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Business and the NEPURC must find a compromise on RAB regulation - DiXi Group

12 June 2020

Incentive pricing will help to find an investment resource to upgrade networks


Business representatives and the energy regulator must find a compromise on RAB regulation (incentive pricing) that is acceptable to all. This was announced in a comment by DiXi Group Research Director Roman Nitsovych.

“Business does not quite accept the Regulator’s position on the reduced rate of return on the old base, a fairly high rate on the new asset base. They insist that there should be a single rate at the weighted average cost of capital for all assets,” Nitsovych said.

According to the expert, the approach offered by the business is clear as a business model, but may not be an incentive to renew assets.

“There is room for compromise. It is necessary to find it and move to this tariff, because the existing system, called “costs+”, clearly does not allow to find the necessary investment resources to invest in the network, which are worn out, and significantly improve the quality of electricity,” the expert noted.

He stressed that the quality of electricity supply suffers as electrical grids continue to degrade.

“Both business and household consumers suffer. Most of the grids are more than 20 years old,” the expert said.

Nitsovych points out that the connection fee as a service and the transmission tariff should be considered separately.

“Depreciation and construction of new networks are financed by the transfer tariff,” the expert added.

It will be recalled that in February, the National Energy and Public Utilities Regulatory Commission spoke about a new concept of transition to incentive regulation for regional energy companies. According to Valerii Tarasiuk, the Head of the NEPURC, the Regulator’s approach is that the rate of return on the new base should be real and profitable for attracting investments, at the level of 15-17%. There should be a minimum rate on the old base, but one that gives a return.

The Ministry of Energy and Environmental Protection hopes to introduce an incentive (RAB) regulation after the implementation of anti-crisis measures in the electricity sector. Incentive tariff formation is a system of tariff formation based on long-term tariff regulation aimed at attracting investments for the construction and modernization of electricity network infrastructure and stimulating the cost efficiency of electricity distribution companies.

Such regulation provides for that regional energy companies are guaranteed to receive a profit that will depend on the total value of assets. It is believed that this will encourage companies to invest in asset modernization.

According to another approach, the same rate of return was offered for both old and new assets - 12.5%.

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