Water utility regulatory models for energy procurement in Europe: An empirical investigation

Since the latter half of 2021, energy prices have risen owing to gas and fuel shortages following the rapid economic recovery after the restrictive measures due to the COVID-19 pandemic, with the 2022 Russian invasion of Ukraine exacerbating this stress. As energy prices rose, procurement became a strategic process even in regulated natural monopolies. To give the right impetus to water utilities, entrusting public bodies in several countries with setting rules for cost recovery, tariff methodology, and ensuring quality standards is essential. These bodies must also recognise that incentive-based regulation will influence energy procurement, especially through tariff methodologies applied by water regulators to recover the costs incurred. Therefore, this study provides an overview of the regulatory models adopted in Europe by National Regulatory Authorities (NRAs) to determine allowed energy costs, along with a detailed examination of the diverse national approaches adopted before the energy crisis. It further highlights instances where certain NRAs demonstrated limited awareness of the importance of incentive schemes associated with energy procurement. Building upon existing models, this study developed a framework to identify alternatives and incentives for regulating energy purchasing prices in the water sector. This framework benefits NRAs seeking to update their methodology for cost recovery of water utilities. • An overview of regulatory models for energy costs of water utilities is provided. • A detailed examination of the diverse approaches adopted in Europe is given. • Regulatory authorities have limited awareness of the value of incentive schemes. • A framework to identify options for regulating energy purchasing prices is defined. • Regulatory authorities should revise methods for cost recovery of water utilities.