Permitted return on assets for electricity transmission and distribution

27 May 2024

The Regulatory Authority for Energy (ROE) of the National Energy Authority has announced the permitted return on assets for electricity transmission and distribution for the year 2025. This return is based on the Weighted Average Cost of Capital (WACC). This metric is used to determine the permitted return on assets within the revenue cap that distribution and transmission companies use when setting tariffs. The revenue caps cover the return on assets, along with operating costs and depreciation. 

ROE has also compiled a comparison of the permitted return on assets in Sweden and Norway. Iceland and Sweden use real returns, while the other Nordic countries use nominal returns. The following figure shows a comparison of the allowed return for the year 2022.  

The permitted return in Iceland is calculated using the risk-free indexed interest rates of government bonds, the credit default swap spreads of the state and energy companies, along with capital cost factors. Compared to Norway and Sweden, Iceland has a higher permitted return on assets for the year 2022. Consequently, Icelandic electricity companies face a higher weighted average cost of capital (WACC). The main reason for this difference is the generally higher interest rate level in Iceland. Sensitivity analysis shows that a 3% reduction in WACC would reduce the cost of electricity transmission and distribution by 10-20%, depending on the size of each company's asset base relative to other costs. 

Further information on the calculation of WACC and how it is used in decision-making for transmission and distribution can be found on the ROE website at orkustofnun.is.