Investment and revenue cap under incentive regulation: The case study of the Norwegian electricity distributors

Dengjun Zhang,Jinghua Xie

doi:10.1080/23322039.2017.1400900

Dengjun Zhang, Jinghua Xie

Open Access

https://doi.org/10.1080/23322039.2017.1400900

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Abstract

Electricity distribution operators are regulated as monopolies around the world. Incentive regulation is further applied to relate their allowed revenues (revenue cap) to cost efficiency and invest...

Highlights

As Chirinko (1993) stated, the fundamental problems of fixed investment research are the consistency of theoretical models and the interpretation of econometric evidence using non-experimental data with limited and noisy variation
We explored the relationship between investment and revenue cap under the last three Norwegian incentive regulation regimes
We explore the relationship between investment decisions and revenue caps under various incentive regulations, with a case study of Norwegian electricity distribution networks

Summary

Introduction

As Chirinko (1993) stated, the fundamental problems of fixed investment research are the consistency of theoretical models and the interpretation of econometric evidence using non-experimental data with limited and noisy variation. For the energy distribution industry, the depreciation and maintenance fees from the last years are used to calculate the efficiency scores and the allowed revenues in later periods This implies that revenue cap, which is mainly based on costs incurred in the last periods, should lead to capital expenditures. The increasing importance of distribution network investment is mostly due to the requirement of having to improve efficiency and achieve carbon-free generation This draws researchers’ attention to evaluating the determinants of investment decisions under incentive regulations. They applied a longer period than the new version when calculating the norm cost Both the fixed intervals of revenue caps and the base years chosen play a substantial role in investment decisions and timing (Cullmann & Nieswand, 2016). These differences may cause structural changes in the impact of revenue caps on investment decisions

Data description and methodology

Results and discussion

Conclusion