COMPARATIVE REVIEW OF GLOBAL APPROACHES TO ELECTRICITY TARIFF SETTING

This report provides a comparative analysis of global electricity tariff-setting methodologies, focusing on the process of determining revenue requirements and conducting Cost of Supply (CoS) studies. It examines various regulatory models—including rate-of-return, incentive-based, performance-based, and market-based pricing—and evaluates their effectiveness in balancing financial sustainability for utilities with affordability for consumers. The document concludes with specific recommendations for South Africa to modernize its tariff structures and revenue determination processes as it transitions toward a wholesale electricity market.

• The revenue requirement process is the first step in tariff setting, aiming to calculate the maximum revenue a utility can recover to cover "prudent costs". This involves determining the aggregate costs of supplying service, including operating expenses, depreciation, taxes, and an authorized return on assets.
• Rate-of-return regulation is a traditional model used primarily for natural monopolies, where tariffs cover prudent costs plus a fair return on investment. While it provides financial stability and investor certainty, it can encourage "gold plating" (overcapitalization) and cost-padding if not combined with incentive overlays.
• Incentive-based regulation, such as the CPI–X model, sets a price or revenue cap for a multi-year period to encourage cost reduction and innovation. However, overly aggressive efficiency targets (X-factors) can lead to underinvestment and deferred maintenance, as seen in the case of Railtrack in the UK.
• Performance-based regulation (PBR) links utility revenues to specific targets like reliability, decarbonization, or customer satisfaction. While it aligns profit motives with policy goals, it is complex to design and requires advanced regulatory capacity to prevent "gaming" of metrics.
• Market-based pricing uses competitive wholesale and retail markets to set energy prices, though network infrastructure tariffs remain regulated. This model improves economic efficiency and resource allocation but can expose consumers to extreme price volatility, as demonstrated by the 2021 Texas winter crisis.
• Socially or politically determined tariffs are often used to ensure affordability but can lead to severe financial distress for utilities if not decoupled from cost recovery. In South Africa, below-cost tariffs and lower-than-requested NERSA approvals resulted in over R250 billion in government guarantees and equity injections between 2019 and 2024.
• A Cost of Supply (CoS) study is a structured analysis used to determine the cost of providing electricity to different customer categories. It involves three main stages: cost functionalisation (splitting costs by function), cost classification (identifying cost drivers like demand or energy), and cost allocation (assigning costs to customer classes).
• There are three primary methods for allocating demand-related (capacity) costs: the Coincident Peak (CP) method, which uses the system peak hour; the Non-Coincident Peak (NCP) method, which uses each class's own maximum demand; and the Average and Excess method, which uses a weighted average of both.
• The debate between fixed and variable charges centers on revenue stability versus price signals. Fixed charges protect utility revenue against falling sales from rooftop solar or efficiency, but can burden low-income users and reduce incentives for energy conservation.
• For South Africa, the report recommends that NERSA mandate that all distributors use the same multi-year revenue determination methodology and that retail tariffs (excluding lifeline tariffs) be unbundled into components including wholesale tariffs, distribution network charges, and transparent subsidy charges.

APA

SALVOLDI, S. (2025). COMPARATIVE REVIEW OF GLOBAL APPROACHES TO ELECTRICITY TARIFF SETTING. Public Affairs Research Institute. https://pari.org.za/wp-content/uploads/2025/12/tariff-setting28-11-25-1.pdf

Chicago

SALVOLDI, SHIRLEY. COMPARATIVE REVIEW OF GLOBAL APPROACHES TO ELECTRICITY TARIFF SETTING. Public Affairs Research Institute, 2025. https://pari.org.za/wp-content/uploads/2025/12/tariff-setting28-11-25-1.pdf.

Wikipedia

{{cite report |last1=SALVOLDI |first1=SHIRLEY |title=COMPARATIVE REVIEW OF GLOBAL APPROACHES TO ELECTRICITY TARIFF SETTING |publisher=Public Affairs Research Institute |date=November 2025 |url=https://pari.org.za/wp-content/uploads/2025/12/tariff-setting28-11-25-1.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{salvoldi2025comparative, author = {SALVOLDI, SHIRLEY}, title = {{COMPARATIVE REVIEW OF GLOBAL APPROACHES TO ELECTRICITY TARIFF SETTING}}, institution = {Public Affairs Research Institute}, year = {2025}, month = nov, url = {https://pari.org.za/wp-content/uploads/2025/12/tariff-setting28-11-25-1.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }