Revenue cap and tariffs
Landsnet operates on the basis of the Electricity Act No. 65/2003. Under Article 12 of the Act, the National Energy Authority (NEA) determines a revenue cap for Landsnet, which decides a tariff for its services in accordance with the cap. The revenue cap is based on historical operating expenses, depreciation of fixed assets, Landsnet’s allowable profitability as decided annually by the NEA and taxes. The profitability factor is accorded significant weight in deciding the revenue cap. Therefore, decisions on the company’s revenue cap and profitability must be made on a solid foundation to ensure the necessary stability with respect to charging for electricity transmission.
In 2015, the NEA issued its decision on the allowed rate of return for the years 2011-2015. Subsequently, the revenue cap settlement for 2011-2014 was finalised. This largely ended the uncertainty that existed for several years regarding Landsnet’s revenue cap for the period 2011-2015.
As a result of a dispute that has lasted for a number of years regarding the allowed rate of return for concessionaires operating in the electricity market, the Ministry of Industries and Innovation decided to review the Regulation on the Valuation of Weighted Average Cost of Capital. This review has been completed, providing a basis on which to determine the revenue cap for the period 2016-2020.
Transmission tariff for power-intensive consumers in line with inflation
At year-end 2015, the last year of the previous revenue cap period, the tariff for power-intensive consumers was in line with that period’s inflation, or up 8% from the beginning of the period, i.e. the beginning of 2011. The tariff has changed in keeping with decisions on, first, the rate of return within the framework applicable to power-intensive consumers and, second, repayment of an older debt.
Large fluctuations in transmission tariffs are undesirable, making it important to ensure stability as regards their underlying assumptions. A firm foundation in this respect depends on decisions on the rate of return, the revenue cap established pursuant to the provisions of law and a stable revenue-cap base.
The graph below shows the development of Landsnet’s tariff since the amendments to the Electricity Act took effect in 2011 compared with the United States Consumer Price Index (US CPI), which the valuation of the asset base underlying our revenue cap is required to follow. This comparison shows how the tariff developed with respect to purchasing power in USD. No changes were made to the transmission tariff for power-intensive consumers in 2015.
Unchanged transmission tariff for distributors
The transmission tariff for distribution system operators remained unchanged in 2015. The tariff was last increased on 1 July 2013, when it had not changed since 2009.
The graph shows how the tariff for distributors has developed since 2011 compared with the Icelandic Consumer Price Index (CPI) and the Wage Index. The asset base for distributors must follow the CPI and has the highest weighting in tariff decisions. The graph shows that the tariff increase did not keep up with inflation for the entire period. It also shows that purchasing power increased substantially in excess of the price of the transmission component of electricity supply to households.
Tariff increase for ancillary services
Ancillary services are the services Landsnet provides to maintain operational security and balance between supply and demand of electricity at any given time. This includes spinning reserves for frequency control and disturbances, non-spinning reserves and instantaneous disturbance reserves. Landsnet must also provide guaranteed regulating power to operate a balancing energy market. To meet these statutory obligations, we purchase electricity, mainly from generating companies, and procure access to non-spinning reserves from distributors.
Landsnet has placed an emphasis on increasing the range of bids in the regulating power market. We continued experimenting with “telephone bids” and other special solutions in an aim to stimulate competition and increase the number of suppliers. A regulating power option held by Landsnet, which had been in effect for over a decade or ever since the company’s founding, was reviewed during the year. The review led to a 12.5% reduction in the tariff for ancillary services as of 1 August, which followed a previous 4.2% increase at the beginning of February. Long-term contracts with generating companies ensured the availability of 100 MW of spinning reserves in 2015. A part of these long-term contracts, or 40 MW of the total of 100 MW, expired at year-end 2015.
A tender process for the period May 2015 to May 2016 was held during the year, with bids received from two parties. In accordance with the winning bid, the average price per guaranteed MWh rose to ISK 393 in the year, representing a 31% increase on average between contracts. The price for up-regulation rose by 51%.
Increasing costs of grid energy losses
Under the Electricity Act, we must provide electricity to replace grid losses. From the outset, the arrangement of such purchases has been that the generators make offers to Landsnet for the purchase of electricity on the basis of a previous auction, leading to the conclusion of contracts on electricity purchases for this purpose for a term of one year at a time. The cost of transmission losses has been rising in recent years, partly because of growing transmission losses attendant with increased generation and partly because of an upturn in the average price resulting from tender processes.
The average price of electricity purchased by Landsnet to meet grid transmission losses rose by 25% year-on-year on the basis of a tender process held in the autumn of 2014. A tender process held in the autumn of 2015 to meet transmission losses in 2016 led to still further increases from ISK 3,799/MWh to ISK 4,447/MWh, which represents a 17% year-on-year rise on average.
Landsnet’s transmission loss tariff is identical for distributors and power-intensive consumers and is issued in ISK. Our purchasing of electricity for this purpose is subject to surveillance by the National Energy Authority, which ensures that the tariff is based on the purchasing price plus a 1.5% margin to meet administration costs.
Spinning reserve is reserve power already connected to the grid and immediately available.
Non-spinning reserve is generating capacity that is not connected to the power system but can be brought online, connected to the system and fully utilised within a short time frame.
Instantaneous disturbance reserve is reactive power activated either automatically or manually during a short deviation from normal operating conditions.
Regulating power is the power Landsnet procures to balance differences between forecast energy use and actual energy use in the electrical network as a whole.
The regulating power market is the market from which Landsnet procures regulating power.
A regulating power option ensures a minimum supply of regulating power in the regulating power market.
Up-regulation refers to a demand for positive regulation power, i.e. power that needs to be fed into the system whenever actual consumption is higher than forecast for the electrical network as a whole.