Output-based regulation
Fields of innovation for energy-grid operators?

Moving towards output-based regulation

In theory, tariff setting should balance three elements: stakeholder protection, economic efficiency and system sustainability. In practice, tariffs are aligned with the end results regulators strive to achieve. In almost all cases, tariffs are designed to favor investment remuneration, mainly to entice operators to develop the network. Otherwise, national regulatory authorities (“NRAs”) push grid operators to seek operational excellence, setting tariffs with the aim of transferring more benefits to the end user issuing the operational-excellence targets.

Tariff regulation schemes across Europe vary widely. However, mainstream regulatory methodologies fall under the following categories:

  • Cost plus
  • Rate of return
  • Revenue cap
  • Price cap
  • Outputs & incentives

Initially, network price regulation was derived from input-based schemes such as cost-plus and rate-of-return methodologies, which indirectly caused grid operators to over-invest in their networks without paying sufficient attention to network efficiency, or to increase costs in order to maximize profit. The internal inefficiencies brought by the application of these