Session 11 Flashcards
Challenges of (TSO) regulation
Objectives:
- Incentivize efficiency and cost-saving (optimal grid expansion, efficient grid operation, smart technology, …)
- Incentivize high quality
- Get the lowest price for customers
Informational constraints:
- Regulator has limited information
- Regulated firm has an informational advantage
The two polar cases of price regulation
Cost of service regulation:
- Firm will be compensated for all costs occured, but not more
- Leave no “excessive profit” to the firm
- Ex-post, costs can be well observed (e.g., through
audits)
(+) Respects the firm’s budget balance
(+) Gets the best price for customers
(-) No incentive to decrease costs
(-) No incentive to improve quality
Price/ revenue cap regulation:
- “Incentive regulation”
- Firm is promised a pre-defined price per unit of
output (or total revenue)
- Firm can keep all cost savings
- Price be dynamically adjusted for inflation and target efficiency improvements
(-) Might not respect the firm’s budget balance (how to set the cap?)
(-) Might lead to excessive profits (for given cost)
(+) Strong incentives to decrease costs
(-) No incentives to improve quality
Cost of service regulation
Cost of service regulation:
- Firm will be compensated for all costs occured, but not more
- Leave no “excessive profit” to the firm
- Ex-post, costs can be well observed (e.g., through
audits)
(+) Respects the firm’s budget balance
(+) Gets the best price for customers
(-) No incentive to decrease costs
(-) No incentive to improve quality
Price/revenue cap regulation
Price/ revenue cap regulation:
- “Incentive regulation”
- Firm is promised a pre-defined price per unit of
output (or total revenue)
- Firm can keep all cost savings
- Price be dynamically adjusted for inflation and target efficiency improvements
(-) Might not respect the firm’s budget balance (how to set the cap?)
(-) Might lead to excessive profits (for given cost)
(+) Strong incentives to decrease costs
(-) No incentives to improve quality
How does the network regulation look like in practice? (3)
- Most countries use a mix of “cost of service” and “revenue cap” regulation
- Revenue cap is re-evaluated every 5-7 years
- new cap might be based on best-in-industry performance - Certain cost components are outside the rev. cap (those who are “non-controllable”)
- This is complemented by quality incentives (bonus, penalty for reliability)
What is an effect of the revenue cap on TSO‘s expenditure behaviour?
If TSOs perform well and stay under their revenue cap, the new assessment might lower their revenue cap.
Thus, expenditure is always done as such, that the revenue cap isn’t going to be lowered, e.g. building new headquaters every 5 years
How is the German (price) regulation designed?
Costs are split in different groups:
- Permanently non-controllable costs (outside the cap)
- Residual costs:
–temporarily non-controllable costs (included in the cap)
–controllable costs (included in cap, but reduced to zero during the next period)
If you are evaluated as “90% efficient”, 90% of your residual costs are assumed to be temporarily non-controllable costs and 10% controllable.
What do the costs of network operators consist of? (4)
- Building and maintaining the grid (annualized investment cost and maintenance)
- Operating the grid / ancillary services (Losses, redispatch, balancing, etc.)
- General costs of running an institution (staff, offices, etc.)
- Sum of legitimate costs is “revenue cap”
What are the German investment plans into the grid looking like?
Huge increase of future investments, more than €18 bn. annually (last 15 years: €2.5 bn. annually)
That’s only TSOs, distribution grids come on top.
How have network charges developed last years?
They have increased dramatically, +100% in 2024
How does the main EU grid cost allocation principle work? (3)
- Locals pay (those who are connected to the same grid)
- Consumers pay (not generators)
- Specificities are a matter of national regulation (little EU harmonization)
What are connection charges, which types are there?
Definition:
- Payment for being connected to the grid
- Usually all grid users have to pay
Shallow connection charges:
- Costs to be connected to the existing grid infrastructure (next line or substation)
Deep connection charges:
- Costs in hinterland networks that require updates because of the new connection
- May include different voltage levels
- Difficult to calculate: requires assumption about the use of the entire network during the asset’s entire lifetime
How can deep connection charges be used as a locational signal?
Connection charges can be used to steer investment to the right place
- Scarcity regions: Charge consumers and generators less
- Oversupply regions: Large consumers less and generators more
Which network charges are there in GER? (4)
- Grid connection charges (shallow)
- Grid usage charges (only consumers)
- Different by voltage level (Cascading: Lower voltage levels pay for el. drawn from the upper level, as they’re considered as consumers)
- Geographic allocation
Potential solutions for Germany’s (unfair& unwise) regional DSO fees (4)
- merge DSOs
- Average grid fees (like for TSOs)
- Apply injection charge
- Apply inverse cascading
