top of page
  • Stephen Nash

Regulating innovation

Since the deregulation of utilities in the 1990s, a conventional wisdom has been established whereby some utility functions have been subject to revenue regulation, and other utility functions have instead operated in a competitive marketplace.  As a general rule, in Europe as least, power generation and upstream activities are subject to competition, while network activities – where a natural monopoly normally exists – are more heavily regulated.

We are now seeing a number of disruptive trends in the industry, and in some cases the innovations taking place do not fit well with this existing regulatory paradigm.  Some examples include:

  1. Some large utility infrastructure investments are essentially being developed by governments. An example of this is the recent tenders held in the Netherlands for the Borssele 1 and 2 offshore wind farms.  These tenders cleared at a low price (72.70 €/MWh), much lower than the UK’s CfD auctions, for example.  But this relies on a large transfer from taxpayers to bill-payers (during development) which is at odds with the principle of cost-reflective energy tariffs.  Where development costs for very large projects can be so great, who should take this risk?

  2. As networks evolve to accommodate large volumes of intermittent generation there is a need to increase investment in networks. In many cases there might be a wide range of possible investments that a network owner could make.  Traditional reinforcement might be an option, but the use of demand-side response, smart control equipment, or battery storage might be alternative options.  Does the existing regulatory paradigm for network companies lead to the right outcomes?  Is there a way to bring competition into this decision making process?

  3. Decentralisation of the energy system is another factor here. This is evident in different guises in different markets, but one obvious challenge is how mini-grids should be regulated, especially in less developed markets where they are a key component of the energy access agenda.  In the case of a mini-grid the provider will often bring a vertically integrated solution, owning generation, network, and supply infrastructure.  Does that bring the best value for money to some of the world’s least well off energy consumers?

Unfortunately, I can’t answer all of these questions in one blog (!), but it is clear that the changes in our industry challenge where the threshold between competition and regulation should be.  The challenges, and the answers, will be different for different markets, and for more developed and less developed countries.

One of the things to consider in designing the right regulatory framework is to determine the level of regulation or competition through the various stages of the project development lifecycle, shown below.


bottom of page