Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty

Abstract

The run-up in the capital stock was driven by forecast demand growth and a tightening of reliability standards. But demand contracted from 2010-2015. With a rising RAB, contracting demand and a regulated revenue constraint, an adverse cycle of sharply rising tariffs and falling demand appeared to be emerging. Some networks were characterised by significant investment mistakes in retrospect, and perhaps unsurprisingly, various consumer groups and regulatory bodies argued assets should be stranded or written-off completely and network tariffs reduced. From 2015-2018, energy demand increased once again. In this article we present a method for dealing with stranded assets under uncertainty; rather than permanently stranding assets that fail a used and useful test, we reorganise the financial and economic affairs of a template network utility and "Park" excess capacity, issue credit-wrapped bonds to temporarily finance the stranded capital stock, then re-test the Parked Assets at the end of each five-year regulatory determination. Parked Assets can then be "Un-Parked" and returned-to-service in line with connections growth, load growth, or both. The most interesting result is the immediate reduction in network tariffs, and a more stable trajectory under our generalised assumptions. Cambridge Working Papers in Economics Faculty of Economics www.eprg.group.cam.ac.uk Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty EPRG Working Paper 1828

Australia's National Electricity Market after Twenty Years

“…A further option for reducing network prices is relieving customers of the cost of financing network investments that appear stranded from excessively tight reliability standards and/or overestimated demand forecasts. Some argue that taxpayers in the relevant states should finance this apparent overhang (Simshauser and Akimov ); others argue that these assets should be written off (ACCC ) . Either approach could have negative implications for new investment, however, by driving up the risk premium and cost of capital for new investments in transmission and distribution infrastructure.…”

Renewable Energy Zones in Australia's National Electricity Market

“…33 For VRE developers, 32 Note 'Regulatory Depreciation' for the purposes of deriving Regulated Revenues is equal to Straight Line Depreciation ($5.6m) less RAB Indexation ($4.5m). The detail of the Regulatory Model used to produce these results is set out in detail in Simshauser and Akimov (2019) and so is not reproduced here. 33 Some regulated network businesses will have constrained or no risk appetite for an (initially) under-contracted asset.…”

“…Queensland region spot prices for calendar years 2017 and 2020.3 A complicating factor in Australia relates to prior episodes ofAverch and Johnson (1962) network gold plating and sharp increases in network tariffs over the period 2005-2012 (seeMountain and Littlechild, 2010;Nepal, Menezes and Jamasb, 2014;Simshauser and Akimov, 2019). Consumer groups are on heightened alert at the prospect of a repeat episode.…”

Lessons from Australia's National Electricity Market 1998-2018: strengths and weaknesses of the reform experience

“…Residential segment price deregulation occurred in 2009respectively (Simshauser, 2018. 45 See Simshauser (2017) and Simshauser & Akimov (2019). 46 See Simshauser (2016).…”

“…most recently, the Paris Agreement), piecemeal State Government policy activity emerges to fill the void demanded by business and stakeholders, but the design of these policies has frequently been incompatible with the NEM's wholesale market design. 5 See Simshauser & Akimov (2019). 6 The policy was originated by the Commonwealth (in a highly politicised manner) and largely driven by an inquiry by the Australian Competition & Consumer Commission (ACCC).…”