The reasons for the long lead times are complex, but the economic regulation of the grid companies has been discussed as one of the causes.
A key element of the regulation of Norwegian electricity grid companies is the obligation to connect, which means that new customers have a right to access to the grid and existing customers a right to increased capacity without undue delay. In practice, however, it can take a long time from the application for connection or increased capacity, and until necessary investments in the grid are completed.
To assess whether the economic regulation of the grid companies facilitates a socio-economic rational rate of grid development, we have used three criteria derived from economic principles. According to the criteria the economic regulation should contribute to shorter case processing time and construction processes, efficient grid utilization and grid development.
The current economic regulation of the grid companies has many favourable features from a socio-economic perspective. However, the incentives for faster connection of customers are too weak. To remedy this, we recommend the introduction of targeted incentive mechanisms based on the number of connections, or the time spent on connection processes.
We recommend the stepwise introduction of new incentive mechanisms. Initially, these new mechanisms should not impose financial penalties. Instead, they should either reward network companies for faster connection or else ensure that network companies’ allowed incomes are not directly affected. We also recommend different target values for the different grid levels. At lower grid levels, a mechanism could be introduced based on the time the grid company spends on different steps in the connection process, for example from the time the grid company has received an application until the customer receives a response/offer from the company.
In the longer term, a one-sided incentive mechanism, in which the grid company receives a financial reward based on its performance against the target value, can be developed into a two-sided mechanism. This means that the grid company receives a penalty or reward through the revenue cap based on, for instance, time use.
For higher grid levels, the connections are more complex, and target levels based on time spent or the number of completed connections are not as suitable as for lower grid levels. We therefore recommend the introduction of a customer satisfaction-based survey, initially used to map customer satisfaction of the grid company and gather experience with the implementation of such surveys for official use. In the longer term, the results of the customer satisfaction survey can be used in a two-sided mechanism, where DSOs are penalised or rewarded through the revenue cap based on the score in the survey.
Recently, RME announced that they want to add a boost factor to the revenue cap, where the value of new customers beyond an expected number of connections is given a higher value. This is a form of reward for grid companies that quickly connect new customers to the grid, and in line with our recommendations.
We find weaknesses in most of the mechanisms that involve adjustment of the existing grid regulation. We do not recommend introducing instruments that reward grid investments in general or that reduce the CENS-risk. Such adjustments to the regulation have undesirable incentive effects in other areas and are to some extent inaccurate.
The feasibility study was conducted for RME, the Norwegian National Energy Regulator. The project was conducted in collaboration with CEPA, an international analysis firm with special expertise in regulation, which has conducted an internation survey of incentive mechanisms.
