Danish Ministry of Energy, Utilities and Climate

Analysis of return and investments in the Danish water sector

Original title: Analyse af forrentning og investeringer i vandsektoren

The Danish water and wastewater utilities have the difficult task to plan and operate an efficient and well-functioning production and distribution of tap- and wastewater. Doing so, Danish utilities face four regulatory challenges: Firstly, the allowable revenue is based on historical data, technology and external circumstances instead of future demand. Secondly, the current benchmarking model does not provide sufficient incentives to implement efficient solutions. Thirdly, the utilities do not have sufficient incentives to seek extraordinary efficiency gains. Fourthly, CAPEX is underestimated compared to OPEX in investment situations.

In this study, we find that the Danish revenue regulation can be improved in three dimensions. Firstly, the regulation should adapt to a forward oriented approach – especially with regard to investments – as well as implement a WACC element and high powered incentives. Secondly, environmental, climate and customer needs must be integrated with the economic regulation. Thirdly, there is a need to increase the efficiency of climate adaptation.

We have analysed the investment incentives in the current regulatory setup, the implications of implementing a WACC and high-powered incentives as well as making recommendations for a reform.

The study is commissioned by the Danish Ministry of Energy, Utilities and Climate.

Available for download is the full study in Danish.