The effects of network regulation on electricity supply security: a European analysis

This paper analyzes the interactions of the regulation of distribution networks and electricity supply security. In particular, the hypothesis is tested that output-based regulatory frameworks, which implicitly take into account quality-of-supply-criteria, improve the level of reliability vis à vis purely incentive-based schemes. To do so, novel empirical evidence is analyzed based on a cross-country panel data set covering 27 countries for the period from 1999 to 2013. Regional heterogeneity and potential endogeneity are controlled for. We find that the introduction of output-based regulation, ceteris paribus, leads to reductions of the annual outage duration by 16.05 % on average when compared to incentive-based systems. Given the substantial economic costs of power outages, marginal reliability improvements have considerable economic effects, which can now be quantfied. In the, admittedly hypothetical, case that EU member states, who have not yet done so, were to implement quality-controlling regulation, macroeconomic benefits amount to 930 m. € p.a. The findings support the argument that the value of electricity supply security should be explicitly accounted for when revising regulatory regimes in the future and that investment and maintenance possibilities for regulated firms need to adequately reflect the economic benefits of high levels of service reliability. Copyright Springer Science+Business Media New York 2015