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Transmission network reliability incentives (1)

This entry was added to on 26 October 2004.
Full blog table of contents available at Contents | viewpoint: Franck.

Ofgem has released on 15 October 2004 a consultation document entitled "Electricity transmission network reliability incentive schemes: Initial proposals": (PDF file)

The final proposals have now been published (1 December 2004).
See Transmission incentives 2 | viewpoint: Franck.

Structure of the proposed scheme

The document proposes to introduce a financial incentive regime for NGC's operational performance as transmission network operator in England and Wales, with the following key features:

Ofgem notes that corresponding arrangements have been designed through the "IIP" for distribution networks, and provides reasonable grounds for most of the differences between the IIP and the proposed transmission arrangements. However, there are some doubts about the quality of the incentives that would result from the proposed scheme.

Short-term problems

Potential problems in the short term include:

Longer-term problems

In addition to these issues, there are some potential longer-term problems that Ofgem's paper fails to address altogether:

It is only fair to point out that Ofgem's scheme is only intended as an interim arrangement, so it may be excusable that it should look in some respects more like sticking plaster than a thoughtful addition to the regulatory regime for electricity transmission networks.

However, this means that much more work will be required to develop a regime that can provide appropriate incentives over time, and can be adapted to the Scottish transmission networks.

If it ain't broke?

Despite the above concerns, Ofgem may argue that its approach to transmission network reliability incentives is similar to the way in which transmission services/system operator incentive schemes have been designed and developed in the past, which it claims have been a success.

To a point, this is a fair response.

But it is not quite enough. As noted above, it is quite easy to make a scheme look successful: replacing "backstop" licence obligations with very strong financial incentives is bound to lead to improvements in the performance measure subject to the incentives in question, and to the associated financial rewards for the company, to the satisfaction of Ofgem and shareholders alike.

The hard bit in regulation is not to improve performance. It is:

Excessively high standards of operational performance can be a sign of lazy regulation and gold-plated management.

Consistency with system operator incentives

This earlier Ofgem consultation document (September 2004) entitled "NGC System Operator incentive scheme from April 2005" relates to the incentive scheme to be applied to NGC's performance as system operator in relation to the management of "balancing costs" (previously known as transmission services costs). (PDF file)

I missed my chance to review this fully at the time, but some general points are still worthy of mention:

Other links

Entry added by Franck on 26 October 2004

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Last changed by Franck at 6:42 AM on Tuesday 21 June 2005.

Reference for this page:
Reckon Open "Transmission incentives | viewpoint: Franck" 2005-06-21T06:42:21