All good points. However, I'm still concerned that the funding for this project will be challenging, to say the least, given that Labour seem intent on killing the golden goose (AKA NSea O&G) which is supposed to generate the tax revenue. a) Gas and Oil prices are not at windfall levels any more b) Labour's throwaway line to "close the loopholes" seems to most, to be targeting investment allowances, without which, there will be no domestic O&G sector to tax in the next 3 years.
And then if we are to have a zero carbon grid by 2030, how do we generate sufficient baseload power that will be required if we do see a resurgence in industrial manufacturing, which GBE is supposed to deliver?
I remain deeply sceptical that the timeline is even vaguely possible. I'm even more sceptical of the practicalities of a zero carbon grid, for the reasons I have outlined earlier, and I'm sorry to say that I think Ed Miliband has a bigger focus on his own relevance as a political leader than that of the overall good of the country. This smacks of a politician who has been out in the cold for too long, suddenly finding an opportunity to become relevant again and building an all encompassing empire that he will be the top of!!
Super work Adam. How would GBE interact with the network operators? If they are free issuing the kit, this must impact how the network operators are paid. In short, why should a network operator get to benefit from the TIM if they haven’t picked the route (the NESO did) or bought the kit (GBE did). I think you inevitably get to capped rates of return. I also think you need to factor in GBE role into how WACC is set. On the same logic that the NO aren’t really taking much risk if they aren’t buying the kit.
I’d say the solution to this is fairly simple and you don’t need to move away from the incentive-based regime. There are already large categories of totex which are pass-through or Use It Or Lose It, both of which don’t flow through the TIM. So if the networks avail themselves of this procurement facility and purchase in turn from GBE then it is excluded from the TIM.
I don’t think you need to adjust the WACC. While GBE may have used its balance sheet to secure supplies in advance (which really is to enable a faster pace of delivery given the 5 year regulatory cycles preclude NOs from engaging in such long-term procurement), ultimately they have expanded their balance sheet which needs to earn a rate of return. Maybe GBE could charge the networks a fee for the cost of its balance sheet in order to avoid value transfer.
More broadly on a move away from incentive-based regulation: I wouldn’t underestimate how powerful it has been in driving better outcomes on costs and performance compared to simple rate of return networks in the US. Those networks are more expensive and less
reliable. I think a good mix / evolution would be where the regulator sets unit prices at which networks are simply allowed to invest and then wrap the RAMs concept around it to avoid egregious outperformance. Finland has a similar concept minus the RAMs.
reliable. I think a good mix / evolution would be where the regulator sets unit prices at which networks are simply allowed to invest and then wrap the RAMs concept around it to avoid egregious outperformance. Finland has a similar concept minus the RAMs.
That is a very interesting idea. Although the networks would presumably be wary of any ex post assessment of costs via a pass through? I agree incentive based regulation has some benefits, but it was for a phase of asset sweating and I’m not convinced the transaction costs work for an asset building phase
That is a very interesting idea. Although the networks would presumably be wary of any ex post assessment of costs via a pass through? I agree incentive based regulation has some benefits, but it was for a phase of asset sweating and I’m not convinced the transaction costs work for an asset building phase
Really enjoyed this, Adam. Do we have good evidence on what the Dutch example has achieved vs a more private-sector led equivalent? What will it be able to do that all the DNOs/Transmission procurement teams cannot do already?
TenneT has basically just happened in contracting terms, as the deal was only signed off last year. From what I can tell, the advantages are:
- Able to buy ahead of price controls or regulatory decisions, meaning larger purchases are possible and longer term certainty for the vendor, which suppresses prices
- Ability to specify location of manufacturing to provide political cover.
Now it might turn out that they've bought the wrong parts, but I'm willing to bet that the first point in particular will see lower costs than network companies could achieve by themselves. But we will see!
All good points. However, I'm still concerned that the funding for this project will be challenging, to say the least, given that Labour seem intent on killing the golden goose (AKA NSea O&G) which is supposed to generate the tax revenue. a) Gas and Oil prices are not at windfall levels any more b) Labour's throwaway line to "close the loopholes" seems to most, to be targeting investment allowances, without which, there will be no domestic O&G sector to tax in the next 3 years.
And then if we are to have a zero carbon grid by 2030, how do we generate sufficient baseload power that will be required if we do see a resurgence in industrial manufacturing, which GBE is supposed to deliver?
I remain deeply sceptical that the timeline is even vaguely possible. I'm even more sceptical of the practicalities of a zero carbon grid, for the reasons I have outlined earlier, and I'm sorry to say that I think Ed Miliband has a bigger focus on his own relevance as a political leader than that of the overall good of the country. This smacks of a politician who has been out in the cold for too long, suddenly finding an opportunity to become relevant again and building an all encompassing empire that he will be the top of!!
Super work Adam. How would GBE interact with the network operators? If they are free issuing the kit, this must impact how the network operators are paid. In short, why should a network operator get to benefit from the TIM if they haven’t picked the route (the NESO did) or bought the kit (GBE did). I think you inevitably get to capped rates of return. I also think you need to factor in GBE role into how WACC is set. On the same logic that the NO aren’t really taking much risk if they aren’t buying the kit.
You're right; there is a significant interaction between this and network incentive structures. If this does happen, everyone gets a re-opener...
I’d say the solution to this is fairly simple and you don’t need to move away from the incentive-based regime. There are already large categories of totex which are pass-through or Use It Or Lose It, both of which don’t flow through the TIM. So if the networks avail themselves of this procurement facility and purchase in turn from GBE then it is excluded from the TIM.
I don’t think you need to adjust the WACC. While GBE may have used its balance sheet to secure supplies in advance (which really is to enable a faster pace of delivery given the 5 year regulatory cycles preclude NOs from engaging in such long-term procurement), ultimately they have expanded their balance sheet which needs to earn a rate of return. Maybe GBE could charge the networks a fee for the cost of its balance sheet in order to avoid value transfer.
More broadly on a move away from incentive-based regulation: I wouldn’t underestimate how powerful it has been in driving better outcomes on costs and performance compared to simple rate of return networks in the US. Those networks are more expensive and less
reliable. I think a good mix / evolution would be where the regulator sets unit prices at which networks are simply allowed to invest and then wrap the RAMs concept around it to avoid egregious outperformance. Finland has a similar concept minus the RAMs.
reliable. I think a good mix / evolution would be where the regulator sets unit prices at which networks are simply allowed to invest and then wrap the RAMs concept around it to avoid egregious outperformance. Finland has a similar concept minus the RAMs.
That is a very interesting idea. Although the networks would presumably be wary of any ex post assessment of costs via a pass through? I agree incentive based regulation has some benefits, but it was for a phase of asset sweating and I’m not convinced the transaction costs work for an asset building phase
That is a very interesting idea. Although the networks would presumably be wary of any ex post assessment of costs via a pass through? I agree incentive based regulation has some benefits, but it was for a phase of asset sweating and I’m not convinced the transaction costs work for an asset building phase
Really enjoyed this, Adam. Do we have good evidence on what the Dutch example has achieved vs a more private-sector led equivalent? What will it be able to do that all the DNOs/Transmission procurement teams cannot do already?
TenneT has basically just happened in contracting terms, as the deal was only signed off last year. From what I can tell, the advantages are:
- Able to buy ahead of price controls or regulatory decisions, meaning larger purchases are possible and longer term certainty for the vendor, which suppresses prices
- Ability to specify location of manufacturing to provide political cover.
Now it might turn out that they've bought the wrong parts, but I'm willing to bet that the first point in particular will see lower costs than network companies could achieve by themselves. But we will see!