Regulatory adaptations for Europe’s TSO grid investments proposed

ENTSO-E has proposed adaptions of regulations for Europe’s TSOs’ grid investments in a new position paper.

The need for increasing investments into the grid in Europe, estimated by ENTSO-E at least €834 billion into the transmission grid alone by 2050, is giving rise to the need for additional capital – both debt and equity – to avoid a financing gap.

Under the EU’s action plan for the grids, national regulatory authorities are required to support TSOs’ investments by sending strong signals through their regulatory decisions.

To this end, ENTSO-E has set out recommendations for a regulatory framework to facilitate their growing investments by providing adequate risk-return profiles to ensure that they remain or become attractive to long-term investors and maintain investment-grade ratings.

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ENTSO-E points out that due to risk-free rates being fixed at artificially low levels in some TSOs’ remunerations schemes, not all TSOs were able to build up additional equity or raise debt to the necessary scale and extent needed in the last years.

As an example ENTSO-E cites a TSO intending to invest €30 billion in offshore assets would be required to raise €9 billion of additional equity, stating that injections of fresh equity on this scale have not been observed in recent years.

At a general level, ENTSO-E recommends that national regulatory authorities should review the regulatory return decisions taken prior to the steep increase of risk-free-rates starting in 2022.

They also should consider regular re-evaluation of risk-free rates and market premiums as long as the investment and interest rate situation call for it .

In general, TSOs need stable and predictable remuneration methodologies, consistent with the long-term nature of their investments and of the related essential funding sources, states ENTSO-E.

Cost recovery

Turning to cost recovery, ENTSO-E states that regulatory regimes should provide reasonable and realistic opportunities for the recovery of TSOs investments and costs, with inflation adjustments an important component.

Regulatory efficiency tools must focus on the future and not calculate efficiency solely based on historic expenses. Sustainable behaviour must be rewarded.

Cost sharing between member states is also expected to play a bigger role in the years to come, but the existing cost sharing mechanisms for new infrastructure need major improvements.

Alternative and simpler mechanisms for the fair and transparent distribution of costs related to major offshore grid investments (with EU-wide benefits) should be considered to avoid overly complex negotiations leading to possible deadlocks.

ENTSO-E also points to the need to provide appropriate incentives on a higher scale and speed.

Incentives should be used to compensate for additional risks for specific assets but performance incentives need to act as a carrot only.

TSOs should also not be disincentivised for including grants in their financing structure.