Combining Forward-Looking Expenditure Targets and Fixed OPEX for Grid Resilience

Combining Forward-Looking Expenditure Targets and Fixed OPEX for Grid Resilience

As Europe accelerates its shift towards clean energy, the critical role of grid infrastructure has come into sharp focus. Ensuring the resilience and reliability of power networks has emerged as a key priority, demanding innovative regulatory approaches that incentivize investments in future-proof solutions.

The ROSS (Regolazione per Obiettivi di Spesa e di Servizio) framework, recently introduced by the Italian energy regulator ARERA, offers an insightful model for aligning infrastructure expenditures with broader societal goals. By combining forward-looking budgeting and a fixed allocation between operational expenditures (OPEX) and capital expenditures (CAPEX), the ROSS approach aims to overcome the historical bias towards capital-intensive grid investments.

Expenditure Targets

The cornerstone of the ROSS framework is the definition of a forward-looking expenditure baseline. Rather than relying solely on historical costs, the regulator works closely with grid operators to establish a realistic budget that accounts for the evolving needs of the energy transition. This baseline encompasses both OPEX and CAPEX, allowing for a holistic assessment of investment plans.

For CAPEX, the baseline is initially set based on actual past expenditures, with the intent to introduce a more standardized, output-based approach in the future. This could involve defining unitary standard costs for specific asset categories or activities, and then scaling the baseline based on the actual volumes deployed during the regulatory period.

The OPEX baseline, on the other hand, is determined using a formula that factors in the number of grid connection points, inflation, and efficiency targets. Importantly, the framework includes provisions for unforeseeable events (e.g., extreme weather) and the energy transition itself, allowing for adjustments to the OPEX baseline through the “Y-factor” and “Z-factor” mechanisms.

OPEX Considerations

A key innovation of the ROSS approach is the introduction of a fixed OPEX-CAPEX share (FOCS), or TOTEX regulation. This means that grid operators are no longer incentivized to favor capital-intensive solutions, as the remuneration is based on the total expenditures rather than a differential treatment of OPEX and CAPEX.

The specific OPEX-CAPEX ratio is set by the regulator for each grid operator, based on a balanced assessment of their historical and projected cost structures. This fixed share is then applied to determine the “slow money” (CAPEX) and “fast money” (OPEX) components of the allowed revenues.

Importantly, the ROSS framework also includes a menu of OPEX efficiency incentives, where operators can choose between a “high-risk, high-reward” or “low-risk, low-reward” scheme. This flexibility helps align the regulatory approach with the distinct characteristics and strategies of individual grid companies.

Resilience Metrics

Ensuring grid resilience in the face of increasingly frequent and severe weather events is a critical component of the ROSS framework. The regulator has introduced a set of key performance indicators (KPIs) to monitor the grid’s responsiveness and adaptability, including:

  • System Average Interruption Frequency Index (SAIFI): Measuring the average number of interruptions per customer
  • System Average Interruption Duration Index (SAIDI): Tracking the average duration of power interruptions
  • Indicators of grid flexibility and hosting capacity: Assessing the grid’s ability to integrate renewable energy sources and leverage demand-side flexibility

These metrics serve as the basis for output-based incentives, where grid operators are rewarded for improving resilience and penalized for underperformance. The regulator also encourages investments in infrastructure upgrades, redundancy, and smart grid technologies that enhance the grid’s ability to withstand and recover from disruptive events.

Regulatory Frameworks

The ROSS approach is underpinned by a broader shift in European energy regulation, as policymakers and regulators strive to create a framework that supports the ambitious decarbonization goals set forth by the European Green Deal. This involves aligning investment decisions with societal and environmental priorities, while also ensuring the financial sustainability of grid operators.

Through initiatives like the ROSS, regulators are experimenting with new mechanisms to incentivize grid modernization and resilience. This includes exploring performance-based remuneration, output-based incentives, and public-private partnerships to unlock innovative solutions and leverage diverse funding sources.

Crucially, the successful implementation of these frameworks relies on close collaboration between grid operators, regulators, and other stakeholders. By fostering transparent dialogue and data-driven decision-making, the industry can work collectively to address the unique challenges posed by the energy transition and safeguard the reliability and resilience of Europe’s power grids.

Cost-Benefit Analysis

The transition to a resilient, future-proof grid infrastructure requires significant investments, which must be carefully evaluated through a comprehensive cost-benefit analysis. The ROSS framework aims to strike a balance between the financial impacts on grid operators and the long-term benefits for consumers and society as a whole.

On the cost side, the forward-looking expenditure targets and fixed OPEX-CAPEX shares help to mitigate the historical bias towards capital-intensive solutions, which can drive up consumer tariffs. By incentivizing a more balanced approach to OPEX and CAPEX, the ROSS model encourages grid operators to explore innovative, cost-effective alternatives that enhance resilience without undue financial burden.

In terms of benefits, the emphasis on resilience metrics and output-based incentives translates to tangible improvements in reliability, service quality, and system flexibility. Reduced outage durations, fewer interruptions, and the grid’s ability to accommodate renewable energy sources and demand-side resources all contribute to enhanced energy security and decarbonization efforts.

Moreover, the cost-benefit analysis must also account for the broader societal and environmental impacts of grid resilience. By strengthening the power network’s ability to withstand disruptive events, the ROSS framework helps to mitigate the economic and social costs of outages, ensuring the uninterrupted delivery of essential services and supporting the broader transition to a sustainable, low-carbon economy.

As Europe continues to navigate the complex challenges of the energy transition, the ROSS model offers a promising approach to aligning grid investment decisions with the overarching goal of building a resilient, future-proof energy infrastructure. By combining forward-looking expenditure targets and a fixed OPEX-CAPEX allocation, this regulatory framework aims to catalyze the deployment of innovative, cost-effective solutions that will be crucial in realizing the continent’s clean energy ambitions.

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