Electricity production and trading, are exposed to competition, and the Norwegian Energy Act is based on the principle that power trading should be market-based. Electricity transmission and distribution, on the other hand, is a natural monopoly. The fixed costs of grid development are high, and it is not rational to construct several competing grids. The grid operations are therefore not subject to competition; instead they are subject to monopoly control.
The authorities have established extensive control of monopoly operations to prevent the grid companies from exploiting their position. A licence under the Energy Act is required in order to construct, own and operate grid assets. Grid operations are regulated using a combination of direct regulation (specific requirements and obligations in licences) and incentive-based regulation in the form of a revenue cap. The overall purpose is to ensure that the operation, utilisation and development of the grid is rational and in the best interests of society.
The purpose of direct regulation is to ensure the necessary level of investment in the grid as well as satisfactory maintenance and operation. Further, the direct regulation shall ensure that all who require it are given access to the grid, that there is sufficient grid capacity and a satisfactory quality of supply, and that the security of supply is maintained in demanding situations.
Within the regulatory framework, the grid companies have considerable freedom to decide how to meet the requirements. The revenue cap regulation is intended to give the grid companies incentives to find cost-effective ways of meeting the requirements. This is important because a regulated monopoly whose costs are automatically covered will not necessarily have incentives to operate cost-effectively.
The Norwegian Energy Regulatory Authority (NVE-RME) sets an annual revenue cap for each grid company. The cap is set at a level that permits grid companies to earn revenues that over time cover the costs of grid operation and depreciation of the grid, and at the same time gives a reasonable return on invested capital, given efficient grid operation, utilisation and development. The design of the revenue cap regulation is intended to provide the grid companies with an acceptable financial framework, and simultaneously ensure that the grid tariffs are set at reasonable levels.
Grid companies earn most of their revenue from the grid tariffs. The grid companies are obliged to set the tariffs such that net earnings from grid operations over time do not exceed the permitted level.
The revenue cap regulation also gives grid companies incentives to maintain an optimal level of reliability of supply. In the event of power supply interruptions, grid companies’ permitted revenues are reduced by means of a quality-adjusted revenue cap for energy not supplied (known as the CENS/KILE scheme). Further, end users who experience power outages that last for more than 12 hours may claim compensation from the grid company.
In addition to the revenue cap and direct regulation, inspection and enforcement is of key importance. NVE-RME is the supervisory authority of grid operations, and may issue orders for compliance with regulations and licensing terms.
Grid customers pay point tariffs for the transmission and distribution of electricity. This means that the grid tariff is dependent on the location of the connection point. The tariffs are intended to cover a share of the costs that accrue at the relevant grid level as well as higher grid levels.
For consumers, this implies that the grid level to which one is connected affects the size of the tariff. Consumers connected directly to the transmission grid, pay a tariff based on the costs of operating the transmission grid. Therefore, they are charged less than customers connected to lower grid levels, who pay a share of the costs at the lower level as well as the transmission grid.
Electricity producers pay a fixed charge that does not depend on the grid level to which they are connected. In 2023 the transmission charge is capped at 1.2 EUR/MWh.
Distribution tariffs vary from one grid company to another. This is partly because the grid companies’ conditions vary and influence the cost of distributing electricity to the customer. Difficult natural conditions and a scattered settlement pattern can often result in high transmission costs. There is also some variation in the efficiency of grid operations between companies.
Grid companies are responsible for setting their own tariffs, but the national authorities set the general principles for the tariff design. Over time, the grid companies’ total tariff revenues must be within the permitted level set by NVE-RME. Grid tariffs must be objective and non-discriminatory, and they must be designed and differentiated based on relevant grid conditions. To the extent possible, tariffs should also be designed to provide long-term signals encouraging efficient utilisation and development of the grid.
Energy component
One fundamental principle of designing optimal tariffs is that grid users should pay a price that is equal to the short-term marginal cost incurred through their use of the grid. As electricity is transmitted through the grid, a proportion of it is lost. The size of the transmission losses depends on the total load on the grid. The marginal loss can be positive or negative, depending on whether changes in electricity fed into or tapped from the grid increase or decrease the energy loss.
The tariff energy component for customers connected to the transmission and regional distribusion grid, and for producers who feed electricity into the distribution grid, must be set on the basis of the marginal cost of transmission losses. The size of the energy component is the same for electricity fed into and tapped from the same connection point, but with the opposite sign. The energy component for customers who are supplied with electricity from the local distribution grid may also be used to cover a share of the fixed costs of grid operation. In practice, the energy component for the local distribution grid is therefore set higher than marginal cost of network losses. From 1 July 2026 the income from the energy component cannot exceed 50 percent of the grid company's total income from each customer group.
The energy component for the transmission grid is set using the marginal loss rates for each connection point multiplied by the area price set in the day-ahead market. The energy component shall be time-differentiated, with one daytime rate and one rate for nighttime and weekends. The marginal loss rates are limited by the TSO to +/- 15 % of the electricity price. The same limits are also used in calculating the energy component for customers of some regional distribution grids, and for feeding electricity into the distribution grid. Marginal loss rates are calculated and published in advance for one week at a time.
There is no requirement to calculate loss rates for each connection point in the distribution grid when calculating the energy component of the tariff. The loss rate is generally determined as the marginal loss in the nearest connection point with a higher grid level plus the average marginal loss for the area. The energy component is determined in advance, often for a year at a time.
Fixed component and capacity charge
Due to the cost structure of grid operations – high fixed costs and low costs associated with day-to-day use of the grid – revenue from the energy component, which is calculated on the basis of the marginal losses, is not sufficient to cover the fixed costs of grid operation. The grid companies can therefore use other tariff components to cover these costs and provide a fair return on grid investments.
All customers who are connected to the distribution grid pay a fixed charge. This component covers customer-specific costs in addition to a share of other fixed costs related to grid operation. The grid companies can divide customers into different categories which are offered different tariffs on the basis of relevant grid conditions.
The fixed component must be differentiated according to power, that is how much capacity a customer demands in the grid. Customers who need a high capacity pay a higher fixed fee than those who need less capacity. Most grid companies have a tiered fixed component, where customers are differentiated according to their peak load hours each month. Customers therefore have the opportunity to influence the level of their fixed fee by smoothing their electricity consumption.
Tariffs for business customers with an annual consumption above 100,000 kWh may also contain a capacity charge. Grid companies use different methods for determining the capacity used as a basis in the tariff. Some companies use the peak load in the course of each month, while others use the average of several measurements during the same period.
Investment contribution
In addition to the tariff components discussed above, a grid company may, subject to certain rules, require an investment contribution from new customers to cover the costs of their connection to the grid or from existing customers who demand reinforced or increased grid capacity. The purpose of the investment contribution is to make customers aware of the costs of expanding and upgrading the grid. Customers can weigh the need of grid access or reinforcement against the costs involved. In addition, the investment contribution is intended to separate the investment costs between the customer who triggers the investment, and the other grid customers. As a general rule, grid investments triggered by a particular customer’s needs are to be paid by that customer.