A regulatory roadmap for electricity distribution remuneration under decarbonization: A European perspective

Abstract

The decarbonization objectives require substantial investment in electricity networks. In this context, combining traditional investment in grid infrastructure with smart-grid solutions is required to minimize consumers’ costs. Because electricity distribution is a regulated monopoly, the efficient combination of both solutions critically depends on the incentives embedded in remuneration schemes. This paper presents a regulatory roadmap to guide the reform of electricity distribution remuneration schemes in the European context. The roadmap establishes a series of priorities, ordered by their potential impact. The first step of the roadmap highlights the need to move from cost-of-service or hybrid approaches to revenue-cap or price-cap regulation to promote productive efficiency. The second step is to decouple ex-ante revenue or price calculation from the regulated company´s investment plans to mitigate allocative inefficiency. The third step is to promote efficient plans by enabling adaptable planning. The fourth step is to implement neutral OPEX/CAPEX neutral incentives by establishing different incentives for OPEX and CAPEX. The first two steps are urgent in the current decarbonization context. The third step has the potential to deliver significant savings if the previous steps are well addressed. Finally, the fourth step proposes a novel mechanism to establish neutral OPEX/CAPEX incentives presented as an alternative to the fixed capitalization rate. The roadmap is validated by prior experiences in a selection of representative European jurisdictions, and its practical recommendations can support regulators in adapting electricity distribution remuneration to today’s increasingly complex context.

The decarbonization objectives require substantial investment in electricity networks. In this context, combining traditional investment in grid infrastructure with smart-grid solutions is required to minimize consumers’ costs. Because electricity distribution is a regulated monopoly, the efficient combination of both solutions critically depends on the incentives embedded in remuneration schemes. This paper presents a regulatory roadmap to guide the reform of electricity distribution remuneration schemes in the European context. The roadmap establishes a series of priorities, ordered by their potential impact. The first step of the roadmap highlights the need to move from cost-of-service or hybrid approaches to revenue-cap or price-cap regulation to promote productive efficiency. The second step is to decouple ex-ante revenue or price calculation from the regulated company´s investment plans to mitigate allocative inefficiency. The third step is to promote efficient plans by enabling adaptable planning. The fourth step is to implement neutral OPEX/CAPEX neutral incentives by establishing different incentives for OPEX and CAPEX. The first two steps are urgent in the current decarbonization context. The third step has the potential to deliver significant savings if the previous steps are well addressed. Finally, the fourth step proposes a novel mechanism to establish neutral OPEX/CAPEX incentives presented as an alternative to the fixed capitalization rate. The roadmap is validated by prior experiences in a selection of representative European jurisdictions, and its practical recommendations can support regulators in adapting electricity distribution remuneration to today’s increasingly complex context.