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, that are not fully used. The grid operations are therefore not subject to competition. Grid operations are subject to monopoly controls.
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 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 and satisfactory maintenance and operation. Licences specify obligations and requirements for grid companies, irrespective of commercial viability. Other purposes of direct regulation include ensuring that everyone who requires it has access to the grid, that there is sufficient capacity and a satisfactory quality of supply, and maintaining security of supply in difficult circumstances.
Within the regulatory framework, the grid companies have considerable freedom to decide how to meet the requirements. 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 company whose costs are automatically covered will not necessarily have incentives to operate cost-effectively.
The Norwegian Water Resources and Energy Directorate sets an annual revenue cap for each grid company. This is set at a level permitting a grid company over time to earn revenues that cover the costs of grid operation and depreciation of the grid, and at the same time give a reasonable return on invested capital, given efficient grid operation, utilisation and development. The design of the revenue cap regulation provides the grid companies with an acceptable financial framework and at the same time ensure that grid tariffs are set at reasonable levels.
Grid companies earn most of their revenue from grid tariffs. They set the tariffs such that net earnings from grid operations over time do not exceed the permitted level.
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 KILE scheme). End users who experience power outages that last for more than 12 hours may claim compensation from the grid company.
In addition to direct regulation and economic instruments, inspection and enforcement is of key importance. The Norwegian Water Resources and Energy Directorate is responsible for inspection and enforcement for 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 amount they pay depends on where their connection point is in the system. The tariffs consumers pay are intended to cover a share of the costs that accrue at the relevant grid level and higher levels.
This means that the charged amount by the consumers depends partly on the grid level to which they are connected. Consumers connected directly to the transmission grid, pay a tariff based on the costs of operating the transmission grid. They are charged less than customers connected to lower grid levels, who pay a share of the costs at the lower level and in the transmission grid.
Electricity producers pay a fixed charge that does not depend on the grid level to which they are connected. The transmission charge is currently capped at 1.2 EUR/MWh.
Distribution tariffs vary from one grid company to another. This is partly because natural and other conditions vary, and influence the cost of distributing electricity to the customer. Difficult natural conditions and a scattered settlement pattern can 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 tariff design. Over time, the grid companies’ total tariff revenues must be within the revenue cap set by the Norwegian Water Resources and Energy Directorate. Grid tariffs must be objective and non-discriminatory, and they must be designed and differentiated on the basis of 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.
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 energy component for customers who are supplied with electricity from the transmission and regional 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 distribution grid may also be used to cover a share of the other fixed costs of grid operation. In practice, the energy component for the distribution grid is set considerably higher than marginal cost of transmission losses, which is estimated at about NOK 0.05 per kWh.
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 marginal loss rates are limited to +/- 15 % of the electricity price. The same limits are also used in calculating the energy component for customers of some regional grids, and for feeding electricity into the distribution grid. Marginal loss rates for daytime and night-time/weekends 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
Because of 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, will not be 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 of grid operation. The grid companies can divide customers into different categories who are offered different tariffs on the basis of relevant grid conditions. It is not unusual for primary residences, holiday homes and industry to be charged differing fixed components.
For customers with capacity metering the tariff must include a charge based on the customer’s capacity usage in defined periods in addition to the fixed component. This applies mainly for businesses, but also for household customers of certain distribution grids who are metered at hourly intervals. 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.
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 and 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.