The Administrative Court today announced its ruling on the weighted average cost of capital (WACC) for the regulatory period 2016-2019. With the support of the expert opinions cited and other investigation in the case, the Court establishes that a reasonable long-term stable WACC should be 5.85 percent.
“Our position has always been that the regulations should have a long-term perspective, considering the nature of electricity networks with long investment cycles,” says Johan Lindehag, CEO of Ellevio.
Swedish network companies are planning major investments to ensure that the electricity network has the capacity to meet society’s requirements long into the future. Between 2016 and 2019, the network companies will invest around SEK 50 billion. Ellevio will account for almost SEK 10 billion of this amount.
"Our Swedish electricity networks are getting old, and there is a great need to modernise them. Customers and society in general expect to enjoy the same security of supply in the future, while we are in the midst of a significant wave of digitalisation within many areas of society. In addition, we are facing a transition of our energy system as a whole towards more renewable energy sources, electrification of the transport sector etcetera, which will of course impact the electricity networks. There are numerous factors driving the necessity to make needed investments," says Johan Lindehag of Ellevio.
"The current network regulation aims to stimulate the investments necessary for Sweden to retain a reliable electricity network also in the future. The WACC is a key element in this, and the industry is of the opinion that it should correspond to the long-term perspective of our investments. We are building an electricity network that will serve customers and society for 40 years or longer, and we believe that the regulations should reflect that. It is good that the Court shares this view," says Johan Lindehag.
“Now we will go through the Court’s ruling and analyse it more in detail,” says Johan Lindehag.
In spring 2015, the Swedish Energy Markets Inspectorate decided on the network operators allowed revenue for the period 2016-2019. This decision was based on a WACC of 4.53%, diverging from the Court's decision announced in March of the same year of a long-term WACC of 6.5% for the regulatory period 2012-2015. The network companies were again drawn back to the courts with the hope of attaining clear directives for how the WACC should be calculated. What does the regulation say?
The regulation is to provide cover for reasonable costs for running the electricity network operations and a reasonable return on invested capital. Prior to the current regulatory period, the Government pushed through a number of comprehensive changes to the electricity network regulation, entailing significantly more stringent directives. The regulatory model which is now in effect reduces the network operators' allowed revenues compared with the previous model, although it does effectively meet the development requirements facing the Swedish electricity network. Today's ruling on the WACC that builds on the long-term perspective strengthens the incentives to develop the networks for the future.