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Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty

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  • Simshauser, Paul
  • Akimov, Alexandr
Abstract
From 2004 to 2018 the Regulatory Asset Base (RAB) of electricity networks across Australia's National Electricity Market tripled in value, from $32 billion to $93 billion. The run-up in the capital stock was driven by forecast demand growth and a tightening of reliability standards. But demand contracted from 2010 to 2015. With a rising RAB, contracting demand and a regulated revenue constraint, an adverse cycle of falling demand and sharply rising tariffs appeared to be emerging. Some networks were characterised by significant investment mistakes in retrospect, and perhaps unsurprisingly, various consumer groups and regulatory bodies argued assets should be stranded or written-off with network tariffs reduced. From 2015 to 2018, energy demand increased once again. In this article we present a method for dealing with stranded assets under uncertainty; rather than permanently stranding assets that fail a used and useful test, we reorganise the financial and economic affairs of a template network utility and “Park” excess capacity, issue credit-wrapped bonds to temporarily finance the stranded capital stock, then re-test the Parked Assets at the end of each five-year regulatory determination. Parked Assets can then be “Un-Parked” and returned-to-service in line with connections growth, load growth, or both. This produces an immediate reduction in network tariffs under our generalised assumptions, but scarce government balance sheet capacity is necessarily utilised and recovery risk is transferred from shareholders to taxpayers. Accordingly, a Park and Loan policy is not a costless exercise.

Suggested Citation

  • Simshauser, Paul & Akimov, Alexandr, 2019. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Energy Economics, Elsevier, vol. 81(C), pages 117-133.
    • Handle: RePEc:eee:eneeco:v:81:y:2019:i:c:p:117-133
    DOI: 10.1016/j.eneco.2019.03.027
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    3. Anwar, Muhammad Bashar & Stephen, Gord & Dalvi, Sourabh & Frew, Bethany & Ericson, Sean & Brown, Maxwell & O’Malley, Mark, 2022. "Modeling investment decisions from heterogeneous firms under imperfect information and risk in wholesale electricity markets," Applied Energy, Elsevier, vol. 306(PA).
    4. Ireneusz Górowski & Bartosz Kurek & Marek Szarucki, 2022. "The Impact of a New Accounting Standard on Assets, Liabilities and Leverage of Companies: Evidence from Energy Industry," Energies, MDPI, vol. 15(4), pages 1-15, February.
    5. Simshauser, P. & Gohde, N., 2024. "3-Party Covenant Financing of ‘Semi-Regulated’ Pumped Hydro Assets," Cambridge Working Papers in Economics 2425, Faculty of Economics, University of Cambridge.
    6. Ansari, Dawud & Holz, Franziska, 2020. "Between stranded assets and green transformation: Fossil-fuel-producing developing countries towards 2055," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 130, pages 1-1.
    7. Simshauser, Paul, 2021. "Renewable Energy Zones in Australia's National Electricity Market," Energy Economics, Elsevier, vol. 101(C).
    8. Yan, Guan & Trück, Stefan, 2020. "A dynamic network analysis of spot electricity prices in the Australian national electricity market," Energy Economics, Elsevier, vol. 92(C).
    9. Simshauser, P., 2021. "Renewable Energy Zones in Australia’s National Electricity Market," Cambridge Working Papers in Economics 2119, Faculty of Economics, University of Cambridge.
    10. McDonald, Paul, 2023. "Locational and market value of Renewable Energy Zones in Queensland," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 198-213.
    11. Paul Simshauser, 2021. "Lessons from Australia's National Electricity Market 1998-2018: strengths and weaknesses of the reform experience," Chapters, in: Jean-Michel Glachant & Paul L. Joskow & Michael G. Pollitt (ed.), Handbook on Electricity Markets, chapter 9, pages 242-286, Edward Elgar Publishing.
    12. Lee, Boon L. & Wilson, Clevo & Simshauser, Paul & Majiwa, Eucabeth, 2021. "Deregulation, efficiency and policy determination: An analysis of Australia's electricity distribution sector," Energy Economics, Elsevier, vol. 98(C).
    13. Paul Simshauser, 2023. "The regulation of electricity transmission in Australia's national electricity market: user charges, investment and access," Working Papers EPRG2311, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    14. Lin, Boqiang & Li, Minyang, 2023. "Emerging Industry Development and Information Transmission in Financial Markets: Evidence from China's Renewable Energy," Energy Economics, Elsevier, vol. 128(C).
    15. Guthrie, Graeme, 2020. "Regulation, welfare, and the risk of asset stranding," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 273-287.
    16. Khezr, Peyman & Nepal, Rabindra, 2021. "On the viability of energy-capacity markets under decreasing marginal costs," Energy Economics, Elsevier, vol. 96(C).
    17. Alan Rai & Tim Nelson, 2020. "Australia's National Electricity Market after Twenty Years," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(2), pages 165-182, June.

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    More about this item

    Keywords

    Electricity utilities; Falling demand; Stranded assets;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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