Offshore infrastructure projects will play a key role in enabling the EU to meet its renewable energy goals. Therefore, effective economic incentives must be in place to ensure adequate investments. • Since the liberalisation of the power sector, the use of ‘incentive regulation’ has become a standard practice among European regulators. This TSO incentive regulation is done in a ‘portfolio’ fashion. • In the countries analysed, different risk/remuneration profiles are set according to the general regulatory regimes. These risk/remuneration profiles have not changed significantly since the previous study conducted by Glachant et al. (2013). 1 • Nevertheless, in recent years, regulators are also providing dedicated incentives for specific strategically important or necessary investments, including offshore projects. • We observe that the trend of providing dedicated incentives appears to modify the risk/remuneration characteristics, leading to a more ‘investment friendly’ environment for TSOs, at least for certain types of assets, such as offshore transmission infrastructures

BHAGWAT, Pradyumna

LIND, Leandro

Cadmus, EUI Research Repository

ENERGYfsr.eui.euPOLICYBRIEFTowards a more Investment Friendly Economic Incentive Regime for Offshore Infrastructure ProjectsBy Pradyumna Bhagwat, Florence School of Regulation and Leandro Lind, Universidad Pontificia ComillasHighlights • Offshore infrastructure projects will play a key role in enabling the EU to meet its renewable energy goals. Therefore, effective economic incentives must be in place to ensure adequate investments.• Since the liberalisation of the power sector, the use of ‘incentive regu-lation’ has become a standard practice among European regulators. This TSO incentive regulation is done in a ‘portfolio’ fashion. • In the countries analysed, different risk/remuneration profiles are set according to the general regulatory regimes. These risk/remunera-tion profiles have not changed significantly since the previous study conducted by Glachant et al. (2013). 1 • Nevertheless, in recent years, regulators are also providing dedicated incentives for specific strategically important or necessary invest-ments, including offshore projects.• We observe that the trend of providing dedicated incentives appears to modify the risk/remuneration characteristics, leading to a more ‘investment friendly’ environment for TSOs, at least for certain types of assets, such as offshore transmission infrastructures.1. Glachant, J.-M., Saguan, M., Rious, V., Douguet, S., 2013. Incentives for invest-ments: Comparing EU electricity TSO regulatory regimes. doi:10.2870/80768.Issue 2018/01February 20182 ■  RSCAS - Policy Brief ■ Issue 2018/01 ■ February 20181. IntroductionSince the liberalisation of the power sector, the use of ‘incentive regulation’ has become a standard practice among European regulators. Furthermore, Article 13 (1) of the TEN-E regulation for PCIs mandates the use of dedicated incentives for projects that may be deemed to have higher risks for their development, construction, operation or maintenance. In the past few years regulators have opted for a case-by-case regulation as a means to incentivise necessary or strategically important investments. Nevertheless, it has not substituted portfolio regulation. Offshore wind is expected to play a major role in enabling the EU to meet its greenhouse gas (GHG) reduction and renewable energy target in the near and long-term future. In this context, the develop-ment of a robust offshore electricity grid infrastruc-ture has the potential to deliver many benefits. Thus, such investments may be considered ‘necessary or strategically important’.This research extends the work of Glachant (2013), and Meeus and Keyaerts (2014).2 We present the combined impact that the general regulatory regime and dedicated incentives may have on the risk and remuneration for TSOs3. Regulatory structures of Great Britain, Germany, the Netherlands and Bel-gium are assessed. These four countries were chosen because of their relevance to the development of off-shore wind power.2. General National Regulatory RegimesIn each analysed country, a general regulatory regime for transmission infrastructures sets the ‘risk and remuneration characteristics’ for the TSO. For the analysis of the general regulatory schemes, we 2.  Meeus, L and Keyaerts, N (2014). The role of the EU and ACER to ensure an adequate regulatory framework for projects of common interest. Florence School of Regulation; 2014/05; Policy Briefs3.  One can argue that not only TSOs invest in offshore transmission infrastructures. Although this is true, our analysis is fo-cused on the TSO, considering that investments on a future meshed offshore grid will be more suitable for TSOs, or at least they are expected to carry the greatest volume of investments in the early stage of a meshed offshore grid.use the analytical framework presented by Glachant (2013). In Section 2.1 we describe the assessment framework. This is followed by an update on changes to the national regulatory regimes that have occurred since the previous study by Glachant (2013) in Sec-tion 2.2.2.1 Assessment FrameworkThe framework presented by Glachant (2013) assesses the regulatory regime’s capability to: 1) Suf-ficiently remunerate TSO investments and to ensure their financeability. 2) Reduce the risk borne by the TSO. 3) Incentivise reduction the TSO’s costs. 4) Transfer efficiency gains and redistribution to final users, using five economic properties of the regula-tory regimes. These properties are namely; 1) The length of the regulatory period. 2) The scope of the revenue cap. 3) The tools to define allowances and efficiency targets. 4) The practical setting of the cap-ital remuneration. 5) The adjustment mechanisms. The results were then transposed into a graphical taxonomy to illustrate the level of risk and remuner-ation for each national regulatory regime. 2.2 Update of General National Regulatory RegimesA literature review indicated that there is not much change in the positions of the countries since the analysis conducted by Glachant (2013). The Neth-erlands moved slightly up and left on the chart, as previously existing adjustment mechanisms were excluded for the new regulatory period. Also, a new decreasing WACC was established. Belgium too saw a decrease in remuneration, moving slightly to the left in the chart.Figure 1 illustrates the position of TSOs in different countries. A high remuneration moves the flag to the 3 ■  Towards a more Investment Friendly Economic Incentive Regime for Offshore Infrastructure Projectsright graph, while a risky characteristic in the regula-tion (e.g. efficiency targets over investments) moves the flag up. For the Netherlands and Belgium, the outlined frames illustrate the initial positions from the 2013 study. Figure 1: Assessment of the current national regulatory frameworks43. Dedicated IncentivesAn alternative way of dealing with specific invest-ments is by the implementation of dedicated incen-tives. These incentives are in addition to the default national regulatory framework. To analyse dedicated incentives, we use the work done by Meeus and Key-aerts (2014). The remuneration increase is mainly calibrated in two ways, either by a fixed premium for eligible project or via a case-by-case assessment and individual premium. Risk mitigation may be done by exemption from the default CAPEX efficiency benchmarking; increasing the regulatory period, and advance timing of cost recognition. Usually, an ex-ante assessment of eligibility is also implemented 4.  Note that the position of each country is illustrative, and although the axis of the graphic represents scales, no inference on the actual amount can be made. It serves rather as a comparative illustration of a qualitative analysis.5.  Ofgem, 2013. Strategic Wider Works (SWW) - Factsheet6.  Ofgem, 2014. OFTO Build : Providing additional flexibility through an extended framework Updated policy proposalsto control the cost efficiency of the investments that would eventually receive dedicated incentives. In this section, we discuss the dedicated incentive schemes in four countries.3.1 Great BritainDedicated incentives in Great Britain are not in one package of measures. The main programme is called the Strategic Wider Works (SWW). However, other policies and decisions also serve the purpose of ded-icated incentives. The SWW scheme allows the TSO to bring projects forward once are they mature enough for considera-tion. Ofgem carries a project assessment to verify if the request is justified. If so, the project can be devel-oped by the TSO, and outputs and allowed revenues are adjusted5. Another dedicated framework for specific assets is the Offshore Transmission Owner (OFTO) model. This framework deals specifically with offshore con-nections. Since 2009, farm-to-shore connections are not built by the TSO, but by the developer that transfers the ownership to a competitively appointed OFTO after completion6. Now, Ofgem wants to pro-mote the ‘OFTO build’ model, in which the con-struction of the connection will also be a responsi-bility of the OFTO.Lastly, a separate regime may also be applied to interconnections. This was the case for the NEMO interconnector, a 1 GW subsea cable linking Bel-gium and GB. For this infrastructure, a ‘cap and floor’ regime was adopted, meaning that the project developer may receive revenues from the congestion of the interconnection, limited to a floor, ensuring a minimal revenue for the developer, and a cap, to 4 ■  RSCAS - Policy Brief ■ Issue 2018/01 ■ February 2018avoid overpayment by users7. To calculate the rev-enue cap and floor, Ofgem used a “building block”. First, an assessment of efficient costs for the project was carried, followed by a return on capital assess-ment and an OPEX assessment.3.2 GermanyGermany has dedicated incentives schemes for cross-regional, cross-border and offshore investments8. Large national and cross-border grid-expansion investments that support the German Energiewende are eligible to receive dedicated incentives. In the case of offshore transmission lines, the TSO is mandated to proactively provide connections. Nevertheless, additional incentives are provided for risk mitigation. The offshore connections are approved by the Bundesnetzagentur (BNetzA) under the so-called investment measures. Under this category, offshore connections are qualified as permanently non-influenceable costs to which 7.  Ofgem, 2014. Decision on the cap and floor regime for the GB-Belgium interconnector project Nemo.8.  Op. cit. fn. 29.  TenneT, 2017. Fixed-to-Reset Rate NC7.1 Perpetual Capital Securities Prospectus.10.  op. cit. fn. 911.  Elia, 2017. Making the energy transition happen - Annual Report 2016.no efficiency targets apply. Also, costs are directly included in the revenue cap based on planned costs9.3.3 The NetherlandsIn the Netherlands, two special risk mitigation measures are applied. Offshore grid investments are remunerated while under construction and no benchmark/theta or frontier shift will apply in this first regulatory period. The maximum deprecia-tion period for offshore grid assets is 20 years10. The WACC though is the same as for onshore invest-ments. 3.4 BelgiumBelgium offers dedicated incentives for ‘strategic investment projects’, that mainly consists of an additional remuneration over the project. Strategic investments are primarly aimed at improving EU integration and may be entitled to receive an additional mark-up. According to Elia,11 “this additional remuneration is calculated Table 1 summarises the dedicated incentives in the assessed countries. 5 ■  Towards a more Investment Friendly Economic Incentive Regime for Offshore Infrastructure Projectsas a percentage of the cumulative actual amount dispensed (investment amounts are capped per year and per project).” The additional incentive, however, is linked to the OLO rate (free-risk rate). The markup is applied at full rate if the OLO rate is equal to or below 0.5%. If the OLO is higher, the markup is reduced proportionally, capped at 2.16%. The application of the additional remuneration is also conditioned to the on-time commissioning of the investment, subject to penalties otherwise. 3.5 SummaryThe impact of these incentives on risk and remuner-ation is illustrated in Figure 2. We categorise dedi-cated incentives into two groups: increased remu-neration and risk mitigation measures. In Germany and the Netherlands, the schemes are focused on reducing the risk for TSOs (downward arrow). Bel-gium provides additional remuneration indicated by a rightward pointing arrow. In Great Britain addi-tional remuneration along with the risk mitigation measures is provided, the combined effect indicated by a right downward-pointing arrow.4. Conclusions & Policy ImplicationsSince the previous study by Glachant (2013), the default regulatory frameworks of the countries ana-lysed have not changed significantly in terms of their risk and remuneration characteristics. However, it is observed that in the past few years regulators have started providing additional dedicated incentives for necessary or strategically important investments. The trend of providing dedicated incentives modify the risk and remuneration characteristics set by the general national frameworks to provide the TSO with a more “investment friendly” environment, at least for certain types of assets, such as offshore transmission infrastructures.Figure 2: Impact of dedicated incentives on risk and remuneration of TSOs6 ■  RSCAS - Policy Brief ■ Issue 2017/33 ■ February 2018QM-AX-18-001-EN-NRobert Schuman Centre for Advanced StudiesThe Robert Schuman Centre for Advanced Studies, created in 1992 and directed by Professor Brigid Laffan, aims to develop inter-disciplinary and comparative research on the major issues facing the process of European integration, European socie-ties and Europe’s place in 21st century global politics. The Centre is home to a large post-doctoral programme and hosts major research programmes, projects and data sets, in addition to a range of working groups and ad hoc initiatives. The research agenda is organised around a set of core themes and is continuously evolving, reflecting the changing agenda of European inte-gration, the expanding membership of the European Union, developments in Europe’s neighbourhood and the wider world.The Florence School of Regulation The Florence School of Regulation (FSR) was founded in 2004 as a partnership between the Council of the European Energy Regulators (CEER) and the European University Institute (EUI), and it works closely with the European Commission. The Florence School of Regulation, dealing with the main network industries, has developed a strong core of general regulatory topics and concepts as well as inter-sectoral discussion of regulatory practices and policies.Complete information on our activities can be found online at: fsr.eui.euFlorence School of RegulationRobert Schuman Centre  for Advanced StudiesEuropean University InstituteVia Boccaccio, 12150133 FlorenceItaly Contact:email: fsr@eui.eu  website: fsr.eui.eudoi:10.2870/947336ISBN:978-92-9084-599-7ISSN:2467-4540Content © Pradyumna Bhagwat, Leandro Lind, 2018© European University Institute, 2018Views expressed in this publication reflect the opinion of individual authors and not those of the European University Institute

Towards a more investment friendly economic incentive regime for offshore infrastructure projects

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Towards a more investment friendly economic incentive regime for offshore infrastructure projects

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