Financial Modelling & Tariff Setting for Utility Sector

Electricity markets are structurally different from other commodities, and the real-time dynamic balancing of the electricity network involves many external factors. Because of this, it is not a simple matter to transfer conventional models of financial time series analysis to wholesale electricity prices. Its unique features are not observed in other markets, such as weekly and daily seasonality’s, on-peak vs off-peak hours, price spikes, etc. The fact that electricity is not easily storable and the requirement to meet the demand always makes forecasting techniques challenging.

This Financial Modelling & Tariff Setting for Utility Sector training course presents the current state-of-the-art electricity price and financial forecasting methods, including statistical time series analysis, equilibrium models, and portfolio methods. It is designed to help delegates build their own utility tariff setting model from scratch and engage in simulation cases to acquire the best practices in modelling revenue requirements.

Day One: Fundamentals To Utility Economic Regulation Model Drivers And Scenarios

• Overview

• Power Utility Challenges

• Key Regulatory Objectives and Aspects of Tariff Regulation

• Objectives of Economic Regulation

• Economic Regulatory Methodologies

• Need for Financial Models

• Financial Modelling as a Regulatory Tool

Day Two: Utility Sustainability

• Economic Sustainability

• Financial Sustainability

• Modelling Alternatives

  • Real vs Nominal

  • Firm or Equity Holders

  • Tax Treatment

  • Flow vs Discount Rate

• Demand Projections

• Revenue Requirement Building Blocks

• Best practices in modelling revenue requirements to determine tariffs

• Presentation of Simple Integrated Model: Single-year Model

• Limitation of Test-Year Approach: Multiyear Tariffs

Day Three: Regulatory Asset Base

• Asset Base Evolution

• RAB & Depreciation Notes

• Asset Valuation

• Asset Base: Which assets to include and how to value them for regulatory purposes?

• Historic vs Replacement Values

• Final Asset Base

• Historic vs Forecast Modeling

Day Four: Opportunity Cost Of Capital Wacc

• Weighted Average Cost of Capital (WACC)

• Risk Aversion

• Risk vs Returns

• Cost of Debt (Credit Ratings)

• Country Risk Premium and Sovereign Risk Rating

• WACC Calculations: Add WACC Calculation and the Revise Current Tariff Requirement

• Sensitivity of Tariff to WACC and Capital Costs: Review the impact of each input to WACC on the tariff required

Day Five: Depreciation, Opex, And Capex

• Regulatory Aspects of Depreciation

• Depreciation Calculations I

• Depreciation Calculations II

• OPEX: Benchmarking Efficiency Factors & Regulatory Treatment of Losses

• Operating Cost

  • Develop operating costs calculations

  • Efficiency factor estimates

• Investments: Develop Investment Calculations

• Exogenous Investments

• Endogenous Investments