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Rate-of-return regulation to unlock natural gas pipeline deployment: Insights from a Mozambican project

Author

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  • Florian Perrotton

    (IFPEN - IFP Energies nouvelles, EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Olivier Massol

    (IFPEN - IFP Energies nouvelles, IFP School, University of London [London])

Abstract

In poor developing countries, the discovery of large gas deposits often stimulates the public authorities' appetite for ambitious development strategies requiring the construction of a large national pipeline system. However, the foreign private investors financing its installation usually prefer smaller infrastructure designs that are solely intended to supply a few creditworthy industrial sites. Focusing on the situation in Mozambique, we examine whether the adoption of rate-of-return (RoR) regulation can reconcile these conflicting objectives. As a first step, we assess the magnitude of the overcapitalization generated ex ante at the planning stage by the application of RoR regulation (i.e., the Averch-Johnson effect) to the investors. Then, analyzing the ex post situation when the enlarged domestic demand materializes, we prove that the allowable rate of return can be set by the regulator to obtain ex ante the degree of overcapitalization needed ex post to serve the enlarged demand in a cost-efficient manner. We finally discuss whether RoR regulation can still protect society from monopoly prices when it is tuned to prompt an optimal degree of building ahead of proven demand.

Suggested Citation

  • Florian Perrotton & Olivier Massol, 2020. "Rate-of-return regulation to unlock natural gas pipeline deployment: Insights from a Mozambican project," Post-Print hal-02418234, HAL.
    • Handle: RePEc:hal:journl:hal-02418234
    DOI: 10.1016/j.eneco.2019.104537
    Note: View the original document on HAL open archive server: https://ifp.hal.science/hal-02418234
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    Cited by:

    1. Jagu Schippers, Emma & Massol, Olivier, 2022. "Unlocking CO2 infrastructure deployment: The impact of carbon removal accounting," Energy Policy, Elsevier, vol. 171(C).
    2. Waidelich, Paul & Haug, Tomas & Wieshammer, Lorenz, 2022. "German efficiency gone wrong: Unintended incentives arising from the gas TSOs’ benchmarking," Energy Policy, Elsevier, vol. 160(C).
    3. Nicolle, Adrien & Massol, Olivier, 2023. "Build more and regret less: Oversizing H2 and CCS pipeline systems under uncertainty," Energy Policy, Elsevier, vol. 179(C).
    4. Singh, Kewal & Singh, Anoop & Prakash, Puneet, 2022. "Estimating the cost of equity for the regulated energy and infrastructure sectors in India," Utilities Policy, Elsevier, vol. 74(C).

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