Electricity distribution companies are committed to increased investment in the fifth regulatory period, according to ANRE officials. We spoke to Daniela Dărăban, executive director of the Federation of Associations of Energy Utility Companies (ACUE), about the prospects for the development of electricity and natural gas distribution networks.
Dear Mrs. Daniela Dărăban, are the investments proposed by the distribution operators sufficient to ensure the necessary transformations in the infrastructure, the new roles and functions that the operators must ensure? What can you tell us about investments in natural gas networks?
By the nature of the business model, investors in distribution networks take a proactive approach, adapting to new demands and developments in the energy market. They must be flexible and ready to respond to technological changes. However, a strategy based on significantly increasing the level of investment in networks is strongly influenced by the regulatory framework. Regulations set the parameters within which companies in the distribution sector operate, thereby affecting operating costs, investment recovery and long-term profitability. In this context, an encouraging, stable and predictable regulatory framework is essential for investors.
In the last five years, distribution operators have invested, on average, approximately 500 million euros, at the national level, to modernize electricity networks. For natural gas networks, 720 million lei (approx. 144 million euros) were invested on average per year in the period 2019-2023, according to ANRE data.
In an energy system in constant evolution, the complexities and rapid changes of the market, technologies and regulations require frequent re-evaluation of tariff methodologies to ensure their sustainability and efficiency.
We have over 500,000 km of electricity distribution networks and almost 60,000 km of natural gas networks. The transformation of the energy distribution infrastructure is crucial to ensure economic competitiveness and long-term energy security. A modernized infrastructure would enable networks to adapt for two-way communication, transition to green gas, adopt smart grid technologies and perform advanced functions, moving from a traditional energy distribution model to an interactive one essential for the energy transition.
However, to meet the needs of the future, the industry estimates the need for a substantial increase in investment in electricity networks, between 9 and 11 billion euros over the next five years, which is equivalent to a tripling of the amounts allocated annually. Of this amount, for around 6 billion euros, operators must attract additional financing from the private sector, according to a study carried out at sector level. Basically, the order of magnitude required for investments in electricity distribution networks goes from billions of lei to billions of euros if we were to compare period 4 with period 5 of regulation.
To achieve this ambitious goal, private capital will be crucial. Attracting funds, however, depends on a regulatory framework that provides certainty and attractiveness to investors, and regulatory stability and clarity will be fundamental to this equation. Unfortunately, the rate of return on capital invested in energy networks, set for the period 2025-2030, limits, in our opinion, the ability of companies to access external financing.
Moreover, the regulatory framework established for the period 2025-2030 for the modernization of electricity distribution networks does not meet the requirements of the moment. There is a lack of anticipation of the scale of energy transformations and a planned and predictive approach. These are fundamental elements for attracting capital and sustaining the pace of modernization required. In the case of natural gas networks, the regulatory framework for the period 2025-2030 is under consultation and the natural expectation is to have a final decision that stimulates investments in smart grid technologies, hydrogen infrastructure and biomethane integration.
In an energy system in constant evolution, the complexities and rapid changes of the market, technologies and regulations require frequent re-evaluation of tariff methodologies to ensure their sustainability and efficiency. In this context, ACER (Agency for the Cooperation of Energy Regulatory Authorities) plays an essential role in supporting national regulatory authorities (NRAs) in adapting tariff regulations to market realities and to the European Union’s energy transition and decarbonisation objectives. ACER has undertaken to provide and update, at least every two years, a best practice report on transmission and distribution tariff methodologies, and national regulatory authorities must adopt these recommendations accordingly.
Distribution tariffs currently account for around 20% of the final bill. How much would this share increase if the regulator were to accept ACUE’s proposal to increase the regulated rate of return (RRR) to allow for a tripling of investments? What are the differences in nominal terms?
The electricity distribution tariff is a component of the total energy cost that a final consumer pays. This tariff usually includes infrastructure costs, operation and maintenance costs, own technological consumption of the network, other service and support costs.
To supplement the necessary investments in electricity distribution networks, ACUE has carried out a series of detailed analyzes to assess the impact of investments in future tariffs, modeling scenarios projecting costs up to 2030. In the most optimistic scenario, investments could triple, and the tariff impact would adjust gradually, up to an increase of approximately 5 bani/kWh in 2030. Translated into a concrete example, for a household with a monthly consumption of 150 kWh, this adjustment would be equivalent to only 8 lei more on the monthly bill, at the horizon of 2030.
For a household with a monthly consumption of 150 kWh, the adjustment would be equivalent to only 8 lei more on the monthly bill, at the horizon of 2030.
Operators, however, are bound by a strict regulatory framework that sets not only the level but also the precise directions of investment. A lower rate of investment than required by the current context would leave consumers without access to the benefits of the modern energy transition. Moreover, it would block access to new distribution functionalities through which users could play an active role in the energy market and, in the long term, would seriously affect the competitiveness of the Romanian economy in the face of an increasingly dynamic global market.
Is there a relationship between increased network investment (and increased distribution tariffs) and lower commodity energy prices? What does this consist of?
Active energy is the main component of electricity consumption. Network transformation, through the integration of new production and consumption technologies, is essential for optimizing users’ energy costs. Increased investment in infrastructure will inevitably lead to an adjustment in distribution tariffs. But here comes an essential detail: the amortization of these investments spans 25-30 years, which makes the impact on the bill gradual and sustainable. In addition, through these transformations, consumers have access to clean solutions and technologies that significantly reduce the share of energy as a commodity in the final price.
Given that active energy represents the largest share of the total cost paid by the final consumer, think about the production model for self-consumption: you produce energy for yourself and call on the grid only when you need it. Or to the new consumption management technologies, which allow a more efficient and intelligent use of energy. Finally, by facilitating these new technologies, the distribution network becomes an active partner of the user, and the total cost of energy for the consumer gradually decreases.
How do distribution operators prioritize future investments and how transparent are these processes to the regulator and the general public?
Distribution operators calibrate their investments in a fine balance between the immediate needs of users, long-term requirements and the economic impact on the entire energy ecosystem. However, being a fully regulated process, operators can act within the limits established by ANRE, which approves investment directions and types of works. At the heart of this planning effort are three major directions: upgrading infrastructure to increase service quality and reliability, expanding network capabilities, and adopting innovative technologies to support the efficient integration of new consumers, prosumers, and producers.
Every investment decision is substantiated by rigorous economic efficiency analyzes and projections that demonstrate tangible benefits for consumers. Operators and regulators must constantly collaborate so that the general public and investors have a clear understanding of how resources are allocated and the strategic reasons behind each investment.
At the European level, the action plan for networks launched by the European Commission discusses anticipatory investments. An anticipatory investment proactively addresses expected developments, looking beyond immediate production or demand needs, assuming with a sufficient level of certainty that they will materialize despite potential short-term low utilization.
In what way can the differences of vision between the regulator and the operators be reduced regarding the RRR calculation methodology, especially regarding the recognition of digitalization investments?
Reducing the differences of vision between the regulator and the operators on the topic of RRR and investments in digitalization requires a dialogue focused on real data, long-term benefits and alignment with the strategic objectives of network modernization – but also a change of mindset that looks at automation, digitalization and, implicitly, cyber security as the foundation for the future of the energy sector.
For balance, a methodological approach can be implemented that gives special weight to investments in automation and digitalization. This would mean explicit recognition of investments in data capture, transmission, storage and analysis technologies, fundamental to optimizing networks and speeding up operational decisions. A pricing methodology that includes an additional incentive for digitalization could better align the interests of both parties, as digitalization brings direct and quantifiable benefits, both in operational efficiency and network resilience.
A close collaboration between network operators, regulatory authorities and technology providers can speed up the implementation of new digital solutions and ensure a coordinated approach in the process of upgrading the energy infrastructure.
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The interview first appeared in the printed edition of Energynomics Magazine in early December 2024.
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