Considerations for Economic Regulation Amendments to Incentivize Flexibility Utilization in the Finnish Transmission System

This paper provides considerations for economic regulation amendments to incentivize flexibility utilization in the Finnish transmission system. An investment deferral shall produce higher economic efficiency if the incurred costs of flexibility utilization are lower than the costs of a comparable investment during the evaluation period while the increase of service output remains the same. The analysis in this paper evaluates costs and benefits for a transmission system operator, connecting party and society in the regulatory regime applied in Finland. Incentives for flexibility utilization are missing from the current revenue capped rate of return regulation. The analysis results show that beneficiaries of flexibility utilization in the current regulation are the society and connecting party while TSO’s efforts to defer an investment would have negative economic impact on its profit. Therefore, amendments to the economic regulation methodology are proposed to incentivize flexibility utilization when total welfare is increased.