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Brief on Key Business Issues
DTEK, Kyiv, Ukraine,
July 01, Wed, 2020
Deloitte on why Ukraine needs incentive based regulation in the energy sector
Artur Ohadzhanyan, Corporate Finance Advisory Partner, Energy and Resources Group Leader at Deloitte Ukraine, explains in his latest op-ed what is RAB (return on assets-based regulation) and why it is currently topical for Ukraine.
In the article Mr. Ohadzhanyan gives a general overview of RAB regulation, comparing it to the “cost+” approach that is applied in Ukraine now and leads to inefficient use of grids with huge electricity losses even before it reaches the consumer (SAIDI – System Average Interruption Duration Index per consumer and SAIFI – System Average Interruption Frequency Index per consumer). “The SAIDI indicator in some regions exceeds 1,000 minutes (i.e. more than 16 hours per year per average consumer in the relevant region). Disconnection during peak loads, accidents, current frequency drops, and property thefts create not only inconveniences but actual losses and emergency situations.” – the author says.
The key features of incentive-based regulation related to tariffs are as follows: tariffs are calculated based on transparent economic rationale; tariffs are set for the specific period of several years; tariffs include components of stimulation for achievement of planned indicators known beforehand and sanctions for failure to achieve them. This is a fundamental difference from "Cost+".