The model of transition to incentive tariffs needs to be revised

01/ 06/ 2020

The introduction of incentive tariffs will solve many problems of the Ukrainian electricity industry and motivate investors to invest in the modernization of electrical grids and the development of distribution infrastructure. At the same time, for a successful transition to RAB regulation, a regulatory framework must be created to meet the interests of potential investors.

The current draft model of the transition to incentive regulation, proposed by the National Commission for State Regulation of Energy and Public Utilities, does not meet business expectations and will have a potential negative impact on the industry. That was concluded by experts of the EBA Energy Committee after a detailed analysis of the model.

The proposed methodology does not consider the successful international experience and will not contribute to attracting a significant amount of investment that would allow upgrading the grids to the desired scale. Therefore, the European Business Association insists on the revision of the proposed methodology considering the proposals of the Committee.

In particular, the EBA experts propose to use European practice, which provides the use of a single asset base and the rate of return at the WACC level recalculated once a year, or before the start of the regulatory period. All investments in fixed assets of the distribution system operator (except for the connection fee) should be calculated as funds that were used to create the regulatory base of assets. It is necessary to consider the rate of return on the asset base for the current and next year of investment to adjust tariffs if the declared investment level is not achieved. The companies also propose to develop a comprehensive government program for distribution system operators to receive long-term loans.

According to business, the National Commission for State Regulation of Energy and Public Utilities should approve only a long-term plan for the development of the distribution system, not an investment program for a specific year, and not make further adjustments to investment programs. Also, companies sometimes have insufficient funds to invest in automation, new technologies, smart meters. This, in turn, directly affects the implementation of the requirements for reducing SAIDI indicators and technological violations. According to business estimates, it will take about 8-10 years to make significant progress in this direction, provided that the National Commission for State Regulation of Energy and Public Utilities allows the distribution system operators to decide independently on the investment objects.

The European Business Association looks forward to having further discussion on the topic with the Regulator and all interested participants offline once the quarantine is eased so that all proposals can be processed effectively!

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