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«1 Summary Security of Supply is considered as one of the key objectives of European Energy Policy besides Climate Change and Economic Efficiency. Yet ...»

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Quantifying Security of Supply

Christian Winzer,

Electricity Policy Research Group, University of Cambridge, E-mail: cw420@cam.ac.uk

1 Summary

Security of Supply is considered as one of the key objectives of European Energy Policy besides

Climate Change and Economic Efficiency. Yet there are only few studies which attempt to

quantify the term.

In addition, quantitative studies are split between authors that look at technical risk and more

recently also intermittency risks, usually using probabilistic models, and those focusing on risks caused by human actors, mostly using non-probabilistic approaches.

While there are models in both groups that produce a useful output metric, there is a lack of models that analyse the combined impact of natural, technical and political risk sources with a focus on possible interactions. In our paper we aim to bridge this gap. We propose a framework that measures the economic value of energy security by linking the output of existing strategic models with a new model of disruption risk, which analyses the combined impact of natural, technical and human risk sources taking into account possible interdependencies between

them. The goal of this research is to answer the following questions:

 What is the security level provided by different infrastructure options?

Countries must decide between different portfolios of energy supply infrastructure. In order to take this decision properly, a cost-benefit analysis of the available options is required. While costs are usually well defined, there is a lack of frameworks which quantify the monetary value of security levels taking into account political, as well as technical and natural risk sources.

 Which is the economically efficient security level?

The infrastructure option with the highest security level does not necessarily have to be the most efficient solution. By integrating estimates of equilibrium prices and quantities with measures of disruption risk we can construct a cost curve of security of supply which allows us to prioritise different options.

 What is the relative importance of each risk source for the security of electricity supplies?

The relative impact of different risk sources on results is an important determinant for the allocation of resources. In research, the importance of a risk source will influence the time and computation power that is spent on an adequate representation within models. In politics and industry, the importance of a risk source will influence the resources that are spent on decreasing the vulnerability of infrastructure to its impacts.

We show the model results for a hypothetical test case to illustrate the possible benefits from applying the framework.

2 Introduction During the past decades the energy sector in Europe has seen a number of developments that had an impact on the security and reliability of energy supplies.

Firstly the introduction of privatization led to significant changes in the electricity and gas sector. On the positive side, competition between suppliers has led to falling energy prices.

However, the failure of markets subsequent to privatization is also seen as a cause for systematic underinvestment in generation capacity, which threatens the ability of the system to meet peak demand levels [1,2].

Secondly the occurrence of several interruptions of gas deliveries from Russia raised the perception of human risk factors in Europe. The political relations between export, transit and import regions are increasingly seen as a major source of risk to the security of supplies. This strong perception of political risk will probably also influence the European attitude towards imports from other countries. As the depletion of indigenous gas and oil resources is leading to rising dependency on a few, politically instable regions, the importance of political risk is likely to continue for some time into the future.

Thirdly climate change concerns will lead to an increasing use of renewable energy sources. On the one hand this introduces a new type of risk to the security of supplies due to the intermittent availability of primary energy sources such as wind and solar radiation. On the other hand the unequal spread of renewable potentials between different geographical regions will make imports from other countries both within and outside the European Union increasingly attractive. This would again increase the importance of political risk for the security of supplies.

A good illustration for these topics can be seen in the current debate about renewable electricity imports from North Africa. The idea behind this is to build solar-thermal power plants and wind-turbines in the deserts of North African countries, where land is very cheap and sunlight and wind are available in abundance. The electricity could then be imported to Europe through High-Voltage-Direct-Current (HVDC) cables, which would keep the transmission losses very low. It is estimated that at current cost levels electricity generated from such plants could be available in Europe at a cost significantly below current feed-in tariff levels1. Cost parity with conventional sources is expected to be reachable during the next 10-15 years. The main challenges for those plans will be the political stability of export countries, the natural fluctuations of the resource availability and the ability to cover their rising electricity demand in export countries through this or other projects at locally acceptable cost levels.





The project viability has been indicated in a number of studies as early as 2006 [3-6]. However, progress in this area has been rather slow. A first step into this direction was taken in the form of the Mediterranean Union in 2008. The most recent EU directive announced the possibility for member states to count renewable electricity imports from non-member countries towards meeting their target[7]. Following this, a consortium of private companies has been set up. The aim of the 400 billion EUR ‘Desertec Industrial Initiative’ (DII) is to cover as much as 25% of Europe’s electricity demand in 2050 with renewable electricity imports from Middle-East and North-African (MENA) countries. The first pilot projects will probably not have a strong impact on the security of European energy supplies. However, in view of the clear interest of private stakeholders to import substantial amounts of electricity from countries outside the EU, it is important to assess the impact of such imports on the security of electricity supplies.

In order to answer this question there is a clear need for an analytical framework that combines the assessment of natural, technological and human risk sources into a single number. The framework would have to fulfill three core requirements.

Industry communication, referring to feed-in tariffs of €0.27 / kWh for solar electricity and €0.072 / kWh for wind electricity in Spain.

Firstly, the framework would have to model interdependencies that could arise between the impacts of those risk sources on different streams. Dependencies can occur between the impacts of the same risk source on different streams. An example of this would be the wind speeds at different locations, which might show a significant degree of correlation. In addition to that, dependencies could also occur between the impacts of different risk sources on either the same or on different streams. An example for the first case would be the correlation between the availability of wind turbines and the risk of transmission line failure which both increase in case of high wind-speeds. An example for the latter case could be an increasing risk of opportunistic behavior by an export or transit country if the shortfall caused by interrupting their share of supplies is larger than the current reserve margin of the import country.

Secondly, the framework has to produce a useful output metric. Since the cost associated with infrastructure investments is expressed in monetary units, the output of the model should express the benefit of the infrastructure in terms of cost savings caused to society over the lifetime of the project.

Thirdly, a framework that combines the analysis of clearly defined and well quantified technological risks with an assessment of highly complex and difficult to quantify political risks has to take into account the different degrees of uncertainty associated with each of the risk sources.

The need for such a framework has been acknowledged in several publications in the past [8-11] and is warranted by an ongoing trend to produce quantitative measures for the security of energy supplies.

In section 3 we will give a brief overview of the relevant existing literature. After that we will explain the methodology used in our framework in section 4 and illustrate it with a stylized representation of a simple network consisting of five nodes in section 0. Based on the results described in section 6 we will then draw a number of preliminary conclusions in section 7.

–  –  –

Articles about security of supply are very heterogeneous in nature and include everything from qualitative political accounts to economic bargaining frameworks and engineering models of system reliability2. In our review we will describe the most commonly used security of supply definitions and then give an overview of typical quantitative measures. Since we don’t have enough space to describe all security of supply definitions and measures in detail will discuss them in groups.

3.1 Security of Supply Definitions A first group of authors define security in terms of the ability of a system to meet demand without interruptions.

"Secure energy means that the risks of interruption to energy supply, are low” [12] This definition is reflected in the use of measures like the expected energy unserved or loss-ofenergy-expected which is widely used in reliability analysis [13]. While this measure can well be As mentioned in the introduction, it is very interesting to observe the divide in literature which is also apparent in the wording: while articles measuring the unavailability of energy due to political or extreme weather events usually talk about “security”, articles measuring the unavailability of energy due to technical defaults describe a similar concept as “reliability”. We therefore consider the technical reliability literature to be part of security of supply studies.

quantified, this definition does not include criteria for determining which security level is appropriate.

A second group of authors try to achieve this by introducing price levels into the definition. The

most prominent of these definitions is the one given by the International Energy Agency:

“Energy security is defined in terms of the physical availability of supplies to satisfy demand at a

–  –  –

References to this definition or variations thereof can be found in [15-23]. Additional aspects such as environmental and sustainability dimensions or social acceptability are included into the definition by ([24], [15]). While price levels provide a means to distinguish between appropriate and inappropriate security levels, the distinction in terms of ‘reasonable’ prices is very subjective and the consideration of additional aspects makes it even more difficult to operationalize the term.

A third group of authors therefore use the welfare concept in order to specify the appropriateness of security levels within the definition. The most prominent definition in this

context is the one given in Bohi and Toman [25] which is also cited by [26] and [27]:

“Energy insecurity can be defined as the loss of welfare that may occur as a result of a change in

–  –  –

The idea of defining security in terms of indirect effects is also shared by [28] and [29] who define security of supply in terms of the availability of the services for which energy is used.

3.2 Security of Supply Measures A first group of approaches produce a dimensionless rating. A typical example for this category is the price index ESIPrice proposed by the International Energy Agency in [30]. The price index ESIPrice is calculated by adjusting the Herfindahl-Index of market concentration for each primary energy market by a political risk rating of the export countries. Similar approaches building mostly on the Herfindahl-Index with or without an adjustment for political risk can be found in [31,32,26,33]. Indices including other aspects such as the adequacy and reliability of infrastructure can be found in [22] and [16]. While these indices provide information about the comparative security of supply levels of different countries, they do not quantify the value of security levels in monetary units.

A second group of models uses volatility measures, typically in connection with portfolio theory.

Authors such as [34-37] use the volatility of the electricity generation cost, import prices or import quantities as a measure for the risk of different primary energy source and calculated variance minimal portfolios based on the correlations between those variables. However, the volatility is a very imprecise measure of disruption risk and therefore less well suited for the calculation of welfare losses. Markowitz portfolio theory is also likely to yield wrong results if the normality assumption is violated for some of the risks.

A third group of authors produce a measure for disruption probabilities. For example [38] suggests the calculation of reliability indices based on the historical frequency of disruption events and [39] uses influence diagrams to quantify the risk of political supply interruptions.

There is also a large number of system reliability models that calculate measures such as the estimated energy unserved based on probabilistic models (for an overview see [13]). The output measures produced by those models are well suited for the ranking of infrastructure portfolios.



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