Risk-based Incentives

Risk may lead project promoters or investors to refrain from investing or to delay their investment decisions in energy infrastructure projects. Regulation (EU) 2022/869 foresees additional incentives for Projects of Common Interest (‘PCI’) in the categories of electricity transmission, electricity storage, smart electricity grids, smart gas grids and hydrogen infrastructure, if the project promoter faces higher risks.

National Regulatory Authorities (NRAs) and Member States play an important role in providing the appropriate incentives to facilitate these investments.

ACER facilitates the sharing of good practices among NRAs.

ACER's (2014) Recommendation on incentives for projects of common interest and on a common methodology for risk evaluation:

• establishes an incentives framework for PCIs promoters who are incurring high risks;
• recommends to NRAs to follow a 7-step common risk evaluation methodology.

ACER highlights the importance of considering project-specific risk-based incentive schemes in conjunction with the risk and reward balance that is offered to project promoters through national regulatory frameworks.       

The ACER’s Report on investment evaluation, risk assessment and regulatory incentives for energy network projects takes into account the methodologies and the criteria used by NRAs to evaluate investments in energy infrastructure projects and the higher risks associated with them. ACER also reviewed the national regulatory frameworks in terms of risk mitigation methods and regulatory incentives for the network operators. The ACER’s Report focuses on regulated electricity transmission projects.

ACER’s findings regarding electricity infrastructure show that:

• The national regulatory frameworks rarely differentiate in their regulatory treatment of specific project features such as high capital expenditure, interconnection or offshore investments;
• TSOs’ risks are generally covered/mitigated by the default risk mitigation measures within the national regulatory framework, while the measures differ across Member States;
• Project promoters have rarely requested additional incentives due to higher risk during the past decade.

ACER concludes that:

• The current national regulatory frameworks are generally effective in mitigating risk, and the need for additional project-specific incentive has so far been limited while this may change in the future.
• The current risk mitigation approach does not guarantee that the most beneficial and cost-efficient investments are put forward by project promoters, because the regulatory frameworks treat all projects alike. Therefore, the focus on how to improve the incentives framework should be on prioritising the identification of more cost-efficient, but currently 'missing' solutions/projects.

In order to assist NRAs, ACER provides several recommendations regarding:

• The evaluation of investment needs and the assessment of individual investments;
• The evaluation of project promoters’ risks and the provision of risk-based incentives;
• Fair risk/revenue balance, benefit-based incentives and related indicators to foster development of efficient networks.

In 2023, ACER has commissioned a consultancy work on benefit-based incentive regulation to promote efficiency in addressing system needs and to overcome the CAPEX bias.

A first report published by ACER presents the main principles of benefit sharing, provides an overview of the experience of different European countries in this area and outlines a proposal for an incentive-based regulatory scheme.