department of accounting and managment control 34th iaee international conference the...

Department of Accounting and Managment Control

34th IAEE International Conference

“The interdependency of incentive-based

regulation and environmental policy

in the German electricity industry”

Sören Agne and Hendrik Finger

Stockholm, 20 June, 2011

2 Department of Accounting and Management Control

Sören Agne / Hendrik Finger

Introduction

Methods

Expert Interviews Results

Simulation Results

Conclusions

Agenda



Introduction

Environmental policy goals in Germany

Reduce greenhouse gas emissions

Increase the use of renewables

Shut down nuclear power plants

Consequences

South-to-north shift of power generation

Need of major electricity grid investments

Re-evaluating the conditions of capital-intensive

investments



Introduction

Regulation of electricity grids

Indispensable due to the natural-monopolistic character of electricity grids

Incentive-based regulation replaced cost regulation in 2009

Aims at a sustainable and reasonable priced security of supply

Current investment conditions

Time lag in refinancing grid investments

Incomplete recognition of capital costs

Few cost pass-through elements within the

incentive-based regulation



Introduction

Methods


Simulation Results

Conclusions

Agenda



Methods

Two-step approach

Qualitative analysis of the condition of transmission grid investments

- Eight individual expert interviews

- Semi-structured and guideline-based

Business simulation model

- Financial simulation model based on the methodology of System Dynamics

- Assessment is based on the forecast of key performance indicators for single

and multiple investment decisions in the regulatory environment

Exploration of the research question the model should focus on



Introduction

Methods


Simulation Results

Conclusions

Agenda




Sample selection and survey period

Survey period January-March 2010

Interviewees represent the regulatory key actors

Interviewee Company or Institution Current Position

INT_1 Regulatory Authority Speaker

INT_2 Grid Operator Head of Accounting

INT_3 Grid Operator Head of Accounting

INT_4 Grid Operator Head of Regulatory Affairs

INT_5 Grid Operator Academic Advisor

INT_6 Electricity Producer Academic Advisor

INT_7 Consulting Firm Manager

INT_8 Law Firm Partner




General

The need of transmission grid extension is mainly induced by political goals

whereas the investment conditions are determined by the regulator

Demands for sufficient investment incentives

Enlarge reliability and credibility between regulatory actors

Investment refinancing without time lags

Increase of the achievable rate of return on grid investment

Unlimited authorisation of investment budgets



Introduction

Methods


Simulation Results

Conclusions

Agenda



Simulation Results

Time lag for investment budgets in accordance with § 23 ARegV

Development of the allowed revenue under different systems:

0

2

4

6

8

10

12MU

Year(T-2) Time lag with correction factor (actual costs)

(T-0) No time lag (planned costs)

(T-2) Time lag (actual costs)

T+2

Reference Scenario



Kdnb =

investment budget revenue / non-influenceable costs

Transition into regular revenue path at the beginning of next regulation period

Variation of the investment year between 2007 and 2011

Investment year has an impact on:

Duration of authorisation as non-influenceable costs with additional correction factor

Residual value within regular revenue path

Kb / Kvnb =

Inefficient and efficient costs

MU

0

2

4

6

8

10

12

0

2

4

6

8

10

12

0

2

4

6

8

10

12

0

2

4

6

8

10

12

0

2

4

6

8

10

12

T=2007

T=2008

T=2009

T=2010

T=2011

MU

MU

MU

MU

Kdnb=5 Years

Kdnb=4 Years

Kdnb=3 Years

Kdnb=2 Years

Kdnb=1 Year

Year

Year

Year

Year

Year

Simulation Results

Transition of investment budgets from non-influenceable to influenceable costs



Transition of investment budgets from non-influenceable to influenceable costs

Simulation Parameters / Impact factors on the revenue:

Investment year (T)

Relative inefficiency (Xind)

General X-factor (PFt)

Consumer Price Index relationship (VPIt/VPI0)

Further assumptions on the development of the regulatory regime required

Simulation Results



2007

2008

2009

2010

2011

60%

70%

80%

90%

100%-30

-20

-10

0

10

20

30

-25

-20

-15

-10

-5

0

5

10

15

20

25

Total revenue in comparison to the reference scenario

Investment year

Relative efficiency

MU

MU

Reference value

255.26 MU

Tot

al r

even

ue in

com

paris

on to

the

refe

renc

e sc

enar

io

Simulation Results

Assumptions:

PFt = RP2 - 1.5%/yr

RP3+ - 0%/yr

ΔVPIt = 2.0%/yr



2007

2008

2009

2010

2011

60%

70%

80%

90%

100%-2%

-1,5%

-1%

-0,5%

0%

0,5%

-2

-1.5

-1

-0.5

0

0.5

Rate of return in comparison to the reference scenario

Investment yearRelative efficiency

%

Rat

e of

ret

urn

in c

ompa

rison

to th

e re

fere

nce

scen

ario

Reference value

6.78%

Simulation Results

* after-tax

*



Introduction

Methods


Simulation Results

Conclusions

Agenda



Conclusions

Incentive-based regulation and environmental policy

The realisation of the German environmental policy goals require a fast extension of the electricity grid and major investments

but

The present regulatory framework is not expected to be suitable for ensuring grid investments in the needed extent, since

- The timing of investment is of great importance

- Time lags reduce the investment incentives

- Limited authorisation of investment budgets increases regulatory uncertainty

Currently the regulatory framework does not supplement the environmental policy, their implications are divergent



Sören Agne

Technische Universität Dortmund

Department of Accounting and

Management Control

Otto-Hahn-Straße 6a

44227 Dortmund

Germany

Telefon: +49 231 – 755 4652

Email: [email protected]

Questions and Comments

Hendrik Finger

Technische Universität Dortmund

Department of Accounting and

Management Control

Otto-Hahn-Straße 6a

44227 Dortmund

Germany

Telefon: +49 231 – 755 5289

Email: [email protected]



References Ballwieser, Wolfgang (2008): Investitionsrechnungen fur Netze im Rahmen der Anreizregulierung, Kalkulationsgrundlagen in der

Energieversorgung - Bd. 9., VWEW-Energieverlag.

Bremer Energie Institut (2010): Anreiz- oder Hemmniswirkung des regulatorischen Rahmens fur Erweiterungsinvestitionen der Stromubertragungsnetze, http://www.amprion.net/sites/default/files/pdf/BEI-Studie.pdf.

Bundesnetzagentur (2006): Bericht der Bundesnetzagentur nach § 112a EnWG zur Einfuhrung der Anreizregulierung nach § 21a EnWG, http://www.bundesnetzagentur.de/cae/servlet/contentblob/32084/publicationFile/1974/BerichtzumDownloadId6715pdf.pdf .

Bundesnetzagentur (2008): Pressemitteilung, 07.07.2008: Anreizregulierung startet fristgerecht zum 1. Januar 2009.

Bundesnetzagentur (2010): Pressemitteilung, 08.06.2010: Investitionsbudgets fur Sammelanbindungen von Off-Shore-Windparks genehmigt.

Burns, Phil and Riechmann, Christoph (2004): Regulatory instruments and investment behaviour, Utilities Policy, Vol. 12, pp . 211-219.

Deutsche Energie-Agentur GmbH (2010): dena-Netzstudie II - Integration erneuerbarer Energien in die deutsche Stromversorgung im Zeitraum 2015 - 2020 mit Ausblick 2025, http://www.dena.de/fileadmin/user_upload/Download/Dokumente/Studien___Umfragen/Endbericht_dena-Netzstudie_II.PDF.

Estache, Antonio; Rodriguez Pardina, Martin A.; Sember, German; Rodríguez, José María (2003): An Introduction to Financial and Economic Modeling for Utility Regulators, World Bank Policy Research Working Paper No. 3001.

Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (2010): Energy Concept for an Environmentally Sound, Reliable and Affordable Energy Supply, http://www.bmu.de/files/english/pdf/application/pdf/energiekonzept_bundesregierung_en.pdf.

Forrester, J. W. (1962): Industrial Dynamics, Cambridge.

Joskow, Paul L. (2006): Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks, CWPE 0607, Working Paper, MIT.

Kurth, Matthias (2009): Was ist eine erfolgreiche Regulierung der Strom- und Gasnetze? - Rolle der Regulierungsbehörde sowie Ansätze zur Bewertung, Zeitschrift fur betriebswirtschaftliche Forschung (zfbf), Vol. 61, pp. 679-697.

Morecroft, John D. W. (2007): Strategic modelling and business dynamics: a feedback systems approach, Wiley.

Sterman, John (2000): Business dynamics: systems thinking and modeling for a complex world, McGraw-Hill.

Vogelsang, Ingo (2010): Incentive Regulation, Investments and Technological Change, CESifo Working Paper No. 2964.

Von Hirschhausen, Christian and Hess, Borge (2007): Das volkswirtschaftliche Profil einer effizienten Anreizregulierung, in: Säcker, Franz J. and Busse von Colbe, Walther. (eds.): Wettbewerbsfördernde Anreizregulierung, S. 1 – 9.



Backup



Sensitivity analysis (T=2011) Total revenue Rate of return

Xind = 60% 230.61 GE 4.83%

Xind = 100% 264.92 GE 6.79%

0

2

4

6

8

10

12

Impact of the relative inefficiency on the allowed revenue

Sensitivity analysis - Variation of Xind:

Xind=60%

Xind=100%Potential subvariants

MU

Year

Investment year:T=2011

2013

2019

2014

2024

2029

2034

2039

2044

2049

Simulation Results

* after-tax

*

Assumptions:

PFt = 1.5%/yr

ΔVPIt = 2.0%/yr

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