A regulatory frame to support a wave of energy grid investments in the EU infrastructure package?
A regulatory frame to support awave of investments in the EU?Jean – Michel GlachantLoyola de Palacio Prof. in EU energy PolicyDirector Florence School
The issue: an EU wave of investmentWave of investments for:•Interconnecting the internal market•Integrating massive Renewables•Deploying technological change (smart this… /smart that…)It is unprecedented since… a while
No Reg. change or big Reg. change?• No Regulatory change needed?Super Optimism: because grid companies are regulated. Hence do what they are told to do (“control and command”).• Big Regulatory change expectedSuper Realism: because existing regulatory frame has not been conceived to steer a wave of investments & tech. innovation = it doesn’t push for effective wave of investments and Tech. innovation
Two holes in our regulatory frame• (1) Our regulation ultimate aim was & is “Low-ering all- Cost”.Model Ryanair or Easyjet for Opex + a break on CapexWhat for a wave of investments & Tech. innovation?• (2) Regulation of investments is only nationalAs if EU internal market was only a by-product of national interestsWhat for EU internal market & regional initiatives?
A wave of four regulatory challenges?• Coordination of our massive investments• Economic efficiency of our regulatory frame• Financial feasibility of an investment wave• Handling of (massive?) redistributive effects
1st Reg. Challenge: Coordination• (1)TRSM investment complement to Generation (“favors” G) ¤ also substitute to G (“kills” or “deters” G) ¤¤ massive TRSM investment > massive effects on G• (2) Social value of TRSM = f(G) ¤ social value of massive TRSM invest = f(G) ¤¤ To get the max from TRSM invest we also need a max from G• (3) Critical to coordinate TRSM and G: How? ??• (4) How to coordinate cross-border invest in TRSM & G? @ EU level? Region? North Sea Off-Shore
2nd Reg. Challenge: Economic Efficiency of Existing Reg. Frame• (1) Incentive regulation gives incentives…Price Cap calls for – Costs for a given Output (given set of services). It targets - OPEX while bypassing CAPEX (assuming – Investments)• (2) No reg. frame for new set of ++services with massive investment and Tech. innovationNew set of services ¤> new set of Key Performance Indicators (KPI)?>¤¤ To buy new grid services through new KPI?>¤¤¤ To go from Price Cap on a given menu to Shopping Price “à la carte” + service volume targets? (Performance based regulation)
Economic efficiency (Cted)• (3) What to do with CAPEX efficiency?¤We did: “invest less for same set of services”¤¤May we do: “pay less for any invest. volume”• (4) Reducing CAPEX for given investment = primarily to lower Capital Costs = to lower the risk of investment… while innovation might increase risk anyhow• (5) Reducing risks by guaranteeing better revenues? By giving longer term contracts 10-15 Years ?
Economic efficiency (end)• (6) To invest less for same target of new services?¤ to really incentivize grid services users?¤¤ To abandon “low direct pricing” / “high socialization tariffs”: “Shallow Costs”>“deep costs”?¤¤¤ To quit “Light Generation charge / Heavy Load charge” for “Heavy G / Light L”?¤¤ ¤¤ How to embark in massive investment if grid users do not feel & care about the costs of their individual provision of new services?
3d Regulatory Challenge:Financial feasibility of an investment waveCould existing Reg. frame deliver wave financing?With low tariffs how to attract wave investments?• (1) Could publicly owned companies borrow more? Did they already reached their Debt limits?• (2) May we favor their cash flow with faster amortization? May public owner inject new equity?• (3) May they swallow real wave of investments with no tariff increase?
Financial feasibility (Cted)Could private companies attract investments?• (1) What ROR level to raise new money?• (2) What good ratio Debt / Equity to boost the Return on Equity with a low ROR? Ratio dividends to benefits? Financially acceptable? Socially acceptable? Politically credible (for decades ahead)?• (3) May they swallow real wave of investments with no significant tariff increase?
Financial feasibility (end)How to combine new wave of investments with actual portfolioof existing assets? Could we isolate the new assets from the old?•(1) a radical move is to go for massive “project financing”?Groups of new assets are lodged in ad hoc companies isolatedfrom existing grids and open to new investors•(2) These new investment vehicles are offered an ad hocregulatory frame (ROR, Amortization, TOTEX Cap, length ofcontracts; rules of contract revision; etc.)•(3) The national Reg. frame is potentially broken: investors fromanywhere can enter the investment race. National TSOs areoffered to self-internationalize by investing abroad.•(4) Cash trapped or tightly regulated TSOs are pushed in“Indian reserves” (old regulatory frame, low return, noexpectation of turn over or revenue growth)
4th Reg. Challenge: Handling of (massive?)redistributive effects• (1) As TRSM invest is complement and substitute to Generation – massive TRSM invest will allow massive Gen. changes:¤ Gen. marginal costs and merit order¤¤ Market value of Gen. assets¤¤¤ Market prices of electricity (day-ahead, intra-day, balancing and ancillary services)
(Massive?) redistributive effects (Cted)• (2) With massive changes for costs, merit order, revenues and market prices, allocation of the benefits and costs of new investments to become very hot potato• (3) Whom to target & whom to favor? National G or Foreign G? National Load or Foreign L?• (4) Eurocrats (like me) see an EU social welfare. Whom at national level sees anything else that national welfare? Even sub-national (Scotland, Catalonia, Flanders, Bavaria)• (5) Coming EU Cost-Benefits-Analysis methodology likely to bypass the national and inter-national welfare redistribution issue? How could national regulators bypass it? Could ACER actually settle all the inter-regulatory conflicts?
(more or… less) To conclude• (1) A massive wave of investments can only have massive consequences• (2) Four substantial regulatory challenges arise: coordination of investments; economic efficiency of regulation; financial feasibility; handling of redistributive effects• (3) A wave of massive investments could less be a dream than… four serious headaches for our beloved regulators