Performance-based regulation: Aligning incentives with clean energy outcomes
For years European policymakers have been working toward an integrated, competitive energy system. Now the Clean Energy for All Europeans package directs Member States to develop a decarbonised, cost‑efficient energy system that provides consumers with access to affordable and secure energy. The urgency of this task is further heightened by climate concerns. Power sector regulation needs to develop in concert with these changes.
Performance-based regulation is a powerful tool to help policymakers create a regulatory framework that rises to the current challenges. It can help network companies contend with issues from rising amounts of variable renewable energy sources and increases in prosumerism, decentralised generation and demand from electrification of the heating and transport sectors.
Network companies, particularly distribution system operators, will play a pivotal role in exploiting these opportunities and facilitating a cost-effective clean energy transition. Using performance-based regulation to link the remuneration of network companies to outcomes consistent with the clean energy transition is an effective method for motivating network companies to become active agents of this change. An outcome-based approach can provide them with incentives to support the energy transition in addition to addressing more traditional concerns such as reliable and affordable electricity supply.
Equally important, regulation needs to ensure network companies meet consumers’ needs. They will place the most value on excellent customer service, efficiency in dealing with complaints, rapid connection to the power system and high levels of network reliability and supply quality. By focusing on these outputs and requiring delivery at least cost, policymakers can protect consumers’ interests in the energy transition. The key to encouraging positive performance over the long term is having clear goals, directional incentives and transparent, measurable metrics to assess progress.
Authors Zsuzsanna Pató, Phillip Baker and Dr. Jan Rosenow provide an overview of different regulatory regimes in Europe and identify policy areas well-suited to the application of performance-based regulation mechanisms. They recommend implementing non-wire solutions and embracing the use of innovation, technology and communications to increase efficiency and reduce or defer the need for expensive network investment.