Energy Networks, Natural Monopolies and Tariff Regulation

Energy networks, such as the networks for the transportation of electricity and gas, are natural monopolies, which implies that competition among these networks is not possible. In order to protect network users against monopoly prices and to give the network operators the incentive to operate efficiently, many countries have implemented tariff regulation. After discussing the economic consequences of natural monopolies and the need for regulation, this chapter briefly compares the various types of tariff regulation, discussing the incentive power, the ability to make a profit, and the reward on the costs of capital. The chapter concludes by discussing how tariff regulation may enable network operators to finance the necessary investments to connect new renewable energy production facilities.