Determinants of investment under incentive regulation: the case of the Norwegian electricity distribution networks
Investment in electricity networks, as regulated natural monopolies, is among the highest regulatory and energy policy priorities. Electricity sector regulators adopt different incentive mechanisms to ensure that the firms undertake sufficient investment to maintain and modernize the grid. Thus, an effective regulatory treatment of investment requires an understanding of the response of companies to the regulatory incentives. This article analyses the determinants of investment in electricity distribution networks using a panel dataset of 129 Norwegian companies observed from 2004 to 2010. A Bayesian model averaging approach is used to provide a robust statistical inference by taking into account the uncertainties around model selection and estimation. The results show that three factors drive nearly all network investments: investment rate in previous period, socioeconomic costs of energy not supplied, and useful life of assets. The results indicate that Norwegian companies have, to some degree, responded to the investment incentives provided by the regulatory framework. However, some of the incentives do not appear to be effective in driving investments.
Poudineh, R. and Jamasb, T. (2016). ‘Determinants of investment under incentive regulation: the case of the Norwegian electricity distribution networks’, Energy Economics, 53, 193–202.