Introduction

Electricity markets differ significantly from other commodity markets, with real-time dynamic balancing influenced by various external factors. As a result, applying conventional financial time series analysis to wholesale electricity prices is complex. Unique aspects such as weekly and daily seasonality, on-peak versus off-peak hours, and price spikes distinguish electricity markets. Additionally, the non-storability of electricity and the constant need to meet demand complicate forecasting techniques.

This GLOMACS training course on Financial Modelling & Tariff Setting for the Utility Sector introduces advanced methods for electricity price and financial forecasting. Participants will explore statistical time series analysis, equilibrium models, and portfolio methods, and learn to develop their own utility tariff setting models while engaging in simulations to adopt best practices for modeling revenue requirements.

Objectives

By the end of this training course, participants will be able to:

• Understand the evolving challenges within the energy sector
• Assess the implications of the latest energy regulatory frameworks
• Develop economic models pertinent to the power industry, including the Regulatory Asset Base (RAB)
• Navigate the dynamics and challenges of forecasting and modeling utility prices
• Evaluate the financial performance of power industry projects using robust financial models

Training Methodology

Participants will receive comprehensive training through a blend of effective adult learning techniques, including:

• Interactive presentations
• Individual and group activities complemented by relevant case studies
• Video documentaries to highlight key teaching points

 Organisational Impact

Professionals in the power sector require specialized skills in financial modeling for tariff setting, a critical competency often lacking in municipal and utility contexts.

Organizations will benefit from the skills that participants apply to enhance their operations, including:

• Understanding the rationale behind traditional financial models versus utility tariff models
• Utilizing quantitative techniques for tariff paths, such as RAB, weighted average cost of capital (WACC), and energy/input costs
• Grasping the complexities of forecasting and modeling utility prices
• Learning tools for forecasting OPEX, CAPEX, and depreciation
• Gaining practical skills to build a tariff model from the ground up
• Analyzing how tariffs are sensitive to WACC and capital costs

 Personal Impact

Throughout the course, delegates will construct a financial model for utility tariff setting, with detailed exploration of key components such as RAB, WACC, and energy costs.

By attending this training, participants will acquire:

• A deeper understanding of the intricacies of utility regulatory frameworks
• Familiarity with financial engineering terminology
• The ability to build an economic tariff model from scratch
• Skills for developing investment calculations, including OPEX, CAPEX, and depreciation
• Enhanced decision-making capabilities regarding future utility projects and plans

Who Should Attend?

This GLOMACS training course is designed for managers, senior professionals, and advisors within utilities, regulatory authorities, and government, equipping them with the skills needed to set tariffs in a regulated environment. It will particularly benefit:

• Utility sector professionals
• Municipal employees
• Officials from regulatory authorities or government
• Utility board members
• Infrastructure fund managers
• Individuals managing or overseeing energy-related projects

Course Outline

 Day 1: Introduction to Utility Economic Regulation

• Overview of power utility challenges
• Key regulatory objectives and aspects of tariff regulation
• Objectives of economic regulation
• Overview of economic regulatory methodologies
• The necessity for financial models
• Introduction to financial modeling as a regulatory tool

Day 2: Utility Sustainability

• Economic and financial sustainability
• Modeling alternatives: real vs. nominal, firm vs. equity holders, tax treatment, flow vs. discount rate
• Demand projections and revenue requirement building blocks
• Best practices in modeling revenue requirements for tariff determination
• Presentation of a simple integrated single-year model
• Limitations of the test-year approach and multi-year tariffs

Day 3: Regulatory Asset Base (RAB)

• Evolution of the asset base
• RAB and depreciation considerations
• Asset valuation and which assets to include for regulatory purposes
• Historical vs. replacement values
• Finalizing the asset base
• Flexibility in modeling historical and forecast dat

Day 4: Opportunity Cost of Capital (WACC)

• Understanding WACC and its components
• Risk aversion and the relationship between risk and returns
• Cost of debt and implications of credit ratings
• Assessing country risk premiums and sovereign risk ratings
• WACC calculations and their impact on tariff requirements
• Sensitivity analysis of tariffs in relation to WACC and capital costs

Day 5: Depreciation, OPEX, and CAPEX

• Regulatory aspects of depreciation
• Depreciation calculation methodologies
• Benchmarking operating efficiency and regulatory treatment of losses
• Developing calculations for operating costs and efficiency factors
• Investment calculations, including definitions and drivers of CAPEX
• Analyzing financial restrictions and the impact of WACC and depreciation on financeable investments

This comprehensive course equips participants with the skills and knowledge necessary for effective financial modeling and tariff setting in the utility sector.