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financing the replacement of the energy infrastructures

Financing the replacement of the energy infrastructures
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Wijnia, Y.; R.A. Hakvoort and H.M. de Jong: Financing the replacement of the energy infrastructures, pp. 1-12. In: The Proceedings of the 30th Conference of the International Association for Energy Economics: From Restructuring to Sustainability: Energy Policies for the 21st Century, 18-23 February 2007. At: Wellington, New Zealand. Cleveland OH: IAEE, 2007 Eds.: Geoff Bertram. ISBN: ISSN 1559-792X. International proceeding (refereed)

Hanneke de Jong
Ype Wijnia

In the western energy distribution systems, the assets are quite old. The oldest ones are about 60 years, with an average age of about 30 years. As their estimated life span is about 40 to 80 years, the distribution companies can expect a large number of assets to fail because they reach their end of life in 10 to 30 years. Those failed assets will have to be replaced, with an estimated doubling of expenditures on the infrastructure. In the Netherlands, the current regulation regime does not take this future liability of the network companies into account. On the contrary, tariffs are in general continuously adjusted downwards, based on the potential efficiency improvements achievable in the industry. Although this brings a short term benefit for the customers of lower costs of the service, keeping the companies on a cash diet will mean that once assets have to be replaced the tariffs will have to go up again. This might prove a tough challenge as present regulatory models like yardstick regulation provide a disincentive for being the first one to start major asset replacement. As a consequence, the companies will face the risk of tariffs lagging the need for cash. This may even result in the bankruptcy of the companies or in a serious deterioration of the service. In the present paper, the authors suggest an innovative approach involving adoption of the so-called the Y-P-E triangle to include the remaining life expectancy of the network in the regulation. Purely incentive-based regulatory systems may not prove sufficient on the long term, as they are unable to cope with the uncertainty involved in future developments. Therefore, the authors propose a mix of regulatory and political ‘tools’ for network regulation which is flexible enough to handle the upcoming wave of network re-investments.

Managing risk in the energy distribution system – models for multiple-issue decision making

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