German Efficiency Gone Wrong: Unintended Incentives Arising from the Gas TSOs’ Benchmarking

02 November 2021
Tomas Haug and Lorenz Wieshammer

Regulatory regimes for gas and electricity network operators feature an efficiency benchmarking in several countries. In this benchmarking, network characteristics and costs are compared across a sample of network operators to assess their relative efficiency. In theory, by linking allowed revenues of a network operator to its estimated efficiency score, the benchmarking incentivises efficient behaviour.

In an article published in Energy Policy, NERA Managing Director Tomas Haug, Senior Consultant Lorenz Wieshammer, and Paul Waidelich from the Swiss university ETH Zurich review the efficiency benchmarking for German gas transmission system operators (TSOs). They find that the benchmarking results may not reflect the true efficiency of all network operators and may have unintended side effects. For example, the authors show that network operators trying to optimise their efficiency score may have an incentive to either forego or to over-dimension network expansion measures deemed necessary by the regulator. The authors suggest remedies for such unintended side effects, including the exemption of some investments from the benchmarking.