Finnish energy regulator Energiavirasto was scheduled to release its updated regulatory framework for the upcoming periods 2024–2027 and 2028–2031 over the course of 2023. In the initial consultation phase conducted early in 2023, the regulator indicated no intention to significantly alter the existing regulatory approach. However, a subsequent consultation was published in October 2023, only three months prior to the framework’s enforcement. In this second phase, Energiavirasto clarified its intent to transition away from the current methodology, which relies on revaluing the Regulatory Asset Base (RAB) based on unit price changes. Instead, the regulator now proposed fixing the initial RAB of new assets at their value at the commencement of operations.

This move from a flexible RAB revaluation mechanism to a fixed RAB valuation is a fundamental departure from the existing framework and carries profound implications for network operators’ cash flows. In 2022, a decline in unit prices—the basis for RAB revaluation—led to a 17% reduction in the RAB for Finnish DSOs. This caused credit rating agencies to downgrade Finland’s largest DSOs. By moving away from RAB revaluation, the Finnish regulator’s proposal threatens to freeze the current, recently decreased asset values until the end of the assets’ life.

Given these risks, Finnish network operators expressed substantial concern about the regulatory change’s impact, fearing it could further undermine their creditworthiness and limit their ability to secure capital essential for investment. These investments are critical to support Finland’s ambitious climate goals through the modernisation and expansion of electricity network infrastructure.

Against this backdrop, Elenia, one of Finland’s leading DSOs, commissioned NERA to conduct an independent economic assessment of the proposed regulatory amendments.

NERA’s analysis focused on:

• Evaluating the theoretical foundations of the proposed fixed RAB approach in relation to the established guiding principles of Finnish energy regulation.
• Assessing how these regulatory changes could affect the credit ratings of Finnish DSOs.
• Estimating the impact on the cost of capital, thereby influencing DSOs’ cash flows and the total costs of the Finnish energy transition.