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Negative spiral threatens electricity grid companies

Read the article in Swedish here.

Nine out of ten Swedish electricity grid companies lack plans for normal reinvestments. They underestimate the consequences of stricter revenue regulation and risk being pulled into a negative spiral, says Oskar Almén, energy expert at PA Consulting.

Our main argument in our previous article was that a very large proportion of electricity grid companies actively choose lower fees to customers instead of utilising the entire permitted revenues to enable necessary reinvestments in the grid.

Our analysis indicates that only 10 per cent of 163 accounting units presented reinvestment plans that would maintain an average asset age equivalent to half the life expectancy.

We believe that these companies, like Tony Rosten, deputy Director General Swedish Energy Markets Inspectorate, underestimate the consequences of the proposals for stricter revenue regulation. Above all, they do not have enough insight into how quickly they can get stuck in a negative spiral where the capital base is eroded due to a lack of investment, and tariffs need to be lowered.

As Tony Rosten writes, electricity companies are required to connect new customers. But in most municipalities, there are no new customers to connect and thus no connection fees to lift. Growth municipalities are automatically better equipped for the future, as their capital base increases with new investments. For rural municipalities, only reinvestments remain to ensure delivery quality.

To make it more complicated, it is also necessary for the electricity companies to procure and complete projects at a cost that does not exceed the so-called ‘norm levels’ for new acquisitions. If they fail, they will receive lower returns than the regulated level when their revenue frame is calculated.

Many years ago, the Energy Market Inspectorate, EI, decided to introduce a crucial change in the calculation of revenue frames. The agency then went from a capital base valued at new value to a model where the capital base is age-adjusted. Sweden's total revenue frame was reduced by SEK 30-40 billion. The age of the grid companies' assets was now decisive for which revenue space is given. The effect of this change will be seen in the next regulatory period 2020-2023, but most electricity grid companies have not seen the change as an argument to increase investment.

EI's desire to push down the revenue levels of the three major companies is unfortunately counter-productive. Who will step in when the rural municipalities' electricity grid companies don’t receive capital injections from their owners?

In fact, a major consolidation wave is now paving the way for the municipalities affected hardest by urbanisation and globalisation (resulting in the closure of electricity-intensive industries) to sell their electricity grid companies at a much lower price than today's value.

Oskar Almén is an energy expert at PA Consulting

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