Benchmarking and Security of Supply in the Utilities Sector

In the utilities sector, integration of security of supply in benchmarking models could affect the incentive for monopoly companies to be economically efficient. In Denmark and many other countries, benchmarking models are used to imitate competitive pressure which does not otherwise exist among natural monopoly companies in the utilities sector. The aim is to boost the incentives for companies to make cost-effective decisions.

At the same time, it is crucial that Denmark’s high security of supply is maintained. Security of supply is not directly included in the benchmarking models used. This working document highlights methodological issues with integrating security of supply into existing economic benchmarking. Such an integration can boost the incentive for companies to maintain a high security of supply, but could simultaneously weaken the utility companies’ economic efficiency.