Abstract
Following the liberalisation of the electricity industry since the early 1990s, many sector regulators have adopted incentive regulation aided by benchmarking and productivity analysis. This approach has often resulted in efficiency and quality of service improvement. However, there remains a growing concern as to whether the utilities invest sufficiently and efficiently in maintaining and modernising their networks. This paper studies the relationship between investments and cost efficiency in the context of incentive regulation with ex-post regulatory treatment of investments using a panel dataset of 129 Norwegian distribution companies from 2004 to 2010. We introduce the concept of “no impact efficiency” as a revenue-neutral efficiency effect of investment under incentive regulation that makes a firm “investment efficient” in cost benchmarking. Also, we estimate the observed efficiency effect of investments and compare these with the no impact efficiency. Finally, we discuss the implications of cost benchmarking for investment behaviour of network companies.
Highlights
inputs are capital expenditure (In) recent years, achieving a sustainable electricity sector, security of supply, and reliability of service have emerged as overarching energy policy objectives in many countries
Contrary to the early years of electricity sector reforms when regulators were mainly concerned with cost efficiency, an emerging and pressing issue is how to ensure sufficient and efficient level of investments in the regulated networks
Efficiency of the natural monopoly power networks has been improving as a result of incentive regulation
Summary
In recent years, achieving a sustainable electricity sector, security of supply, and reliability of service have emerged as overarching energy policy objectives in many countries. Further electrification of the energy is generally regarded as desirable for a sustainable energy-economy These objectives are pursued through large scale deployment of renewable energy resources, more efficient use of energy, and active participation of the demand side. Achieving the above goals requires a transformation of the electricity networks through expansion of grids, adoption of new technologies for managing the variability of the supply side, accommodating an active demand side, and focused research and development. Such transformation can only be reached through substantial capital investments. Given the anticipated scale of the required investments in the coming years, ensuring sufficient and efficient investments in the networks presents itself as a policy and regulatory priority
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