Regulating Energy Networks to facilitate the Transition in the Energy Industry

Dr Machiel Mulder, Netherlands Competition Authority NMa

The growing attention for the environmental effects of using (fossil) energy calls for an evaluation of current regulatory regimes. In the past, regulation of the electricity and gas networks was mainly meant to foster competition and improve efficiency, which would result in lower prices for energy users. Now, regulation also has to facilitate the process of decarbonisation. In order to deal, for instance, with the growing significance of distributed generation, distribution network operators have to upgrade their network. In principle operators have two technological options for upgrading. The first one is extending the grid, making the grid sufficiently large to facilitate both peak demand and peak supply to the grid. The other option is making the existing grid smarter, which mainly means the use of information technology to optimize the use of the grid. The key question now is whether the existing regulatory frameworks are designed to enable these type of developments.

In this paper we assess to which extent the current regulation in the Netherlands is able to facilitate the transition of the energy industry. First we analyse, using insights from economic literature, the fundamental characteristics of the current framework (like yardstick, treatment of investments and the remuneration of capital costs). Secondly, results of an empirical research into the effects of regulation on investments are presented. We analyse data on the historical investments by operators and conduct in-depth interviews with all Dutch network operators about their investment activities in relation to the current regulatory regime.

The paper concludes that several mechanisms exist by which the current framework stimulate investments fostering the transition in the energy industry. However, the framework also includes some mechanisms potentially hindering efficient investments. By adding more flexibility to the framework, this inefficiency in regulation is likely solved adequately.