Jean – Michel Glachant

Loyola de Palacio Prof. in EU energy Policy

Director Florence School

A regulatory frame to support a wave of investments in the EU?

The issue: an EU wave of investment

Wave 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 expected

Super 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 Capex

What for a wave of investments & Tech. innovation?

• (2) Regulation of investments is only national

As if EU internal market was only a by-product of national interests

What 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. innovation

New 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 wave

Could 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 portfolio of 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 isolated from existing grids and open to new investors

•(2) These new investment vehicles are offered an ad hoc regulatory frame (ROR, Amortization, TOTEX Cap, length of contracts; rules of contract revision; etc.)

•(3) The national Reg. frame is potentially broken: investors from anywhere can enter the investment race. National TSOs are offered to self-internationalize by investing abroad.

•(4) Cash trapped or tightly regulated TSOs are pushed in “Indian reserves” (old regulatory frame, low return, no expectation 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