of energy, maturity of technology and the actual total percentage that can come online considering the
installed capacity and implied lucrum ceasans if there becomes excessive penetration of electricity from
renewable energy sources (RES-E). Also this decision cannot be taken unilaterally as acting independently of
other EU member states can lead to blind investment or overinvestment. Hence there is a need for a long term
strategic planning involving all countries with diverse abundance of primary source of energy with the ones
that don’t have, to facilitate a regional economic development or at least avoid the issue of over investment.
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The next challenge of how to distribute RES to sectors considers the transport and the electrical sector as
the major “victims”. However, it seems relatively cost effective and efficient to approach the RES plan from the
electric sector. In other to make sure that reduction does not come as a public good, it is essential to raise the
taxes in other sectors in other to avoid leakage and to provide incentive for innovation that will use clean
electricity like electric cars and discourage their reckless squandering of fossil fuels without internalizing the
externalities and also to stimulate research in the transport sector.
Focusing now on the electric sector with relatively easier and more matured technology, the third
challenge could be how to redistribute the development percentages to the technologies available. Assigning
this to the technologies with higher maturity might lead to the loss of innovation capabilities and
discrimination, while an equal distribution of percentage of development might not be cost effective. To tackle
this dilemma, it becomes necessary to implement different economic instrument to promote different
technologies according to again, different variables. These variables include but not restricted to the cost
effectiveness, protection of knowledge spill as a public good, non-discriminatory promotion, political
acceptability, and maturity of technologies involved. The implied multi-criteria evaluation might be subjective
to the Dutch cultural dimensions2 to avoid direct institutional transplantation3 and economic determinants that
might attach different weights to the decision criteria. (Geert, Gert Jan, & Michae, 2010) (Martin, konstantinos,
& Mamodouh, 2002)
The issue of funding could be one with conflicting factors. However, it apparently seems normal to
distribute the funding across board in all the sectors, including the output channel, in order to stimulate the
demand side response while making sure those taxes sustain competition and avoid leakage especially to the
transport sector where the issue of renewable has seen a sluggish growth. The issue of Ramsey pricing,
although might seem attractive still poses the challenge of discrimination and response of inelastic demand on
the long term that might distort the investment recovery plan since the investment is long term based. The
need to tax other sectors in other to ensure competition across sectors makes it obvious that a multi facet
instrument is essential to promote RES plan and the funding might as well exploit different avenues while
reducing discrimination to the minimum.

2.1 Regulation as a complement to the market
In as much as the Dutch regulators are good disciples of the “market paradigm” and its efficient allocation
of resources, they are still conscious of the fact that this will work up to the extent the microeconomic structure
of the Dutch electricity market permits and this in reality entails micro- granularity in market structures.
Devoid of this perfection, its implication is not farfetched: difficulty and complications in the design,
implementation and monitoring of markets which undoubtedly, is present in the Dutch electricity market.
(Sioshansi & W, 2006)
The issue of the networks (distribution and transmission) is under consensus to be under regulation
following their natural monopoly characteristics, however the generation and retail that is well suited to the
competitive environment has not had a good history in the Netherlands considering the XS energy saga
(Coquet, 2010). Moreover, the issue of market deciding the level of investment is almost compromising the
minimum adequacy requirement in the Netherlands hence demanding the need for the regulator intervention.
Sequel to these limitations of the market in taking care of long term availability of energy resources and also
the strong need to influence the level of energy dependency and resources mix, there is a need to take care of
contingencies arising due to this market failure in the Dutch market from the issue of security of supply and
adequacy that might even worsen due to exposure to dependency. Looking at the support mechanisms for RES
which is long term cannot be done effectively from the perspective of the market because of political interest,
regulatory failures and uncertainty that accompanies long term investment, it seems apparent that there is a
need to help the market with a strategic vision orientation so that agents can be assured of uncertainty
minimization in long term investment.
Going a layer further in the exploration of the Dutch electricity market onion reveals a problem of adequacy
since she is a net importer of electricity with more than 98% oil import in 20104 used mostly by the fossil fuel
plants. Referencing the average of 50% primary energy dependency in Europe, the Netherlands can be assumed

2 Hofstede five dimension for Netherlands shows that they can have behaviour orientations to a particular group of EU countries
3 Martin de jong refutes the issue of forcing a policy on a country rather they should be allowed to adopt it.
4 http://ec.europa.eu/energy/publications/statistics/doc/2011-2009-country-factsheets.pdf

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vulnerable to energy dependency, relying mostly fossil fuels with energy dependency of 38%. Even though
there was a proliferation of CHP and energy efficiency program, the issue of energy efficiency paradox remains
relevant5 with the growth of energy intensity almost doubled (referenced to 2000) and their non encouraging
effort to reduce GHG. Another source of complication is that the Netherland electricity system is capacity
constrained and not energy constrained as there are no hydro in the Netherlands making them dependent on
Gas especially since they have it in abundance in Groningen. With the Netherlands having the lowest share in
Nuclear energy in the EU15 (4%) coupled with the German nuclear moratorium, the issue of adequacy and bad
energy mix cannot be overemphasized6.
Another issue that cannot be neglected is the industrial growth rate of the Netherlands especially in the
region of Rotterdam, Maastricht where the heavy industries are consuming power with a lot of emissions. The
Netherlands is supposed to reduce their emission by 6% according to the Kyoto protocol burden sharing
agreement before 2020 however; their emission is on the rise (200 Mt/CO2 eq) with 90% of that coming from
the energy sector. Hence an eyebrow can be raised on the “total market control” and the quest for regulation as
a complement is obvious and this can be long term and mostly indicative.

2.2 The role of indicative planning
Sticking to the market model in the absence of centralized planning, provokes the policy need to identify
the lack of sustainability in the current regime, the minimum application timeline requirement, the role of RES-
E and the required minimal mix, the method that can stimulate energy efficiency and conservation across
sectors (especially electricity and transport) and the use of the market for obtaining signals. The regulator
might be needed to design mechanisms for adequacy, incentives for RES-E support while avoiding
discrimination in technologies, ensuring that the EU 2050 roadmap is achieved and ensuring universal access
to electricity in the Netherlands. This complementary function requires a strategic appraisal and normative
planning of the electricity generation in Netherlands and EU as a whole, and hence indicative planning might be
an essential requirement.
The indicative planning which should be more than a scenario analysis7, will allow the degree of freedom
that is healthy for the market while complementing the market in many situations. Its aim should be to
enshrine what should happen in the future into a holistic approach considering all the stakeholders, clarifying
the necessary requirements to achieve the EU 2050 target in the Netherlands in time frames of maybe 10, 15
and 30 years. Modifying J Black definition, “indicative planning should attempt to promote a more stable, rapid
and efficient growth in the electricity market via the exchange of forecast leading to generally held set of
consistent expectations especially with the 2050 target”
The role of indicating planning in the Dutch achievement of the 2050 plan will focus on the provision of a
framework that is clear to all affected agents, encompassing the goals and the required resources needed to
affect the regulated aspect of the electricity sector. This should include but not limited to the volume target of
the renewable energy, the time and secured rate of penetration, the corresponding support mechanisms and
dynamism that could accrue due to variation in technology maturity that might affect incentive methodology
change, the lower boundary of reliability that can be accepted due to intermittent penetration of renewable and
how to effectively engage the output channel. Also, it should outline the investment rate especially in lump sum
infrastructures, issues of interconnectivity in the Netherlands for the security of networks, demand side
management which should not be devoid of sound educational programme for consumer’s orientation. An
upper layer of the indicative planning should acknowledge that the Netherlands cannot achieve this target only
nationally, hence there should be regional analysis of the EU and the global implications of the carbon
emissions and incorporate them and all these should be done in a manner that explores the challenges posed by
delivering the EU's decarbonisation objective while at the same time ensuring security of energy supply and
competitiveness in Netherlands. It should respond to a request from the European Council on the EU 2050
roadmap. The inner layer should focus on the Dutch electricity value chains and their connectivity.

5Energy efficiency paradox
6 According to the fact sheet of 1, the energy mix of the Netherlands is 40% oil, 50% gas, 5% coal, 1 % nuclear and 45 renewable. However in

electricity generation, renewable penetration is 9% with 62 %, 21% and 2% of generation from gas , coal and oil respectively
7 Unlike the 2030 transmission plan, a proper indicative planning should be inclusive

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3 Renewable generation
The design of renewable energy sources of generation plan (RES) is no longer a single variable
constrained optimization problem in terms of looking at technologies constrains alone. Taking the EU member
state into this context could mean extra variables like EU targets on reducing emissions, renewable energy and
energy efficiency, constraints on energy security, differences in cost of technologies and their impact on the
competitiveness of the economy and of course environmental impact. This could make this complex problem
elude Energiekamer of feasible solution set or provide one with conflicting challenges. Because of the
geographical location of the Netherlands and the associated weather conditions, this section will be based
mostly on wind and biomass.
Bearing in mind that the objective of every EU member state of which the Netherlands is almost the same,
which is to design a plan to achieve a target on renewable energy imposed by the EU at minimum cost and
without putting security of supply of its consumers to risk. This could translate quantitatively to a 20% share of
renewable energies in final energy consumption, implying a 40% share of renewable in the electricity demand
by 2020 and an almost a 100 carbon free electricity by 2050. Moreover, understanding that climate change
cannot be separated from the EU 2050 decarbonization target which concurs with the IPCC in its Fourth
Assessment Report8 that recommends the target stabilization level of 450 ppmv CO2eq emissions with result of
expected global mean temperature increase above pre-industrial level, at equilibrium, of 2.0 to 2.4 ºC from
Annex I9 parties of which the Netherlands is a member. This should boil down to a decrease of about 25% and
40% below 1990 levels in 2020, and between 80% to 95%, below 1990 levels in 2050”. This will surely come at
a cost, as it was estimated that a reduction of global GDP in the range of 3% total (or 0.2% per year) to nil by
2030, and up to 5.5% total by 2050. However, this might be if the basics are on the fossil fuel technologies,
however incorporating the RES-E could change the results posing a challenge of how to achieve the
development and the massive deployment of these new low carbon technologies as soon as possible.
In as much as it has been established that economic instruments are better than standards and there are
pros and cons of using the price or quantity instruments, (Linares & Labandeira, 2010))10 and some other
economist11 negates the belief of a single instruments to deal with the climate change. Hence one could not
agree less that it is preferable to use a multi-instrument approach to support the renewable sources support
while combating the associated climate change. This should be a carbon price established as the benchmark,
preferably through the auction mechanisms with a safety valve to hedge against risk which can be in the form
of a price ceiling and a price floor to avoid total price excursion. This could be complemented with a technology
policy, technology standards, information and educational policies. Voluntary approaches should also be
encouraged. The reasons follow.
The issue of the cost competitiveness of the RES-E can be a problem especially when the fossil fuel
generations as cheaper. Two approaches can be to standardize some processes in the production lines that
could reduce the emission or preferably, internalize the carbon price as an externality, thus paving way for the
economic instruments. The argument against the standards is the lack of equimarginality which the economic
instruments favors, however that does not rule out the entire use of standards in this multi-instrumentality
approach. Because electricity is a homogenous good and the output channel (demand side management) is
inelastic on the short term, there might be a need for standards when the output channel is to be included. A
step further shows that when the economic instrument is to be used, a price or quantity instrument poses a
challenge. Using a tradable quota as being used in the EU addresses the problem of volume uncertainty but not
when there is no safety valve (as can be seen in the price of carbon that has just fallen) hence there might be a
need for the safety valve as both a price floor to avoid what is currently going on and a price cap to avoid the
carbon prices going through the roof. The cost of carbon should be high enough to discourage the construction
of fossil fuel plants while making the RES-E technologies competitive. For the Netherlands, the adopted target
of renewable is around 15% by 2020 and 30% by 2050. To achieve this, there will be a need for technology
standard.
Leaving this target to the market is obviously unfeasible especially because of its long term orientation
favoring a need for technology policies that will promote the amount of renewable penetration that is required
especially support their R&D because knowledge spillover is a public good. This can be done through different

8 IPCC report 2007, see reference
9 Annex 1 countries are the OECD countries. http://unfccc.int/kyoto_protocol/items/3145.php
10 Pedro linares suggested multi-system because of the energy efficiency paradox
11 Others that supports multi—Newbery, Kohoene etc . See references

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approaches depending on the maturity of the technology. For technologies that are still in the demonstration
phase or in their cradle a policy that will push them into the market will be the right one. Hence there will be a
need to have a technology push policies accepted into the Dutch regulation. This is essential as 90% of the
electricity generation that are existing in the Netherlands are fossil fuel ( coal, oil, gas) and hence are polluting.
Sequel to the long life of this generators, it is obvious that technologies like Carbon capture and storage has to
be encouraged as an abatement technology to capture the emissions. Shutting down these plants will incur a
double cost, firstly, the cost of renewable replacements within short periods and the associated lucrum ceasans.
Another pressing need for the renewable will be the technology mix that is to be achieved. Promoting
technologies according to maturity will not only discriminate against growing technology, but will discourage
proper technology mix, frustrate dynamic efficiency and encourage technology dependency. Thus in other to
avoid these, a market pull mechanism that will compliment the technology push policies is essential. However,
using the right according to battle et al 201112, RES-E support mechanism can be seen from 2 perspectives
depending on the involvement of the regulator. If the Regulator provides an implicit payments or discounts or
provide institutional support tools that include: research and development funding, below-cost provision of
infrastructure or services (costs of technical adaptations such as shadow connection charging) , removal of
costs of imbalances and ancillary services in general), and positive discriminatory rules (such as regulations
facilitating grid access for RES-E power, RES-E dispatch priority in the EU and other: net metering, building
codes, etc.).It can be referred to as indirect methods otherwise it is called the direct methods. Also for matured
technologies , it could depend on the learning curve which can favour the quantity instrument if they are flat (
for matured technology) or price instrument if they are steep ( immature technology)
3.1 RES –E Support schemes
When categorizing the different types of support mechanisms available to electricity from renewable
energy sources (RES-E), a fundamental distinction can be made between direct and indirect policy instruments.
Direct policy measures aim to stimulate the installation of RES-E technologies immediately, whereas indirect
instruments focus on improving long-term framework conditions. Besides regulatory instruments, voluntary
approaches for the promotion of RES-E technologies also exist, mainly based on consumers’ willingness to pay
premium rates for green electricity. Further important classification criteria are whether policy instruments
address price or quantity, and whether they support investments or generation. Table 1 of appendix, shows the
classifications and the best applications to the Dutch electricity market.
The Netherlands might not have the luxury of sunshine; however they can harness the offshore wind by the
coast of Maastricht13. Nonetheless, the price of wind energy cannot compete with the price of fossil fuel unless
there is a support mechanism. A price based mechanism to guarantee entrance into the market will favour the
implementation of Feed-in-Tariffs (FIT)( although they have been using Feed in premium ) in the Dutch
regulation which will promote investment by guaranteeing RES-E generators a specific price per MWh that is
produced. To encourage development of new RES-E capacity, FIT must be high enough to ensure long-term
recovery of costs for a given technology and the time duration should be up to 20 years to discourage
investment uncertainty on the long run. Even though FIT can come in form of regulatory agreements or
contracts ,a flat or stepped tariffs, because of variation in RES-E development especially considering wind ,
solar and biomass and also variation in siting and scale (e.g. onshore vs. offshore wind) a stepped” tariffs will
be encouraged to differentiate levels of remuneration according to the RES-E profile. The payment will be
decreasing and should be indexed to a lot of factors like the learning curve, and the influence of other RES-E
technologies.
A quantity instrument can be applied also which should be enforceable and this can take the form of
renewable portfolio standards (RPS), also referred to as tradable green certificates (TGCs) or renewable
obligations (ROs) in the EU, establish quota requirements for consumers to have certain percentage of
renewable in their consumption. This will help in price recouping for these technologies.
There will be cost associated with the integration of large scale wind. The balancing cost will rise because
of the likely frequent need for more reserves and balancing services which will lead to a need for different
reserves for Regulations, load following and scheduling. The associated cost increase will be because of the
need for additional quick start capacity and conventional power plants running at technical minimum .Weak
contribution of wind power to peak situations due to variability of wind power generation will lead to

12Battle did a nice design on how penetration of different renewable can take care of the current issues of proper mix and who pays
13The most likely renewable that will dominate the Netherlands RES-E is likely to be wind and a little of biomass since the APX has started
trading in biomass. the issue of wind is the high intermittency while biomass does not have intermittency
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additional reliability cost due additional installed generation capacity needed to achieve the same level of
LOLP14.Additional congestion and losses cost will also accrue because of locations of the wind parks which
most times leaves one with no choice and this is because the lead time of construction of wind plants is less
than the time for network capacity expansion. There will also be associated connection cost and hence the need
for network reinforcement.

3.2 Market design
The market design will determine the quality or accuracy of market signals .With the Dutch day ahead and
intraday market being the most liquid, the volume of trade of the bilateral market (OTC) dominating the APX
trade ( spot market) , it might be ill equipped for optimized generation scheduling. In terms of gate closure,
there might be a need to reduce the time for real time emulation, to decrease imbalances. Balancing signals by
TenneT should be cost reflective to induce efficient behaviour and this leaves a dilemma of single or dual
balance prices15.
In terms of market signals, wind technologies have no way to react to market signal and the agreement
might favor their non-exposure to market signals. However, this might be for the short term only. In the long
run, there might be a need to expose wind to market signals since there are positive effects. These include
optimal selection of wind site to harness the varying wind patterns that will take the different temporal value of
energy expressed in forward and balancing market signals. Locational signal should entail the optimal selection
of wind sites to minimize the congestion costs and losses hence favoring the adoption of locational network
tariff or cost –reflective connection costs. There should be improvement in maintenance planning and
improvement in technology combination in portfolio. Also exposure of wind energy to market signals will
encourage control (reduction) of production for extreme cases of imbalance or network constraints,
improvement of controllability by innovation, improvement in individual forecasting and system balance
efficiency and transparency of the support schemes that were employed.
The wholesale market (APX) will have to adapt to these RES-E infiltration. There might be a need for
priority in dispatch as the renewable cannot store the primary source of energy. Although this might distort the
merit order for large penetration context (example solar or biomass), the increasing accuracy weather forecast
can help reduce these uncertainties.
In the case of lucrum ceasans for the older technologies that are polluting, this avenue can be used to
promote the CCS as a transition technology. The CCS technology could be broken down as a business in its value
chain, which includes transport and storage and mandate the polluting technologies to use it if they want to
continue to generate although this might demand a legal back up since they have license given to them.
However CCS has to come out of the demonstration phase and there is a need for educational awareness to
encourage its social acceptability. All these require an indicative planning in order to coherently implement
them in the regulation adjustment.

3.3 Evaluation of the Different RES-E Support Schemes (Effectiveness and Economic Efficiency)
It is not all about the mechanism for supporting investments, there is a need for reviewing and evaluating
the different RES-E support schemes described above, the key question is whether each of these policy
instruments has been a success. In order to assess the success of the different policy instruments, the most
important criteria are Effectiveness which checks if the RES-E support programmes lead to a significant
increase in deployment of capacities from RES-E in relation to the additional potential. The effectiveness
indicator measures the relationship of the new generated electricity within a certain time period to the
potential of the technologies. Also the Economic efficiency checks the absolute support level compared to the
actual generation costs of RES-E generators, and what was the trend in support over time. It also analyses if the
net support level of RES-E generation is consistent with the corresponding effectiveness indicator. Other
important performance criteria are the credibility for investors and the reduction of costs over time.
4 The regulation mechanism for the Dutch electricity Networks
The regulation of the networks in Netherlands shares some characteristics and regulated by the same
authority: Energiekamer, although with variation in specifics hence the implied method of regulation differs a
little. In general the Dutch electric network regulation is incentive based, which involves a yardstick ex-ante

14 Loss of load probability of the initial system will reduce due to high wind penetration.
15 See table 3
8


methodology by an explicit use of benchmarking employing non –parametric frontier analysis called data
enveloping analysis, with generic efficiency scores .

It is necessary to look at the performance of the networks from two perspectives viz efficiency and quality
which is still a regulatory concern the Netherlands now more complicated by the EU roadmap. Considering
efficiency, the use of simple indicator of inefficiency which can be defined as the ratio of an output measure to
an aggregate measure of inputs, even though it does not require a multivariate is not adequate to account for
the environmental factors and more elaborate methods are generally preferred. These methods are generally
based on distance functions called frontier analysis of which the Dutch uses DEA which is very recommendable.
This benchmarking is used to deduce the level of attainable costs and in setting the X-factors within periodic
price control reviews assuming that assumption that cost data of a group of firms are mutually informative
Measuring service quality can be linked to its importance to consumers, the controllability by network
operators and its measurability by regulators. The choice of X has an influence on the migration of low carbon
economy and thus a need to set out a new sustainable regulatory framework. Borrowing a leaf from the RIIO
model (Revenue set to deliver strong Incentives, Innovation and Outputs) 16of the UK seems quite interesting
in other to encourage the network industries to get fully involved in the delivery of a sustainable electricity
sector and deliver long-term value for money network services for existing and future consumers
The current industry sector is adequate in running this although there might be need for offshoots of
parastatal from the Energiekamer and NMa to take care of the indicative planning. The stakeholder should
empower Energiekamer and the TenneT in network planning and expansion decision. The level of involvement
of whom and how will vary17 and this will influence the level of third party modification request which should
follow the rules meted out by NMa.
The result of this modification should be oriented to the delivery of safe and reliable services, non-
discriminatory and timely connection and access terms, customer satisfaction, limited impact on the
environment and delivery of social obligations. Regulatory control will remain ex-ante maintaining the upfront
price control indexed to inflation using Consumer price index (CPI).
The length of the price control will be a bone of contention. The initial 4 years might not work well in the
low carbon economy due to the influence of investment cycles and dynamic efficiency. An extension might be
necessary which has to be at least 6 years initially (50% increment relative to the past time) which however,
will have to be reviewed before the end to avoid gaming. This price period can be adjusted as time goes
depending on the lesson learnt. This is expected to be proportionate since the Netherlands uses a yardstick
measurement, however this can be internationally benchmarked but taking spatial and temporal differences
into consideration.
In terms of incentives, this should be a carrot and stick mechanism, favoring the good and punishing the
offenders. Penalties should be high enough to deter offenders which might get up to license revocation while
reward should adequately stimulate performance. Finally, for distribution to have dynamic efficiency, it should
have an innovation stimulus package limited in time that favors innovation in performance and cost savings as
fast as possible. A detailed concern of distribution and transmission follows.

4.1 Distribution
The Dutch are not new to distributed generation (DG) especially with the proliferation of micro combined
heat and power (CHP) in her power system, however currently; this does not contribute significantly18 to the
total generation volume. Subsequently, when it does which is likely to be the case, there may be a lot of
differences in the operation of their power system. Unbundling at the distribution level is very essential as it
may negatively impact the access conditions for new DG operators trying to penetrate the market especially
when Distribution system operators (DSO’s) exhibits anticompetitive behaviour if neglected.

16 OFGEM RIIO Model - http://www.ofgem.gov.uk/Media/FactSheets/Documents1/re-wiringbritainfs.pdf
17 Sherry R. "A Ladder of Citizen Participation," http://lithgow-schmidt.dk/sherry-arnstein/ladder-of-citizen-participation.html
18 What is significant can be relative

9


4.2 Distributed generation and smart metering
The current Dutch electricity regime is expected to experience a significant metamorphosis, primarily
driven by the need to deliver a low carbon economy - with a target of more than 80 per cent reduction in
greenhouse gas emissions by 2030 and decarbonizes electricity generation by 2050 – while maintaining
security of supply. The drivers of change will be dynamic hence the network companies and the regulatory
framework will need to evolve with it. These drivers that will be the offshoots of the replacement of ageing
assets include the offshore networks, electric vehicles, electric heating, smart grids, electricity storage, new
nuclear and having a predominant renewable energy sources. However, this is expected to come at a cost of
which the security of supply; the issue that is mostly dreaded could be affected by local generation, energy
efficiency, district heating and climate change adaptation. One could not agree less with the DG grid report19
that under the resultant decarbonized system, two broad categories of issues will most probably arise. This
include how DSO regulation should be changed for enhancing the share of DG and the economic signals to be
given to DG to achieve its active integration in distribution networks. However the rate of penetration of these
drives the temporal dimension of the above two challenges
The penetration and integration of Distributed Energy Resources (DERs) is a major planning challenge to
the DSOs. There will be a need for accurate assessment of the impact that DER will have, when it will have it
and how , since the specifics of installed DERs may affect the control of the networks within limits, quality of
supply losses and may have resultant financial hurdles. Limiting this to effect of inclusion of electric vehicles
(EVs) on the distribution networks raises the question of efficient use of EVs as responsive demands and
dispatchable storage.
The considerations for connection of EVs to the Dutch distribution networks are similar to that of other
DERs and should be subject to the same technical, economic and regulatory challenges. Technical challenges
can be analyzed in terms of three main categories of impacts: network demands, network voltage levels and
secondary transformer overloading with general effects that includes large voltage drops, increased losses,
voltage unbalance and other issues related to power quality20. Economic challenges include costs of
infrastructure, maintenance and shifting the operation of distribution networks toward active instead of
passive management21. The third and perhaps most important challenge is a regulatory one which demands a
clear policy from both governments and utilities across car manufacturers and consumers However, it is
unlikely that PHEVs will have the impact that some researchers are suggesting is possible hence might not be
considered here .22
4.3 Transmission
The Dutch system comprises several regional grid administrators, while the national high-voltage grid is
only managed by TenneT. The duties and areas of authority of all grid administrators have been laid down in
the 1998 Electricity Act, and various transmission procedures and regulations is based on this act of which its
implementation is monitored by the Office of Energy Regulation (DTe) on behalf of the government, by
checking the services and tariffs of the grid administrators. In order to harmonize performance, the joint grid
administrators have submitted an annex to the Act for the tariff structure and the technical conditions
(regulations) to DTe. The technical regulations are summarized in codes which are the Grid Code, the System
Code and the metering code and tariff code
TenneT is not lagging behind in the concern of the 2050 decarbonisation road map of the EU because of the
detailed plan that they have 23 which might be called an indicative planning is supposed to provide an efficient
transmission grid that facilitates a high degree of security of supply, and reacts in a timely fashion to
developments in the energy market such as internationalization and the drive for greater sustainability
The Dutch electric transmission grid operates at a number of voltage levels (see figure appendix) where
higher voltage levels (Extra high voltage (EHV) and high voltage (HV)) transmit large quantities of electricity

19 DG can be a serious issue when not taken care of . see reference by Gomez et al
20 V. H. Méndez, J. Rivier, J. I. d. l. Fuente, T. Gómez, J. Arceluz, J. Marín and A. Madurga. Impact of distributed generation on distribution
investment deferral. International Journal of Electrical Power & Energy Systems 28(4), pp. 244-252, 2006.
21 A. Vojdani. Smart integration. Power and Energy Magazine, IEEE 6(6), pp. 71-79, 2008
22 J. A. P. Lopes, N. Hatziargyriou, J. Mutale, P. Djapic and N. Jenkins. Integrating distributed generation into electric power systems: A review

of drivers, challenges and opportunities. Electric Power Systems Research 77(9), pp. 1189-1203, 2007.
23 Vision 2030 and quality and capacity plan .TenneT is tasked with providing an efficient transmission grid that facilitates a high degree of
security of supply, and reacts in a timely fashion to developments in the energy market such as internationalization and the drive for greater
sustainability

10


over long distances with low levels of energy loss while the lower voltage levels are used to connect the
consumers .This grid cannot be exonerated in the need to integrate the north west European electricity market
even though it is obvious that the transition to a sustainable energy supply has posed other challenges. This is
evident in the EHV that was meant to be an interconnection that has now changed its role24.

4.3.1 Sustainable development impact on the Dutch transmission grid
The impact of the carbon free electricity market in the EU will influence the Dutch grid of which most of the
influences will be observed in
• The liberalization of the market has made the national borders less relevant in this respect as the
investor’s decisions transcend national border (CWE coupling with the Belgian and German borders has shown
the same price) (Energiekamer, 2011).
• The market integration and coupling is on the rise leading to a growing international trade in electricity
resulting to increased transmission instability over longer distances across the Dutch border including the
HVDC line with the UK and growing lines with other borders25.
• The location of the Netherlands with respect to the North Sea which is considerably an attractive location
for large scale electricity production partly due to availability of sufficient cooling water and partly due to the
excellent possibilities for shipping in fuels such as coal and biomass not neglecting the abundance of wind.
• Energy conservation, reduction of CO2 emissions and the increased use of sustainable energy, in pursuit
of the EU 2050 agenda will result in new initiatives and the application of new technologies, Nonetheless, the
electricity demand in Netherlands is expected to rise substantially.
In the response to these likely developments, four scenarios 26, with the corresponding possible
transmission grid configurations and their associated transmission capacities have been analysed for their
resilience of which the analysis shows that the electricity transmission grid will increasingly have to handle
large transmissions over longer and longer distances. The trend of ever greater distances between production
locations and consumption centers is set to continue, resultant from some developments such as the
construction of new power stations on the coast and the installation of large scale offshore wind farms.

4.3.2 Gray areas in current Dutch transmission regulation
The current legislation of the Dutch and the neighboring countries especially the ones with which her
market is coupled. In terms of planning criteria, there might be a need to have a harmonized planning criteria
with the neighbors and this should be frequently announced to the give the generators indications for
investment location and also give locational signals. The TenneT should be given full responsibility to engage in
well proven expansion for the Netherlands. Then for the interconnection expansion, there is a need to have a
regional institution responsible for this with full power given although the might be a need for a competition
authority in all the associated member states that can have a veto power when there is a fear of market power.
Also the cost allocation should be harmonized and most probably be from the citizens.
The business models for transmission development should be a little ahead of the generation and should
also be harmonized with the siting procedures and also explicit for the Netherlands and for the neighboring
countries. The clearing of these gray areas will be a major step towards legislative support for the efficient
transmission system in the coming regime.

4.3.2.1 Investment
Using the security of supply and cost effectiveness as the criteria for analyzing the pros and cons of
investments in the EHV grid and the HV ,it is obvious that investments to respond to the earlier mention issues
may result to adjustments to the grid structure, grid upgrades, better control of the grid, and modifications to
EHV/HV interconnections
One loophole in the regulation can be observed in a situation where the HV grid is connected to the EHV
grid via a single EHV/HV interconnection, this makes the underlying HV grid to become more susceptible to

24 The capacity planning docs
25 http://www.tennet.org/english/projects/Projec ts_Europe/Internationalesamenwerking.aspx
26 See appendix for scenario diagrams
11


interconnection related ‘common cause failures’27 if structural changes are not made to the EHV/HV
interconnection. This is a problem as the grid code does not consider the common cause failure because grid
code recognized only the failure of single component during operation and not during simultaneous failure of
two components.
In as much as structural changes in configuration like the transformer substation might provide an
effective solution to this problem, analysis with a mid to long term focus indicates that splitting the EHV/HV
substation’s busbars into sections instead of investing in HV connections between the high voltage grid sections
is the most cost effective approach because it fully resolves three long term challenges of controlling the effects
of parallel transmissions on the HV grid, managing the short circuit capacity in the EHV and HV transmission
grid and reducing the long outage duration that may result from a common cause failure. This is however more
expensive.
In light of the above limitation of the grid code, issues of grid spurs that is a major concern as it neglects
some part transmission grid of 110 kV and 150 kV spurs with a total load of 100 MW or less. In the regulatory
response to this there is a need to upgrade those spurs with a load that currently exceeds 100 MW or will do in
the near future by TenneT which involves an investment of 127 million euro in these upgrades over the coming
years with the expectation of reducing consumers in the Netherlands dependent on spurs by a 33%.
28According to the Grid Code and analysis of social costs and benefits, spurs with a load of less than 100 MW

does not merit structural investments. The lack of economic justification of these investments within the
context of current legislation will demand a change in the prevailing legislative regime and authorization from
the Office of Energy Regulation. However this can be justified using the equality rights and lack of
discrimination.

4.3.2.2 Access
With the strategic location of Netherlands near the North Sea, the development of offshore wind farms is
expected and this will step by step with the first step being the construction of a number of wind farms closer
the coast. Their most economically efficient access to the grid is expected to be via the onshore grid, singly as
via a high voltage AC cable connection. The plan for the deeper offshore connection will be via the development
of a ‘collecting station’ (the ‘Socket at Sea’ project) which will be transmitted to one of the onshore 380 kV
grid’s four coastal locations 29by means of a high voltage AC connection. However, for wind farms with greater
capacity (or energy extraction areas) and with deeper offshore location, the sockets will be used to connect
them to onshore grid via a DC line. Rules of connection whether deep or shallow needs to be set because of the
cost that is involved and hence, a regulation for this is essential.

4.3.2.3 Tradeoff between centralized and decentralized planning
The issue of balancing that TenneT currently achieves by regulating large scale production units and
keeping several major industrial producers on call to provide emergency capacity if necessary works .
However on the advent of sustainability objectives set out by the European Union and the Dutch
government .The implication is that current flexibility arrangements might no longer be sufficient in the future
as a result of likely high increase in the generation of electricity by sustainable methods, including very large
numbers of small scale energy sources which are close to consumers (e.g. photovoltaic systems integrated into
buildings) and large scale energy sources which are usually far away from consumers (e.g. offshore wind
energy). This kind of electricity generation is source dependent (supply driven) with high output variability
(fluctuating, intermittent).
In terms of investment, the integration these sources on a large scale requires the use of intelligent, flexible
technologies in the electricity system. Another complication is the decentralized regime in generation which
results in bidirectional traffic in the distribution grids, with high intermittency leading to imbalance. Hence
balancing will have to change and not by using the traditional matching of supply to demand rather better

27 A common cause failure is defined as a failure of two or more components (leading to an interruption in the supply of electricity) which can be
attributed to a single cause.
28 TenneT’s Quality and Capacity Plan
29 The four locations are the coastal locations Eemshaven, IJmuiden, Maasvlakte and Borssele.

12


flexibility is essential in which includes demand side response, controllable consumption including the use of
electric cars and storage systems
5 Locational signals for new generation
A clear look at Figure 3 and 4 in the appendix shows that a large penetration of renewable will most likely
shift balancing from “business as usual “of demand matching supply to something innovative. Ab initio,
locational signals in electricity pricing applies only to the transmission level which is certain to change with the
change in regime. The application of locational signals can be categorized into short term signals and long term
signals. For the Dutch electricity transmission grid, the short term signals ( energy prices ) has been in form of
implicit and explicit capacity auctions that is relevant in their trilateral market coupling while the long term
signal ( network tariff)has been a postage stamp. In as much as these choices could have been driven by
simplicity, the complexity of the system did not disappear by their use and is likely to worsen.
In the situation of excess proliferation of the RES-E capacity which is obvious as shown in figure 5 of the
appendix, it becomes succinct that a need of strategy is essential that will drive both long term objectives while
not causing chaos in the short time. There is a need to differentiate horizontal signals, referring to price
differentiation per location on the same voltage level, and vertical signals, referring to price differentiation
between voltage levels. While the former case relates to only transmission, there is a need to include
distribution in order to ensure an optimal dispatch of DG units in the later regime.

5.1 Impact on Transmission
In the transmission network in the Netherlands, the short term signals can be continued especially with
the extent of maturity and vibrancy of their auction market. However the long term signals may need to be
reviewed, having in mind that there is a need to make DG connected to the transmission grid effective and to
ensure that cost causality principle rules. A clear understanding that electricity flow does not commercial
transaction will provoke a suggestion of a methodology that is maintains cost causality while retaining the
simplicity and clarity of use points all fingers to average participation.
Average participation is a good method for the Dutch considering them as an integral path of the EU
network, a major force in the North sea wind farm project and also better than the existing postage stamp.

5.2 Impact on Distribution
Locational signal is very essential with the likely development which can be seen in the disparity between
figure 3 and figure 4 of the appendix. The implied need for locational coordination is to solve the dilemma of
avoidance but not to impede necessary investment in the network. This is necessary since the liberalization
with the sustainable generation regime could lead to a decentralized system at distribution level working with
a decentralized market system hence the need to achieve coordination so that network and energy charges
should reflect the actual network condition in both long term and short term. Not only that, this could stimulate
distributed generation and demand to relieve the system in case of instability and attract flexible users
(controllable generation / demand or storage) to suitable Because of the difficulty in using the locational
marginal pricing like the nodal pricing in distribution that arises through the dense network, a no cost
reflective pricing in distribution is used in Netherlands with shallow connection charges and locational
differentiation is still rare. Thus with the likely development in the distribution level, it becomes apparent that
a voluntary agreements between system participants that can create a pareto improvement, reward a grid
friendly behaviours and compensate for control might be a good solution to the Netherlands. This is called
smart contracts.
The smart contract30 is designed to be an individual agreement that is not mandatory which target specific
users that are influenced by the DG proliferation while sparing the little consumers. It is designed to comply
with the priority of dispatch for RES-E while not compromising regional competitiveness in attracting new
industry. It may entail some standardization to drop transaction cost, varies according to location, size of user,
pattern and flexibility of network use. Although a voluntary agreement, it uses standard tariff as a fall back

30Locational signals to reduce network investments in smart distribution grids: What works and what not?
Christine Brandstätt ,Gert Brunekreeft, Nele Friedrichsen

13


solution which can be default tariff for most customers or individual contracting where additional benefit is
possible. An extra advantage of smart contract is that no major system reform required except a few
requirements concerning market design and regulatory approval is only for standard (fall-back) tariffs
In order to implement smart contract in Netherlands, there is a need to set a level playing ground and put
certain things in order. There is a need to incentivize The DSO’s to optimize network development in
preparation for the penetration of renewable and also incentivize network users to accept smart contracts. Also
the electricity regulation need to allow for the voluntarily in this arrangement and allow network operators or
retailers to have flexible charging. Also this cannot be effective without smart metering which the Dutch wants
to roll out en masse in 2012. Thus there is a need to adjust the tariff code of the regulation to take care of this
6 Generation adequacy
One fact that is obvious with the penetration of renewable is that the Dutch electricity system becomes
more energy constrained than capacity constrained. A closer look at figure 4 in the appendix again will explain
the implications of adequacy in the presence of generation mix which is assumed to be optimal considering this
energy constraint. However, how to reach the level of optimality in the mix and in the investment is a question
that the Dutch electricity sector needs to look into. The introduction of large penetration of Wind, photovoltaic
solar and concentrated solar power without storage will lead a gap in variability, unpredictability and
locational dependency, hence the need for attention in the regulation that affects this intermittency decisions.
Intermittency can be preferably seen from the spectacles of Ignacio Perez Arriaga as the combination of
limited controllable variability and partial unpredictability31. Even though these characteristics exist, their
combination makes the issue complex especially when the volume of impact is relatively high. In terms of
intermittency characteristics of the renewable in the Dutch system, it will be mostly looked at in terms of wind
generation rather than solar generation.
The concern for this intermittency can span from technical issues of reliability, need for increase of
required flexibility in the power system by the better utilization of transmission capacity, effective demand side
management to employing more storage. Economically, this will definitely influence the market rules which
will need adaptation to effectively emulate real time operation and hence translate to different patterns in the
electricity prices. This brings up the regulatory issues of the efficient scheme that needs to be adopted in order
to make the intermittent generation financially viable. These concerns when adequately treated will influence
the volume and the cost of investment. The issue of capacity mechanism will now involve flexibility.
6.1 Flexibility as a tradable commodity
Because the proliferation of RES-E will bring a lot of flexibility issues, there might be a need to have
flexibility traded like capacity, if not this will lead to having a reserve that is almost as much as the installed
capacity of RES-E which does not make economical sense. The Dutch can be advised to have a limited amount of
Nuclear but because of the associated NIMBY and BANANA , it might be very difficult to achieve.
Riding at the back of the reliability option that was excellently designed by Ignacio Perez Arriaga and that
has been successfully implemented in many power systems, one can extend this to flexibility in the system
adequacy requirements. Therefore, it is necessary to provide a much stronger incentives for Flexible reliability-
oriented operation because the proliferation of RES_E makes the system more energy limited than capacity
limited. Through these incentives, the markets bring the consumers a broader security that the contracted
generation equipment will be available during the critical periods to provide capacity and flexibility at the same
time. This will be like a derivative call option with a physical delivery obligation is tied to the option, in order to
provide stronger incentives for the generators and to make sure that the more flexible reliable production units
will be in a better position at the reliability market.
The generators for the reliable flexibility provision will be assessed based on the following properties

31See Ignacio framework presentation in 2011 MITEI symposium for a perfect approach that can be tailored to fit many situations
14


Then an auction is organized for these generators that will be categorised into different groups of load
following, regulating and scheduling where the auctioneer has to determine, in advance, at least the following
parameters:
- the strike price, s : which based on reliability option standard , should not be too low, since it acts as a
price cap for demand and somehow represents the frontier between the “normal” energy prices and the “near-
rationing” energy prices,
- The time horizon: typically a year; the seller can be required to generate the committed capacity at the
expected flexibility at any time during that period,
- The total amount of power to be bought and at what range of rate should it be produced,
- The value of the explicit penalty for capacity tied to flexibility
- The generators submit one or several bids to the auction, expressing quantity at a flexibility range that is
standardized (the capacity they want to sell) and price (the required premium).
- The market is cleared as a simple auction and all of the accepted bids receive the premium that was
solicited by the marginal bid.
6.2 Investments in adequacy
In terms of investment, it has been shown that Feed in Premium has been generally successful especially in
Spain and Germany32 . This is because premium has proved to be better when combined with market signals in
creating the incentives for wind and solar plants to adjust according to the market conditions and help improve
prediction of their output together with the management of maintenance operations. In terms of cost, the
location and technologies will mostly influence the cost of wind and solar especially when geographically
dispersed. This means that the cost might not only be the cost of the generation, but also the cost of
reinforcement of the transmission lines. The implication of these designs on market architecture determinants
is shown in table 2 of the appendix and the reason for the support of Feed in premium for the Dutch can be seen
to be based on basically how RES-E producers (especially wind) are exposed to market signals in forward
markets, balancing markets, congestion and losses while not neglecting the pricing, connection and network
tariff.
The issue of having the right instruments that stimulate the right investment as the optimal cost is not the
only issue of adequacy when it comes to large penetration of renewable because the larger the share of the
renewable generation, the higher the intermittency. In the case of wind, variability can be reduced by
aggregation of wind turbines over a large geographic area. Predictability can be reduced by reducing
forecasting to almost emulate real time and with closer spatial aggregation of generators while considering a
large geographical areas. The case of solar can be a little bit different as it is affected by diurnal and seasonal
patterns with the patterns occurring at midday and at summer that happens to be the time of peak demand of
electricity. Nonetheless the issue of cloud speed and geographical area cannot be neglected. Thus in general,
mitigation of variability can be by combination of spatial diversity, use of advance forecasting techniques,
reduction of unit commitment planning timeframe (scheduling interval) and the use of capacity mechanism.
The use of capacity mechanism is essential. The best approach is the one that takes care of variability in
generation and demand that can be slow or fast , occurring from a non event or for contingency purposes and
this can be found in operating reserve sometimes called moth ball reserve. Following the analysis of Milliham et
al33, the Dutch can be advised to have a variety of operating reserves. There is a need for a mix in the
characteristics of the generators that used for operating reserve. For the ones that will be used for non event,
there is a need for regulating reserve that will have a fast response and a load following reserve that will have a
slow response. In terms of contingency reserves, the operating reserves that serve this purpose can be
frequency responsive reserves that have fast response and supplemental reserve that have slow response. In
the case of slow events, the ramping reserve is for fast response while the supplemental reserve is for the slow
response. This operating reserve or mothball reserve are usually old plants that have a little time to be
decommissioned hence with little fixed cost ( maintenance cost ) and their associated variable cost. The use of
mothball reserve does not only offer the advantages of cheaper price but the variety that can be gotten for
different purposes.
Another source of help in terms adequacy can be the demand response by the means of variant retail
electricity rate like the real time pricing and interruptible load agreement. The issue of real time price can be

32http://www.worldfuturecouncil.org/fileadmin/user_upload/Miguel/feedin_systems_spain_germany_long_en.pdf

33 See references
15


easily done since 2012 will see a lot of installation of smart meters that can enable this hence help in smoothing
the load.

7 Market power
The definition of market power for the electricity market in the Netherlands can only be coherent if there
is a general agreement on the definition of what is the relevant market and the way the regulator looks at the
mergers and acquisition in this relevant market. However, concentrating on the market alone can lead to a need
for the Dutch to reduce market power hence market power is defined based on production and capacity.
Analysis of the market power is mostly performance and structural based, however emphasis is on measuring
the structure of bulk power and the conventional tool is the Herfindahl Hirschman index which is the sum of
the squared market shares of every firm in the power market
According to the 2011 Energiekamer report to the EU, there are approximately 25 with three quarters of
the production controlled by the largest four. Interpreting the implication of this by the degree of concentration
showed that the static HHI index is 1433 and the dynamic HHI index is 1810 as of 2010 when that data was
available. This means that there might not be market power in installed capacity but likely to be in the
production capacity and this calls for a serious concern as market power comes in energy constraining and not
capacity withdrawal.
The market structure of the Dutch electricity retail is dominated by three large suppliers that are
incumbents, four relatively small companies and quite some numbers of small companies. Looking at the
market share by the concentration ratio of the incumbents (C3), as of 2011 their market share is above 80%
which is not very healthy. However switching of retailers has been relatively active in the retail market. Even
though there has been a lot of mergers and acquisition since full liberalization in 2004 in the Dutch electricity
market allowing international penetration, there has been market power. This is because all the mergers and
acquisition has been a large company that acquires large Dutch companies to become bigger. In terms of
vertical integration, there is above 60% production supply linkage which makes the entry of smaller companies
very difficult.
Energiekamer monitors the barrier to entry and competition issues in the Netherlands; however they
focused on the monitor of the concentration over the years, not the establishment of market dominance. With
this in mind, there might be an issue in the renewable energy generation. One of the issues is that because of
time limitation and resource availability, the bigger companies might be given more licenses to build renewable
generation and this will impede the microstructure of the market. This is obvious, since if they build more
renewable and retire their older generations as mothball reserve, their market power increases. Thus it
becomes apparent that the Energiekamer while monitoring the concentration ratios in the market should try to
monitor dominance. The use of concentration ratios and HHI in generation should be applied in all mergers and
acquisition to limit the market power both in the installed capacity and production capacity to limit pivotal
supplier. Hence it is important to use residual supply index to monitor the amount of powers given to
renewable energy suppliers in order to control market power ex-ante. While competition should be monitored
ex-post with Lerner’s index.
8 Wholesale market design - refining the Dutch electricity market architecture
Having a level playing ground, not only in the origin and destination of generated electricity but also as
close to real time as much as possible determines the level of competition wholesale prices and to maximizing
social welfare and the Dutch has been in this business for long. This has been the main driver of constant move
towards the integration of the Dutch wholesale electricity market with the surrounding markets. In 2010 there
was coupling of the day-ahead market within the CWE-region. Not only that, there was also an integration of
the CWE-market with the Nordic electricity market by means of a tight volume , introduction of the Elbas
platform for intraday trade on the Dutch-Belgian border and the integration of NorNed in this tight volume
coupling. This will surely promote the implicit trading method that they prefer, but the issue is how this could
metamorphosis or degenerate in the light of large penetration of renewable with high intermittency.
Taking care of the intermittency will mean tremendous changes to the current Dutch electricity market in
terms of rules of dispatch that will need creation of additional flexibility, backup services and storage facilities.
There should be rules that will take care of when to use storage and the backup services. It should determine if
the storage and backup services should be used as reserves in the peak period of in case of balancing. Also the
use of storage and backup electricity across the border will be a case that needs legislation that might be
regional and this is essential for the Dutch because of the extent of market coupling that is going in. The
16


fundamental implication of this is that the rules that govern the wholesale market of the Dutch cannot be
adjusted in isolation. All the same the organization of the Dutch market can be seen from the diagram below
with each of the market defined by different rules. The Dutch market design changes and the associated risk
that will vary due to the penetration of the RES-E are summarized in table 3 of appendix.

The issue of market design as earlier done in the RES-E section, shows that the most liquid market (intraday
market) might need to change to a centralized system since decentralized system with low power traded in the
APX might not allow an optimized generation scheduling. The gate closure might change from four hours to
somewhat closer to hourly trading to allow better forecast of wind. The efficacy in market design will
determine if TenneT will use dual or single balancing. This will also affect the power given to the TenneT in
short term and long term locational pricing. The lesser the short term locational market signal, the more likely
TenneT might tend towards redispatching to solve congestion problems.
Moreover there might be a need to take care of the grid infrastructures will need an overhaul, to deal with
completely new requirements. These will include “de-localizing” injection of wind production and facilitating
additional flexibility on the demand side via “smart” grids. This challenge could mean a need to change the
derivative market implying the need of a state-of-the art approach to risk assessment that will encompass
portfolio management, asset optimization and investment evaluation. This sophisticated approach will be
possible if the Dutch wholesale market has a high level of transparency hence encouraging trading to be used as
a major tool. Trading will be very essential in understanding the value of the flexibility needed to cope with
intermittent renewable power production, and to adapt during a transition. A recommendable major step has
been adopted to do this in which the APX has lunched the exchange of the trading of biomass after developing a
referenced price index for standardized wood pellets in 2008. This biomass exchange, developed in synergy
with Port of Rotterdam, is launched in two phases with the first stage providing an opportunity to trade
standardized, non-cleared products where the physical settlement is arranged bilaterally by the counterparties
and the second phase planned for 2012, entailing the implementation of clearing services for wood pellets
contracts, which will provide further financial security to market participant.
This might need to be extended to an appropriate market design which will be essential in achieving a well
functioning wholesale market with price formation based on fundamentals. While moving in the direction of a
harmonized regional market and European market design while keeping in mind, in particular during this
transition decade, that too many regulatory changes could be dangerously disruptive. One of the disruptive
regulatory changes might be the need to use smart meters to encourage demand side management that will be
essential in reducing intermittency. The issue of utilization of the operating reserves and its charges depends
on who acquires them. If operating reserves are moth ball reserves and are acquired by the TSO, then there
might be a need to charging that should be regulated in a manner that will be sustainable and encourage
adequacy and firmness. This method will method might need the intermittent generators to pay. However, if
the RES-E follows the program responsibility of the Dutch system and there is effective derivative market in the
renewable, then this might not be possible as the derivative market can balance this. However, this will require
that the mothball reserves enter the derivative markets also.

9 Retail market design
The Dutch electricity retail system is expected to have a change with the EU 2050 decarbonisation goal.
Energy efficiency and conservation especially in terms of electricity conservation is on the on the increase and
will influence the retail market and the method of retailing. The driving forces include greenhouse gas concern,
excessive use on-peak due to the absence of real-time pricing, the economic and political costs of expanding
transmission and generation capacity, and the energy paradox problem (a widespread belief that consumers
fail to invest in privately cost-effective, energy-efficient technologies because of limits in information and

17


bounded rationality). The implication of the energy paradox34 which is present in the characteristics of the
Dutch energy usage, coupled with the density of the distribution networks is that energy efficiency cannot be
addressed simply by adopting rules or institutions marginal prices expanding the use of smart meters, real-
time price information, and automated controls that allow time-variant pricing and provide missing incentives
to use energy more efficiently only. There is a need for a regulatory instrument that could aid this transition
and stimulate it effectively while being assisted by demand side management (DSM). Thus there is a need for a
multi instrument policy that will be very essential in blocking the energy leakage.
9.1 The Dutch electricity Retail Market in the face of total decarbonisation
The first is to have a price control mechanism that will make the consumers aware of the price implication
of their usage. This the Dutch has started by trying to install smart meters in 2012. However the intermittency
in the generation can lead to high price excursions that might have a lot of social and political implications.
Hence to help the smart metering, it is suggested for the Energiekamer to have a legal and regulatory
framework that will support technology policies. These standards will entail standards in electrical equipment
and installation in the building sector with minimum requirement standards. Then there is also a need for
educational policies alongside all these. This is required to enable public awareness in the intermittency and
implication of sustainable energy to encourage acceptance and it added benefits which is the freedom to plan
what you use. However the most important aspect is to encourage DSM
To design an effective DSM framework there is a need for a DSM policy that will seek to reduce customer
energy bills in a cost-effective manner, reduce capital spending on new energy system infrastructure,
encourage an optimal mix of energy supply and demand and minimize environmental and social impacts due to
energy infrastructure and use. A little downward to retail, the subset of DSM that is very essential is the
demand response (DR) which includes the activities to reduce or shift electricity use to improve electric grid
reliability, manage electricity costs, and ensure that customers receive signals that encourage load reduction
during times when the electricity grid is near the upper limit of its capacity. To stimulate the DR in the Dutch
electricity retail, this can be done in two ways. Firstly through Emergency Load Response programs which are
interventions aimed at avoiding shortfalls in energy supply. Usually, the Transmission System Operator (TSO)
offers remuneration to particular categories of consumers amenable to planned and unplanned interruptions to
their energy supply in order to prevent critical situations in network operations. Such consumers are generally
industrial and large commercial operators, whose supply is interrupted when resources supplied by the TSO on
the dispatching services market are insufficient to maintain the safe operation of the system.
The second method is by Demand Side Bidding (DSB) which is a mechanism that enables consumers,
either directly or through a broker (maybe their retailer), to participate in the electricity market or in the
operation of the system through offers that cause changes in their normal consumption profile. This
mechanism can be very helpful as it enables consumers to participate actively in the market and while giving
them price signals that, by reflecting of actual costs, would result in a higher efficiency of the energy system.
After developing the system, the next issue is the implementation system. The DSO should be accountable
for DSM within its service territory, but not be required to implement program design, delivery, and evaluation
because they will know the amount of reduction in infrastructure that results and they should measure the
DSM program cost-effectiveness and DSM performance should be based on the Total Resource Cost ("TRC")
test. The Energiekamer should have a central role in DSM policy development and regulatory oversight. The
retailers should be responsible for the educational program and evaluation.
Connection and transport Energy programmes and imbalances Supply of electric energy
9.2 Redesigning the Dutch retail market to fit the target.
The picture by the side depicts what the Dutch retail market looks like. The respective
legislations that guide the retail market are specified in black while the red represents the System Operator Generators (DG and
RES_E with
needed legislations. The double arrowed lines, shows regulated contract if thick and unclear (TENNET)
Conventional)
contract if the line broken. The pink arrow shows a needed connection that has to be regulated
since it is bold. For example, the lack of proper legislations in case of bankruptcy is
Systeem codes
responsible for the XS energy calamity in Netherlands. Thus there will be a need to design
legislations that will specifically call out that is the supplier of last resort and the rules of the
Program responsible Supplier
game. There might also be need for back up supplier of last resort that has to be specified in the Network parties (Supplier of last resort)
system code. The program responsible party of last resort has to be specified in legislations and operator (Back up parties)
the law should specify is DG and RES-E should be accountable for these. The suggestion is that Art 3.1.13
non dispatchable DG and RES_E can be exempted systeem
The need to include the DG’s and RES_E in the program responsibility is essential as this operator Code Need a legislation of program
might reduce market power and forecast and investment in forecast technologies to reduce Electricity act 1998,
responsibility party of last resort

intermittency. technical codes and Proper legislation in case of
34 Energy paradox see Linares in the reference travien codes
Eligible bankruptcy

customer 18

Contract status unclear Regulated contract Likely connection need

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