The electricity market in Norway is not static but it has adjusted itself according to the necessities. In 1990 influenced by some initiatives of market liberalizations, for instance New Zeeland and UK, a necessity for better performance Norway’s electricity market started a reform. Again in 1997 it was introduced a new regulatory model based in incentives (revenue cap) that replaced the rate of return model in which there was a lack incentives for efficiency.
Norway electricity network has three levels of electricity grids: distribution grid, regional grid and central grid (national transmission system) and is divided into 5 market areas for electricity, which means different prices for different parts of the country, depending on supply and demand in each area. Its regulation is made at a national level through NVE and at European Level by the European Union. Contrary to what happens in other European countries the distribution sector in Norway has many independent companies (more than 150) with big differences in terms of size and density of consumers served. And there are only one TSO the Statnett SF.
Regarding competition the price of this power is calculated through the balance of bids and offers of producers, distributors, traders, energy companies, large consumers and TSO in the Nord Pool Spot (NPS) market. In order to guarantee balancing of supply and consumption participants have to adjust their bid when imbalances appear. Under the regulation of 7th May 2002 Nº 448, TSO has the power to declare volumes at an electricity spot price for the area. According to the Norwegian Competition Authority (NCS) every retails entity in the electricity market or network business need to have a trading license.
Regarding unbundling restrictions, it is possible for network and supply companies to be bundled if the number of their consumers is at most 100 000. For the ones with a higher number in addition to the unbundling requirements these companies are require to participate in a compliance program.
The Norwegian regulatory model is incentive-based, as its main purpose is to give incentives to the firm to be efficient in both prices and quality. Under this model the companies have some flexibility in adjusting individual prices taking into account elasticity, that is, if needed they will increase prices in the markets where the demand is more inelastic. This revenue cap is determined by NVE, the objectives are evaluated periodically but should last a minimum of 5 years. Companies are notified before the beginning of the year facilitating their decision about tariffs (which are two part tariffs). Additionally firms can also ask for connection charges. The formula of revenue cap is based in several costs that the firm will incur where 40 % of the costs are based the firm’s actual costs, while the others 60 % are based on a cost norm.
Finally even being called as Revenue cap its important to refer that there is a big approximation to the concept of Rate of Return since the Revenue cap calculation is only based on costs but the revenue cap will not only allow for the coverage of the costs incurred but also allow for benefits of cost savings activities.