Incentivising efficient grid investment in Europe

A benefit-based remuneration approach is proposed as an option for grid infrastructure investments in Europe.

In a new study for the EU Agency for the Cooperation of Energy Regulators (ACER), the Florence School of Regulation has set out the features of a benefit-based scheme that could incentivise the all important investments in the grids.

Studies from the EU and organisations such as Eurelectric have highlighted the need for rapid expansion of the transmission and distribution grids to deliver on the 2030 and 2050 net zero climate targets.

However, this cannot be achieved with the traditional regulatory investment approach. Aside from issues such as lengthy permitting, current practices have a capex bias favouring capex-heavy solutions and there is a lack the incentives for more efficient solutions.

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A ‘totex’ approach, in which the capex and opex are treated symmetrically, has been proposed as a way of overcoming the capex bias but is considered to provide only a partial remedy.

Project benefits

Building on earlier work and the support in the EU grid action plan for alternatives, the Florence School has detailed an additional scheme in which the incentives can be calibrated on the cost-efficiency of the solutions to system needs, i.e. that the focus is on the value the project brings rather than on its costs

In broad terms, the scheme works as follows, starting with the national regulatory authority identifying the system’s need or needs.

The authority then defines the traditional solution and its costs while at the same time, the TSO proposes and costs a more efficient and innovative alternative.

Then the incentives, which are shared between the grid user and grid operator, are calibrated on the difference between these costs.

A further incentive could be a reduction in the original incentive if the chosen solution is delayed or fails to deliver on the identified system need.

The full details of the scheme, which is intended as an additional tool rather than a replacement, still needs to be worked out in practice and it comes with challenges to implement, the study points out.

However, these – such as the need to identify a system need and solution – do not look very different from the typical challenges associated with network regulation.

If the problem is a lack of resources for national regulatory authorities, member states are likely to benefit from investing more in them and adopting the proposed scheme, the report concludes.