Policy and regulations

THEMA’s experience on projects for public bodies, interest groups and market actors gives us a comprehensive understanding of the trade-offs that need to be made and how markets and policies interact.

Our policy, regulatory and market design services provide expert advice on:

• how markets should be organised to ensure the efficient use of resources,
• how markets and regulation can work together to provide effective price signals and incentives for investments in infrastructure, capacity and energy consumption,
• how regulation and policy instruments should be designed to ensure the efficiency of markets and realise policy goals, and
• how market actors can respond to the commercial opportunities provided by the policy environment.

Market design

Well-functioning markets are essential to sustainable resource use and the efficient transformation of the energy system. We are leading experts in energy and power market design.

Market design aims to organise markets and define products such that prices accurately reflect the cost to producers and the value to consumers. By revealing the price of products and services, markets allow coordinated decision-making among a large number of producers and consumers.

Energy markets must adapt as the energy system transforms

The energy system is transforming and energy markets need to adapt to meet the needs of a system with more renewable, variable and distributed generation capacity. New sources of flexibility will be needed and markets will need to evolve to facilitate both greater end-user participation and the use of new technologies.

The markets that exist, as well as their design and interaction, affect the efficiency of the system, its ongoing transformation and consumers and producers of both energy and flexibility services. Both public authorities and market actors therefore need to understand these effects and the implications for how markets should be designed.

We provide analyses on relevant issues related to the development and design of energy markets, for example:

• how to design markets that appropriately value flexibility or different network locations (localisation signals),
• how differences in market design among EU countries affect electricity trade within Europe,
• how increased intraday power trading affects the day-ahead market,
• how different capacity mechanisms affect European power markets,
• how flow-based market coupling affects trade in the electricity market,
• what affects the liquidity of financial power markets and how it can be increased,
• the effect of alternative power trading arrangements for cross-border transmission capacity,
• how markets for consumer flexibility can be designed,
• how markets used in the electrification of transport should be adapted to support the electrification of the transport sector,
• how the regulation of district heating affects the development of the energy system, and
• the interaction between market design and network regulation for hybrid offshore wind projects.

Insight based on economic expertise and in-depth knowledge of the energy markets

Our market design work is based on solid economic expertise and extensive experience developing market solutions, combined with an in-depth understanding of the technical and commercial conditions and the interaction between markets and regulation.

This combination of expertise in the relevant technologies, the power system, companies’ commercial strategies, the regulatory framework and energy and climate policy goals provides a unique basis for conducting a holistic and informed analysis of market design.

We deliver insightful research reports for public bodies, system operators and interest organisations. We also help clients understand power market design through reports and workshops, support as part of consultation processes and work to develop proposed reforms.

Contacts

Berit and Julian

Climate and energy policy measures

Our expertise in designing measures is based on our understanding of the economics, our market knowledge and our insight into climate and energy policy

Energy market transformation is at the centre of the energy transition. The authorities are setting energy and climate policy goals in many areas. The transition of the transport and energy system should take place in a socio-economically efficient manner. If the result is to be as desired, the policy instruments must support the goals and interact with each other in a good way.  

The energy transition requires the extensive use of policy measures

We need to reduce greenhouse gas emissions and transform the energy system in the process. This requires the development and use of new technologies in several sectors, as well as the coordinated use of different energy carriers. To achieve these changes, well-designed policy measures are needed.

Given this, it is imperative that these measures are designed to promote a cost-effective transformation of the economy, achieving our sustainability objectives without wasting resources in the process. To do so, market actors must face incentives that support the realisation of society’s objectives in both the short and long term.

We analyse how different policy instruments work and advise on the design of effective instruments for both the energy and transport sectors. Our assessments are based on extensive experience analysing the markets, knowledge of the players involved and an understanding of the relevant technologies.

Designing effective policy requires not just a solid understanding of the relevant economic theory, but also knowledge of the physical system and insight into how market actors will respond to different policy instruments.

We provide advice on how to design effective policy measures

For measures to be effective, they need to target clearly identified barriers and market failures, as well as enable market actors and final consumers to respond. They should also be integrated into the existing policy framework and work in conjunction with the price signals and incentives provided by the market.

One example of the sorts of policy challenges in which we specialise is analysing measures designed to help with the transformation or adaptation of the energy system. We also work a great deal on policy frameworks to decarbonise transport.

Studies to support effective policy design include:

• assessments of policy-intervention needs based on the identification of barriers and market failures,
• advice on how the design can be tailored to the specific objectives of the instrument,
• analyses of how an instrument will work in the short and long term when acting in conjunction with the market and other instruments, and
• analyses of how a policy instrument will affect different actors, including its distributional effects.

Among other things, we have advised on the design of policy instruments to:

• support renewable generation, including market-based schemes such as certificate markets and auctions for support,
• stimulate the electrification of the transport sector,
• impose regulatory costs on network companies, notably concerning household outages, and
• improve energy efficiency.

We also assess existing measures, e.g. reviewing the design and consequences of Norway’s energy taxation regime, and evaluate their impacts, e.g. for climate policy support programmes.

We closely monitor regulatory developments in the EU and Nordics

Energy markets and climate policy are closely interlinked, and the energy transition means that the interaction between different energy sources and carriers is becoming increasingly important. This makes it important to understand the development of and interaction between energy and climate policies at the European and regional level.

We monitor and analyse ongoing developments in European and Nordic energy and climate policy to provide reports tailored to the needs of different stakeholders.

Contacts

Adrian, Berit and Svend

Network regulation and grid tariffs

Effective design of both network tariffs and regulation is a prerequisite for well-functioning markets and overall efficiency in the power system.

THEMA has extensive experience with network regulation. Our analyses and advice combine our expertise in regulatory economics and business administration with a solid understanding of network users and companies.

Infrastructure is typically a local monopoly and therefore requires regulation

Our analysis ranges from theoretical work to quantitative modelling. Most of our work centres on the power system, but we also have extensive experience working on regulatory issues in the gas and district heating sectors. Similarly, we have experience working on the regulation of the hydrogen sector, where regulatory issues are becoming increasingly important for both regulatory authorities and market players.

Questions related to the regulation of monopolies and the pricing of network services are also important in the transport sector, both because actors in the sector are becoming consumers of alternative energy carriers and because the markets involved in the electrification of transport contain a mixture of monopolistic and competitive activities.

Regulation must incentivise cost-effective operations and investments

Economic regulation and incentive mechanisms are intended to stimulate the cost-effective operation and use of infrastructure while providing incentives for investment and security of supply.

Some illustrative examples of the range of issues that we work on include:

• the regulation of Transmission System Operators (TSOs), including the regulation of system operation costs and congestion revenues,
• how the energy transition affects the optimal financial regulation of network companies,
• regulation to facilitate the coordination of energy infrastructure across different sectors (sector coupling),
• the design of incentive mechanisms related to the quality of power supply, including the quantification of outage costs,
• required rates of return and regulatory interest rates for network operations,
• how network tariffs impact consumers’ incentives to offer flexibility,
• designing network tariffs and connection charges so as to provide appropriate incentives to generation developers regarding localisation and technology choice,
• principles and methods to allow network companies to collect regulated revenues in the least distortionary way possible,
• designing tariffs for special customer groups such as power-intensive industries, and
• methods for network benchmarking, including the creation of new output variables reflecting the distance that power needs to be transported.

Insights based on a detailed knowledge of international practice

There is growing interest in exchanging experience on network regulation and tariffs internationally. In recent years, we have carried out projects on network regulation and tariffs in Sweden, the UK and Germany, as well as for the European Commission.

Our clients in this area include public authorities, network users, industry organisations and network companies, to which we provide insight on complex regulatory topics in a way that is both precise and easy to understand. Our analyses and advice are based on up-to-date regulatory expertise and knowledge of the players and opportunities present throughout the value chain. This enables regulatory decisions to reflect the facts.

Our consultants have a detailed knowledge of current network regulation and constantly monitor regulatory developments. We understand the principles underpinning the regulation (why), how it has been designed and have a practised approach to identifying what adjustments are possible and how they can be implemented.

We provide public reports, workshops and ongoing advice on regulatory issues. We also conduct quantitative analyses and license analytical tools to help public and commercial decision-makers. For example, we have an in-house twin of the Norwegian regulator’s network benchmarking model which is used to analyse the regulatory impacts of decisions on behalf of Norwegian distribution networks.

Contacts

Åsmund and Kristine

 

Economic analysis

We conduct cost-benefit analysis, macroeconomic impact analysis and analysis related to industrial organisation based on a solid understanding of the relevant economics.

Economic theory underpins the assessment of both public policy and commercial investments. Comprehensive assessments of social benefit include a consideration of how the wider economy is affected. We conduct cost-benefit analysis—assessing the net social benefit of different options—and assess the potential macroeconomic impacts of projects, including the potential effects on employment and national and local value added.

By combining our expertise in economics and the energy sector, we can conduct analyses efficiently and provide results that are both trustworthy and respected by the sector’s main stakeholders.

Cost-benefit analysis

Cost-benefit analysis is used, among other things, to assess the impact of major public policy initiatives. It assesses whether the social benefit resulting from an option is greater than the associated socio-economic costs. In the power sector, cost-benefit analyses are often used to make decisions on major network infrastructure investments. Here, the relevant costs will include both the direct costs, notably the investment and operating costs of the asset, as well as external costs, including the impact on the surrounding nature and environment.

Macroeconomic impact analysis

Macroeconomic impact analysis is primarily used to assess the consequences of one or more investments on employment and value creation in the broader economy. THEMA has developed its own model to assess the direct and indirect effects of investment on the supply chain and the rest of the economy. Thanks to our experience conducting such analysis, we are familiar with the economic relationships relevant to the assessment of both generation and network investments.

Industrial organsiation

Industrial organisation is the field within economics that covers how industrial policy can be used to support industrial development, employment and long-term economic growth. It therefore includes critical questions such as how to transition from a reliance on the fossil fuel industry to take advantage of emerging areas of green growth. These are the sorts of questions that we have good experience analysing through projects for a variety of clients.

The analysis we conduct covers issues relating to industrial development and how public authorities, through policy, can foster value creation and growth in various industries.

Contacts

Åsmund, Adrian and Svend