Price regulation to remove EE-DSM disincentives and pressure for increased energy sales in monopoly segments of restructured electricity and gas markets - The Multiple Drivers Target (MDT) tariff scheme

Panel: Panel 5: Energy Efficiency Markets & Financing Mechanisms

Authors:
Lorenzo Pagliano, Politecnico di Milano
Pierluigi Alari, Energy Consultant
Wolfgang Irrek, Wuppertal Institute for Climate Environment Energy
Uwe Leprich, IRP-Consult Gianluca Ruggieri, Energy Consultant
Stefan Thomas, Wuppertal Institute for Climate Environment Energy

Abstract

Even in restructured markets a part of the energy business remains a monopoly and should be correctly regulated. We present an analysis which reveals common structures in tariff schemes enacted in UK, Norway, Portugal, New South Wales (Australia) and recently in Italy. The identified structure, which we named Multiple Drivers Target (MDT) regulation, is a performance-based regulation scheme, which provides incentives for greater economic efficiency, without creating biases against environmental efficiency. The method relies on a statistical analysis of the correlation of utility costs and a few "cost drivers" (e.g. number of customers served, grid length, sold or transported energy). We discuss how MDT can be used to set price levels and their evolution over time in such a way to more correctly match the evolution of costs and reduce unwanted signals to the regulated companies. At the opposite, pure Price Cap regulation provides artificial incentives to energy companies to increase energy sales beyond the predicted levels used as a reference to set prices in year zero of the Rate Case, even if this is not economically efficient for the customers nor for society.

We show that under MDT regulation the reduction in profits due to reduced sales as a consequence of EE-DSM can be avoided. In so doing this procedure removes one of the most important disincentives for regulated energy companies to implement EE-DSM programmes (lost profits due to reduced sales can be - in a short term perspective - substantially higher than direct costs of EE-DSM programmes). Once MDT regulation is in place, also direct costs can be recovered through a small part of the tariff.