Incentive Based Regulation Around the Globe

Incentive Based Regulation Around the Globe

THIS ARTICLE WAS WRITTEN BY Energy Watch | 30.01.18 | 8:36 PM

Innovation is not something we always think of when we’re discussing regulation. But when it comes to the modern international energy landscape, the two must work hand-in-hand to provide a framework that can keep up.

Exciting new opportunities are constantly emerging in this fast-paced energy ecosystem, from tidal power stations harnessing the awesome potential of the oceans, to innovative energy policies embracing the opportunity of the sunshine that falls on our homes. Making the most of these opportunities means utilising a regulation system that can adapt to a changing landscape. In Malaysia, as in many places around the world, that system is Incentive Based Regulation, or IBR.

IBR builds a sustainable power system

Incentive Based Regulation helps us embrace new opportunity for electricity generation in Malaysia. It is a framework which allows us to build on the successes of our admirable energy ecosystem today, in building the foundations to meet our future demand.

IBR is founded on the ability to adapt, and the built-in flexibility to allow our energy producers to offer sustainable power in our modern global energy marketplace. It is a system that aims to encourage innovation while incentivising success.

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Malaysia can proudly boast itself a regional leader in adoption of this form of regulation. It is only the second ASEAN nation to realise the opportunity of efficient, transparent networks that are often cited as the benefits of this new regulatory framework. Malaysia’s power sector has now been operating under IBR for over four years, but the opportunities of this innovative new regulatory system are becoming more and more apparent around the globe.

United Kingdom – RIIO

The United Kingdom has enjoyed the benefits of an IBR system since 2013. The Revenues = Incentives + Innovation + Outputs (RIIO) is roundly praised for delivering on the promise its name.

RIIOs were benchmarked against six key output categories: reliability; environmental; connections; customer satisfaction; social obligations and safety. The latest report shows that this model of IBR has delivered improvements across all six categories, providing a safer, more reliable and more efficient energy network.

Denmark – IBR for Distribution System Operators (DSOs)

Denmark has implemented IBR to address the issue of system reliability across its energy network. By benchmarking DSOs for incentive based regulation, they targeted an increase in national network reliability. This system not only aims to incentive distribution reliability, but provides the impetus to continue to improve and maintain the existing distribution network.

Philippines, Guaranteed Service Levels under IBR

The Philippines was the regional pioneer in incentive-based regulation. It was first introduced to two operators in 2008, expanding implementation to state-operated Meralco the following year. IBR in the Philippines is based around the idea of guaranteed service levels, where operators are benchmarked against performance thresholds such as power disruptions and connection time. With 148 distribution utility companies throughout the nation, this IBR framework incentivises reliable supply to ensure customer satisfaction. Calls to adapt the system to ensure better service and more frequent regulatory reviews are currently being put forward in a recently drafted bill, showing the need for modern regulation to be flexible to meet the needs of a changing environment.

Ontario, Canada

Ontario, Canada, is host to what is held to be one of the most successful IBR systems in North America. Despite the diverse nature of power producers in the region, the introduction of IBR by the Ontario Electric Board in 2001 has encouraged positive performance results in producers. Cost-performance for utility companies grew far above the average over North America, revealing a more efficient, cost-effective energy market.

Malaysia’s success with IBR

We can’t discuss IBR without highlighting Malaysia’s flexible implementation through use of the Imbalance Cost Pass-Through (ICPT). ICPT enables electricity producers to adapt tariffs in response to global fuel prices, making the production of electricity far more economically resilient to fluctuating fuel prices.

Malaysia has shown benefits of almost RM6 billion to date, the result of savings from developing greater efficiencies in coal-fired power alongside lower LNG and coal prices. Customers are equally likely to reap the benefits of these efficiencies as producers. ICPT rebates mean that a consumer with an average RM200 per month bill would save around RM300 over just 36 months thanks to ICPT and the wider IBR regulation.

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IBR is also helping build a more sustainable ecosystem. Customer satisfaction in the Malaysian power system has steadily increased as a result of significant performance improvements. Peninsular Malaysia now enjoys one of the most reliable energy networks in the region, and one which measurements show compares on an equal footing with advanced nations around the world.

IBR is a flexible model for the future

No regulatory model can ever be considered perfect. Power production is a rapidly changing industry, which means the model that we employ must always be ready to adapt to meet current needs.

IBR is itself built on a foundation of forward-looking regulation

IBR is itself built on a foundation of forward-looking regulation that seeks to meet those future needs. It is a framework based around predicting electricity demand and future production costs. Any future-looking model must always be understood in terms of predictive variables. That means looking forward over the future 3 years must leave room for flexible delivery.

Predicting that future is ever more challenging in today’s volatile global economy. Socio-economic issues which impact one country will inevitably have a knock-on effect around the world. That means currency prices in particular can lead to significant impacts on the cost of fuel that powers our electricity generation. The Malaysian ringgit has been no exception to these global conditions.

Even in the face of those challenges, IBR provides a flexible framework to continue to drive efficiency in the power sector. In powering our globally connected world, incentive based regulation seems to be an increasingly global framework. Making sure that works for Malaysia means constantly adapting to the needs of today, while embracing this innovative framework that enables us to build for tomorrow.

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