Combining Forward-Looking Expenditure Targets and Fixed OPEX-CAPEX Shares for a Future-Proof Infrastructure Regulation: the ROSS Approach in Italy

Abstract

Abstract Purpose of Review Decarbonization of many energy sectors is led by a process of “new electrification”, which poses great challenges to achieve in parallel a timely and cost-effective development of electricity networks. It becomes thus fundamental to assess the best approach on how to successfully regulate new investments in power grids, addressing their development in the general interest of consumers. Recent Findings Over the last twenty years, many researchers and practitioners highlighted the bias towards capital intensive investments, induced by regulatory frameworks currently adopted, based on rate-of-return regulation for capital expenditure (CAPEX) and incentive regulation for operational expenditures (OPEX). This issue is exacerbated by the potential of digital-based solutions, that are often overlooked by system operators as they mainly entail operating costs (OPEX), often subject to incentive regulation. Summary This work discusses an analytical model, combining total expenditures evaluation with a forward-looking approach (business planning and output-based incentives) and a fixed opex capex share, aiming at overcoming the CAPEX-bias. This is done leveraging on the Italian recent change in infrastructure regulation, introduced by the Italian regulatory authority (ARERA), that builds on a core incentive on productive total efficiency (i.e. CAPEX + OPEX) plus a scheme of output-based rewards and penalties. In the new ROSS (Regolazione per Obiettivi di Spesa e di Servizio) approach, several elements are in place in the first stage (“ROSS base”) to likely mitigate the capital bias effect, even though a more complete approach (“ROSS integrale”), including the forward-looking dimension of planned expenditures, is still under consideration by the Italian regulator.