Determinants of Investment under Incentive Regulation: The Case of Norwegian Electricity Distribution Networks

Investment in electricity networks, as regulated natural monopolies, is among the highest regulatory and energy policy priorities. Given the large scale of required investments in the coming years, impelled by the need for decarbonising the electricity sector, identifying investment drivers of power networks facilitates effective regulatory treatment of investment under incentive regulation. This study analyses the determinants of investment in Norwegian electricity distribution networks using a panel dataset of 126 companies from 2004 to 2010. A Bayesian Model Averaging approach is used to provide a robust statistical inference by taking into account the uncertainties around model selection and estimation. The results show that five factors drive nearly all network investments: depreciation, number of network stations, energy density, cost of energy not supplied, and number of leisure homes. Among these, depreciation plays the most important role regardless of the choice of prior. The study finds no evidence of impact on investments by weather and geographic factors which might be due to small variations of these factors across the country. Finally, distributed generations show no effect on investments reflecting the fact that Norwegian distribution networks are already adapted to connect many dispersed small scale hydroelectric resources.