The government recently came to an agreement with a majority of Parliament concerning the financial regulation of electricity distribution companies. The agreement aims to improve the efficiency of electricity distribution companies, thereby reducing electricity bills for households and businesses by up to Dkr600 million annually.
The agreement is the first step towards the government's new energy supply strategy. It is hoped that by 2025 this strategy will have optimised district heating, waste incineration, electricity distribution, gas distribution and water supply by up to Dkr5.9 billion annually.
Under the agreement, the price of electricity distribution will be linked more closely to distribution companies' expenses and optimisation requirements will continuously be imposed on the sector based on comparisons between the cheapest and most expensive distribution companies.
A distribution company that performs better than required may keep the resulting profit for a certain period, after which it will be used to reduce prices further. The financial regulation of electricity distribution companies aims to incentivise them to optimise their services. However, in the long term, the sector's optimisation potential should also benefit consumers.
The financial regulation of electricity distribution companies will be based on the following principles:
- Framework for allowed profits (ie, revenue framework) – the revenue framework will consist of an expenditure framework and an interest rate framework.
- Regulation based on actual expenses – the expenditure framework will be determined by the distribution company's expenses in the previous regulation period.
- Multiannual regulation periods – the revenue framework will be fixed in multiannual regulation periods.
- Market-based proceeds – distribution companies should be able to gain market-based, risk-adjusted proceeds from their investments, to the extent that the company is run in an economically responsible manner.
- Adequate quality – the financial regulation of electricity distribution companies will support optimisation and quality in the form of high-supply reliability.
- Benchmarking and optimisation requirements – by introducing a new benchmarking model, inefficient distribution companies will be required to meet an individual optimisation requirement.
- Efficient technology development – the financial regulation will support a sector which demands efficient new technology by giving distribution companies incentives to invest in the most efficient solutions without having to undertake unnecessary economic risks.
The agreement's details are vague, including with regards to general and individual optimisation requirements. The Energy Association has noted that, in a sector in which investments total billions of kroner each year, detail is essential. However, it has clarified that the dual optimisation requirement should not result in companies being required to implement the same optimisation measures twice.
The energy sector will have to wait to see that the consequences are when the agreement is implemented as part of the new Electricity Supply Act, which is expected to take effect on January 1 2018.
For further information on this topic please contact Nicolaj Kleist at Bruun & Hjejle by telephone (+45 33 34 50 00) or email ([email protected]uunhjejle.dk). The Bruun & Hjejle website can be accessed at www.bruunhjejle.com.
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