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ACER Recommendation on risk evaluation and incentives

Article 13(5) of the Regulation (EU) 347/2013 requires Member States (MSs) and National Regulatory Authorities (NRAs) to provide appropriate incentives for projects of common interest deemed to incur higher risks as compared to the risks normally incurred by a comparable infrastructure project. In the recommendation, ACER considered that the incentives should aim at mitigating risk, or providing adequate compensation for it, especially when such risks could cause project promoters and/or investors not to invest or to delay their investment decisions.     
ACER assessed national practices regarding risk evaluation and noted that the methodologies to evaluate the higher risks faced by project promoters are generally applied in the MSs in the context of a portfolio risk profile of a TSO or other project promoters.  ACER found that in the large majority of MSs the allowed cost of capital for regulated infrastructure is determined on the basis of the capital asset pricing model. This approach focuses on the identification of the level of systematic risk for the overall transmission activity and ACER found that, currently, NRAs do not generally assess the specific risk of individual investment projects.     
ACER recommended NRAs follow a 7-step common risk evaluation methodology to encourage reasonable and transparent evaluation of risks. The recommended methodology should consider the distinctive features of and the measures available in the different national regulatory systems, in order to assess to what extent the risk for the project promoters is higher than the risk of a comparable project.    
Next, ACER assessed national practices regarding risk mitigation regulatory measures (rules for anticipatory investment, rules for recognition of efficiently incurred costs before commissioning of the project and other regulatory measures) and monetary reward or penalty schemes, which typically consist of rules for providing additional return on the capital invested. ACER considered that the existing national frameworks already offer a wide span of regulatory measures that protect project promoters from many risks.     
In its recommendation, ACER set out the general principles NRA should be following when considering incentives and for particular risk mitigation measures proposed under five risk categories: the risk of cost overruns, the risk of time overruns, the risk of stranded assets, risks related to the identification of efficiently incurred costs and liquidity risks. ACER took the view that NRAs should be free to decide on the combination of regulatory measures and monetary reward/penalty schemes.    
The recommendation further noted that the consistency between the various national regulatory frameworks may be especially important for cross-border PCIs. However, this broader context, relevant to align the project promoters’ incentives and where TSOs contribute to the costs of a national PCI in another jurisdiction, is left for separate future investigation.