Report
15.05.2025
Electricity

CEER Paper on Incentives in Regulatory Frameworks with a Focus on OPEX/CAPEX Neutrality

The EU’s climate and energy goals are accelerating electrification across sectors, requiring a major expansion of fossil-free generation and grid infrastructure. EU initiatives such as Fit for 55, REPowerEU, and the Action Plan for Grids highlight the need for cost-effective, flexible, and digital solutions. However, regulatory frameworks often favour CAPEX-heavy investments, making potentially more efficient OPEX-based solutions less attractive. Addressing this bias is vital to support smart, flexible grids.

Context and Purpose

This paper examines the incentives embedded in regulatory frameworks that may inadvertently favour CAPEX over OPEX. In particular, it focuses on two specific sources of CAPEX bias:

  • Hybrid regulation bias – where CAPEX and OPEX are treated under different regulatory regimes or with different incentive strengths.
  • Operator bias for stable returns – where CAPEX is preferred because it offers long-term, predictable returns, unlike OPEX-based approaches.

The goal of the paper is to identify practical regulatory instruments and design features - based on literature and current national practices - that can help mitigate these biases and promote OPEX/CAPEX neutrality.

Key Findings

  • Technological neutrality is essential for ensuring network operators choose the most cost-effective solutions, regardless of whether they are CAPEX- or OPEX-based.
  • Regulatory solutions identified include:
    1. OPEX capitalisation – treating selected OPEX costs as capital investments.
    2. Fixed OPEX/CAPEX Share (FOCS) – pre-defining a share of total expenditure to be treated as CAPEX/OPEX, ensuring symmetric treatment.
    3. TOTEX benchmarking – assessing efficiency based on total expenditure, which aligns incentives across CAPEX and OPEX.
    4. Output-based regulation – incentivising outcomes like efficiency or reliability, irrespective of the type of expenditure used.
  • TOTEX models already adopted by several European NRAs reduce hybrid regulation bias, while FOCS can address both bias types when paired with performance-sharing mechanisms.
  • Additional design elements - such as less frequent parameter updates and longer regulatory periods - further support neutrality and reduce the attractiveness of CAPEX-based investments solely for their stable returns.
  • While regulatory improvements are needed to correct CAPEX biases, care must be taken to maintain investor confidence and ensure financing of necessary infrastructure is not undermined.