Regulatory Experimentation in Energy: Three Pioneer Countries and Lessons for the Green Transition

Regulation cannot always move as fast as innovation. Regulatory experiments enable real-life testing of new products, services or business models by allowing derogations from existing rules while maintaining the protection of energy consumers. The outcomes of these experiments inform future regulation. In this chapter, we discuss the experiences with regulatory experimentation in the energy sector of three pioneering countries: the Netherlands, Great Britain and Italy. We compare the implementations along six dimensions: eligible project promoters, scope of the derogations, length of the derogations, administration of the experiments, funding, and transparency. We also describe how the early approaches have evolved in these countries. Finally, we look ahead and discuss how learnings can be applied to enable experimentation at the European level involving technologies that are expected to become important to enable the green transition.

Consumer Ownership of Natural Monopolies and its Relevance for the Green Transition: The Case of District Heating

District heating is important for the transition to sustainable energy systems. In order to implement district heating, consumers’ trust and acceptance of this technical monopoly structure is necessary. This necessity leads to the question of price regulation and ownership in the district heating sector, since these institutional structures are the measures for creating trust and acceptance. This article is based on a Coasian approach, where information costs and concrete institutional structures are at the centre of the analysis. This approach is applied for the purpose of understanding the role of consumer ownership in the district heating sector. An ownership model which has been shown to be the most efficient in Denmark. Through a detailed empirical case study, it is shown how private commercial companies have avoided the state regulatory monopoly price regulation and inflated consumer prices. The case study also describes how changes in ownership immediately led to price reductions. It is concluded that the consumer ownership model has played a vital role in getting price regulation to succeed and thereby consumers to trust and accept the district heating systems in Denmark. This result is an important contribution to heating policy development as well as monopoly regulation theory.

Price Efficiency, Green Transition and Channels for Regulating Natural Monopolies: The Case of Power Distribution System Operators (DSOs)

The subject of this chapter is the governance system of the distribution system operators (DSOs), i.e. the companies that own, operate and develop regional and local electricity networks. These companies are natural monopolies, and subsequently need strong regulation by public authorities and/or by consumers. The role of the DSOs has been changing fundamentally in recent years, together with the rest of the electricity system, due to the transition from stored fossil fuel-based electricity to electricity based on fluctuating renewable energy sources. The paper analyses the changing circumstances for the DSOs in the development of integrated smart energy systems, based on an innovative theoretical framework with a strong focus on ownership in the understanding of governance of natural monopolies. After a comparative analysis of shareholder versus consumer ownership, based on two cases, the paper sets up several conclusive recommendations about ownership, governance and the new role of the DSOs in the developing smart energy system.

The Danish Income-Cap Regulation in the Power Supply Sector: A Legal Perspective Considering the Green Transition

The break-even principle has been a fundamental principle for the price regulation of the Danish utilities for several decades. Following the liberalization of parts of the energy sector, this regulation has been supplemented with new instruments to regulate monopoly areas. This form of regulation was introduced in connection with a new electricity supply regulation from 1999. The detailed design of the income-cap regulation has been left to the Minister responsible for the energy sector and the supervisory authority (currently the Danish Utility Regulator). Income-cap regulation of power grids has given rise to several challenges. Thus, the specific design of the revenue framework has been changed several times. At the same time, however, some experience has been gained with the administrative handling of this form of regulation. Several cases have, in the absence of administrative courts in Denmark, been dealt with by the Danish Energy Board of Appeals. Since the introduction of revenue frameworks, the power (electricity) sector has changed. Furthermore, the sector must adapt to the Green Transition, which will require capacity expansion at both transmission and distribution levels, or other measures must be taken to prevent bottlenecks in the system. In this paper the income-cap experience will be discussed.

Energy Network Innovation for Green Transition: Economic Issues and Regulatory Options

In this age of low-cost capital and stimulus packages, is it the best time to heavily invest in tomorrow’s energy networks and research infrastructure? In the academic literature it is widely acknowledged that innovation is key to decarbonising the energy sector and fostering sustainable development. However, post liberalisation has been struggling to promote R&D and innovation. Is this a case of business, regulatory, or policy failure, or are there other factors involved? In this paper, we discuss the reasons for slow uptake of new technologies in energy networks and propose some remedies for the European context, where innovation in the area of energy networks is crucial for the implementation of the Green Transition. The solutions to address this shortfall need to be considered in an overarching manner. The specific points raised here are based on incentive regulation, the establishment of competitive funding models like Ofgem’s Low Carbon Network Fund, and a large European collaborative research hub.

Discounting and the Green Transition: District Heating in Denmark

Taking Aalborg as the basis for a case study, we consider the discount rates, annuity rates and costs of capital that were used in recent socio-economic and financial Net Present Value (NPV) analyses of a proposed geothermal district heating plant. While the core NPV analysis applied a real social discount rate of 4 percent, in keeping with Danish government guidance, emissions and electricity prices were based on costs of capital that differed from this rate, as did the annuity rate applied in the financial analysis of the project. While the different rates are carefully justified in each setting, we question whether there is consistency in the approach taken to intergenerational welfare across different steps of the analysis. The use of high corporate rates in some contexts potentially makes it more difficult for Green Transition projects to meet the legal requirement of being evaluated as socio-economically optimal.

Net Present CO2 Reductions – A Measure for an Adequate Evaluation of Green Initiatives

When assessing a green initiative, the standard approach is an application of the classical discounting of future gains converted into monetary terms. In doing so, significant uncertainties about the future value of CO2 reductions are introduced. The current alternative is to measure the CO2 reductions in a single reference year, e.g. 2030 or 2050. This does not take into account the CO2 reduction trajectory process during the years up to, and after, the reference year. In this paper, a new basis for decision making is presented, in which discounting of the CO2 reductions is measured in tonnes. In this approach, the discount factor takes into account the impatience implied from the tipping point theory. Furthermore, such a measure would adequately reflect the entire CO2 reduction profile of the initiative in question, rather than being restricted to focusing on the impact in a (single) selected reference year.

Electricity Tariff Design in the Context of an Ambitious Green Transition

Current tariff designs do not incentivize efficient or equitable responses by active customers adopting renewable self-generation or providing flexibility in a future fully decarbonized electricity system. This chapter revises current practices in Europe and, based on the revisited principles of efficiency and equity, proposes a first benchmark for tariff design. Forward-looking peak-coincident network charges that reflect network incremental costs and fixed charges that collect residual network costs and policy costs are recommended. No one-size-fits-all model exists, in practice. These are guidelines for regulators when dealing with the trade-offs between the tariff legacy and the new requirements imposed by this energy transition.

Acceptance Issues in the Transition to Renewable Energy: How Law Supposedly can Manage Local Opposition

Renewable energy projects are increasingly confronted by persistent resistance from local communities, which delays and sometimes even prevents their implementation. This reflects the frequent gap between support for the general idea of renewables as a strategy for reducing greenhouse gas emissions and acceptance of renewable energy installations in the local landscape. For more than a decade, the Danish Renewable Energy Act has applied various financial measures to promote local acceptance. A general characteristic of the measures is their compensatory purpose, which presupposes that renewable energy facilities have negative impacts. The current toolbox includes instruments aimed at compensating individual house owners for specific financial losses, as well as measures that in more general terms, and ex post, compensate for non-financial impacts. Nevertheless, the toolbox is not yet fully developed and there is a need for further understanding of how different measures work, also in relation to more recently introduced renewables within the local acceptance framework of the Renewable Energy Act, such as solar power. Suggestions are made for the development of more dynamic and flexible regulatory approaches that would include individualized measures tailored to meet the distinct needs of local communities or individual landowners.