Raising public awareness and trust in electricity transmission infrastructure development
Written by Pradyumna Bhagwat
Taking stock of the current state of affairs in stakeholder engagement
The need for substantial investment in the European electricity transmission grid is well known. The investment is necessary to meet the ambitions of market integration and decarbonisation as reflected in the EU third package on energy liberalisation. The goals are reiterated in the recently proposed package on Clean Energy for all Europeans.
Electricity infrastructure projects have a significant impact on the communities living in the vicinity of these projects which are increasingly active in expressing their concerns and opposition. In recent times, due to easier access to information, technology and education, stakeholders are becoming more aware, organised and demanding. Therefore, stakeholder engagement activities are becoming increasingly more challenging and vital for project promoters to raise public awareness and trust in infrastructure development. It is important to note that about 1/3rd of the 93 Connecting Europe Facilities (CEF) actions for energy infrastructure, up to November 2017, have at least some elements of public acceptance issues. Moreover, these problems are not limited to TSOs but are also faced by merchant project promoters as well.
Suboptimal stakeholder engagement by project developers leads to a short-term distortion of infrastructure planning and development; namely, delays of the actual project implementation. Although there is no (publicly available) quantitative data to the matter, we may cautiously presume that there are financial costs attached to these delays (at a minimum the discounting effect on the benefits of the project).
In addition to the short-term distortions, suboptimal stakeholder engagement practices in the network planning process may also lead to long-term distortions. For example, to avoid difficulties to gain public support, a project promoter might exclude those options in network planning that have a higher risk to face public opposition. Considering the consequential emergence of these short-term and long-term distortions, it is critical to ensure that project promoters are encouraged to implement innovative and effective stakeholder engagement strategies.
This article gives a glimpse of the on-going FSR Study titled “Enlarging incentive regulation to improve public awareness and trust in electricity transmission infrastructure development”.
Obstacles to engaging in activities to raise public awareness and trust
We will discuss three obstacles to engaging in activities to raise public awareness and trust by project developers. The first obstacle is the framework offering economic incentives to engage in the above mentioned activities. The second obstacle is the internal TSO procedures, organisation and culture, which may not be adjusted to the complexity of the task at hand. The third main obstacle is the legitimacy of the activities carried out. It should also be noted that these obstacles are not mutually exclusive from one another.
Economic Incentives
Any activity undertaken by a firm entails costs. The resources allocated to any activity would eventually depend upon the total resources that are at the disposal of the firm (e.g. total budget for a project). Furthermore, the level of engagement of a firm in an activity is dependent upon the benefit that it would derive from this activity.
The same holds true for the stakeholder engagement activities that a TSO carries out. The level of those activities is likely to depend on the incentive that the TSO receives to conduct those activities. These incentives would range from tangible financial benefit arising from the on-time commissioning of projects to more intangible gains such as a better public image for the firm.
The costs of stakeholder activities and the benefits they bring are largely unknown. They might not be monitored by the TSOs, (or at least such data is currently not publicly available). Without such information, both the TSO and the NRA operate blindly and may adopt a prudent, conservative attitude towards possible costly innovations with uncertain returns. Today, TSOs experiment with innovative approaches. However, within the current economic and regulatory framework, moving from pilots to practice can be complicated. For example, the TSO may treat the additional cost of these activities that do not constitute acquiring or building an asset as operating expense (OPEX). However, this additional OPEX may not be accepted by the regulator and thus leave the TSO with just an additional cost. Such a situation may create a disincentive for innovation.
TSO procedures, organisation and culture
Traditionally, TSOs’ tasks were focused on achieving technical excellence in terms of its operations. TSOs’ interactions with external stakeholders was limited to organisations such as the NRAs. Therefore, TSOs have not been very consumer-centric or have had any incentive to change the company’s procedures, organisation and culture.
Due to an ever-rising level of awareness of the impact that transmission infrastructure projects may have on them, consumers and other stakeholders want to be involved more and more in the decision-making process. Even the approaches used for certain activities such as spatial planning and environmental planning that have been used traditionally require the innovative implementation. Therefore, firms have to deal with the stakeholders to ensure public acceptance of their projects during their development. Conducting innovative stakeholder engagement activities necessitate an equally diverse set of competence and skills that can then be either outsourced to external experts or developed within the organisation.
The use of outdated practices on the field can be considered as the first major obstacle that impedes the effective implementation of stakeholder engagement activities. Such situation could arise when a TSO does not have the right background and skills to engage effectively with the public. Thus, to keep up with this change, it is necessary for a TSO to review and appropriately update the company’s procedures, organisation and culture. It should be noted that some TSOs are already engaged in a transformational change of their processes, organisation and culture.
Legitimacy
Adger et al. (2005) define legitimacy as “the extent to which decisions are acceptable to participants and non-participants that are affected by those decisions.” TSOs have a clear legal mandate for carrying out the monopoly activities such as operating the grid and ensuring security of supply. In many cases, TSOs also have a social responsibility bestowed upon, which can be part of a legal or moral mandate, to work towards the betterment of the society at large. For instance, a TSO may be tasked with supporting the energy transition to a decarbonised energy system in its role as infrastructure operator. TSOs, like any other organisation, may also call for a moral mandate to engage in activities that are just and fair for society.
However, the recent experience of TSOs with public opposition against new infrastructure developments and the resulting delays suggest that the public is not fully accepting the mandate of the TSO. The lack of legitimacy may partly be attributed to TSOs being unknown to the public. Indeed, since the unbundling of the energy sector, TSOs have a role with few direct interactions with the public and many citizens may not even know the name and the role of their national TSO(s).
To gain legitimacy, the TSO should interact with the stakeholders and explain its role in the supply of energy, connecting electricity producing units with energy consumption centres. Secondly, TSOs should explain their role in the energy transition and how their activities contribute to the required change of the power system. In particular, project developers should inform the people about why infrastructure projects are important enabling elements of the energy transition. Stakeholders who are fully aware of the importance of taking action (such as investing in a new transmission line) may have a more positive attitude towards TSOs, their activity and the related costs such as paying for a community project (such as building playgrounds, streetlights, pedestrian/cycling paths etc.) to compensate strongly affected communities.
To summarise, it is observed that obstacles to effective stakeholder engagement and to the implementation of such measures continue to exist. In the next instalment stakeholder activities that project developers are currently involved in would be discussed.
TSO activities to raise public awareness and trust
Project developers are increasingly engaging in innovative stakeholder activities to raise public awareness and trust in their infrastructure development. This research proposes a categorisation based on the nature of the activities and related costs. TSOs, like any other business organisation, can gain support for their core business by engaging in three types of activities namely; corporate level stakeholder engagement, project-level stakeholder engagement and compensation. It should be noted that in practice, TSOs utilise a combination of one or more of the activities mentioned above.
1 Corporate level stakeholder engagement
Corporate level stakeholder engagement activities are defined as the interactions with stakeholders that are not related to a specific project investment but are conducted with the public at large. The goal of such engagement is to create goodwill regarding the TSOs as a corporate entity and for all of its business activities. Through building name recognition, a strong reputation and positive image with the public, the TSO expects to reap the rewards, indirectly, by experiencing larger levels of public support in general and during the execution of specific projects.
The most common examples of corporate level stakeholder engagement are corporate social activities, educational campaigns, advertisement, and sponsoring. The costs entailed for these kinds of stakeholder engagement can be classified as corporate level costs.
Example from the practice of corporate level stakeholder engagement
According to the Renewables Grid Initiative (RGI) database, educational events are organised annually at primary schools by 50Hertz in collaboration with the Independent Institute for Environmental Issues. The goal is to engage school students in learning about the energy transition using information and learning exhibitions. At such events, the students may interact with politicians, industry and other authorities on this topic.
A higher level of controversy over corporate level stakeholder engagement costs
Corporate level stakeholder engagement costs raise significantly more controversy than project-level stakeholder costs. The root of the controversy lies in the debate over whether a natural monopoly, such as a TSO, with a regulated income stream should be spending money on activities to build name recognition and corporate reputation, which are generally part of the corporate level stakeholder engagement strategy — especially since the benefits of these activities not always immediately quantifiable.
On the one hand, it can be argued that such activities do not add any value in terms of increase in quantifiable benefit. On the other hand, a positive image may be useful for improving public support during the execution of new transmission expansion projects. Furthermore, the regulatory frameworks governing such activities are sometimes unclear. The following hypothetical example was provided during our interaction with an expert. It may be that a TSO is not allowed to spend money on sponsoring a community by paying for the naming rights of the football stadium, but it may be allowed to pay for the construction of a new stadium for the community as part of a compensation package. Considering the ambiguity in regulatory practice, corporate level stakeholder engagement costs are subject to a significant level of controversy.
Project-level stakeholder engagement
Project-level stakeholder engagement is defined here as the interactions with stakeholders involved in specific investment projects with the goal of creating goodwill for the project in the short term. In many countries, including the stakeholder perspective in infrastructure development decision-making (such as permitting) is considered so important that project-level activities are made mandatory for the project developer. Examples of such stakeholders are project affected parties such as the neighbours of the project corridor or the mayors of towns in the project corridor, but also stakeholders who have an indirect interest at stake such as environmental groups. Furthermore, the costs entailed in executing such activities can be defined as project-level costs of stakeholder engagement.
Examples of project-level stakeholder engagement activities include local dialogue forums, stakeholder workshops, information campaigns, information stands and fairs, project branding, educational campaigns, a public consultation of network planning, and project advisory boards. The best practice examples, as collected by the RGI, show that effective project-level stakeholder engagement requires a combination of these activities.
2.1 Example from the practice of project-level stakeholder engagement
In partnership with the Lithuanian Fund of Nature, LitGrid carried out environmental surveillance at the construction site for the LitPol link. This was done in addition to the Environmental impact assessment (EIA) carried out in 2010. Between April — August 2014, monitoring was undertaken for identifying protected species and habitats. A rare early-marsh orchid was identified and relocated. The results of the monitoring process were made available to all stakeholders.
2.2 Low level of controversy of project-level stakeholder engagement costs
Transmission system operators widely adopt Project-level stakeholder engagement activities, and their costs are not controversial in regulatory terms as they are seen as project development costs, consent costs or alike. Some project-level stakeholder activities are even mandatory by law, for instance, the organisation of one or more public consultations as part of the permitting process. Note that NRAs decide mandatory activities at national level.
2.3 Compensation activities
The mere engagement of stakeholders to generate public support may not be sufficient in the case that some stakeholders suffer negative externalities of a project. In welfare economics, compensation is a way to mitigate those negative effects. The beneficiaries of a project could share back some of the project’s benefits as damages to those affected to make them better off. The outcome of the project and compensation would thus leave everyone better off than a situation without the project.
Compensation can be of a financial nature, involving payments to affected stakeholders, or it could involve compensation in kind by adjusting the project to create fewer externalities (typically at the expense of a higher project construction cost). The most common examples are direct monetary compensation to project affected persons such as landowners and farmers, community monetary compensation such as building of community centres, hospitals and sports facilities, or building sound screens on highways in the vicinity of the overhead transmission line. Non-monetary compensation may consist of changing the project design by undergrounding or modifying the route, use of compact pylon designs, etc.
Many countries have compensation schemes for objectively negatively affected stakeholders such as landowners who suffer a reduction in the value of their land; these countries include, e.g. Belgium, UK, France, Slovenia, Spain and Sweden. Several countries have schemes to compensate by means of funding community projects; these countries include, e.g. France, Germany, Ireland, Italy, Slovenia and Spain. Non-monetary compensations have been provided by TSOs in, e.g., Belgium, Germany, France, Italy.
3 Example from the practice of compensation activities
Eirgrid, the TSO from the Republic of Ireland provides community-level compensations in specific geographic locations surrounding a new infrastructure, called ‘proximity pay’. The compensation is provided in the form of grants from a ‘Community Fund’ set up by EirGrid. This concept of Community Fund is part of EirGrid’s company policy and will be utilised for any new transmission infrastructure project. An example of such compensation is the 110kV Mullingar-Kinnegad line. A total fund of €360,000 was made available to organisations of communities situated 2 kilometres on either side of the line. According to the RGI database, in 2016, 37 community groups received funding from the ‘Mullingar-Kinnegad Fund’ for various activities such as music, athletics, sports, childcare services and senior citizen support.
3.1 A higher level of controversy over compensation costs
Compensation costs can be considered to have a significantly high level of controversy and are the most controversial among the three approaches discussed in this topic. The reasons that the provision of compensation can be controversial are the following. Firstly, not all TSOs have a mandate to make decisions regarding payments of compensation. For some TSOs, the quantity of money that can be spent on compensation is strictly regulated. Furthermore, all consumers eventually pay the cost of compensation. Therefore, such compensations entail a significant reallocation of welfare from society as a whole, towards a set of selected parties. These beneficiaries may be individuals or a community. A degree of subjectivity is involved in perceiving or assessing the transparency behind the purpose of such transfer of wealth even when it is done within the necessary and required legal boundaries. The views on the legitimacy and purpose of compensation may vary from the above-described definition to the other extreme that would perceive it as ‘bribing’ these parties to ensure the implementation of the project, even if this is a subjective and mistaken perception. Compensation activities also open the possibility of strategic games by vested interests to make monetary or political gains, e.g. holding out to get the maximum amount of compensation.
To summarise, three levels of stakeholder engagement activities are discussed. The next instalment will discuss quantification of the impact of such activities.
Quantifying the impact of stakeholder engagement
Despite the abundance of qualitative evidence of TSOs undertaking diverse public engagement initiatives, there is little quantitative assessment of the impact of these activities on the project developers’ business.
An econometric analysis would aid both TSOs and NRAs in dealing with economic incentives to raise public awareness and trust. Such an analysis would give greater confidence to regulators for incentivising such activities as they would now have a better understanding of the costs and benefits of various stakeholder engagement activities.
However, any robust econometric analysis requires the identification of the relevant independent and dependent variables. Table 1 summarises some possible variables. In the next section, we discuss these variables further. Indeed, it should be noted that such an evaluation would also entail monitoring of relevant data and use of the highest methodological standards.
Independent variables
The following two possible independent variables to be used as inputs for an econometric analysis are discussed.
Staff and Budget
A firm requires expending of resources to conduct any activity. The resources may be a combination of person-hours that employees dedicate towards the task and the monetary cost incurred over and above the employee costs. The same holds true for stakeholder engagement. This variable can be measured in a disaggregated manner by logging the number of manhours that employees spent on specific stakeholder engagement activities and monetary overheads from such beyond the employee time or in an aggregated way as the total cost to the company of an activity ex-post. In case the company has set a budget ex-ante, this budget too can be considered as the value of the variable
Media reports
The impact of favourable and adverse media reports on the dependent variables used for the analysis has been applied by Henisz et al. (2014)[1] in the context of the gold mining industry. According to the authors, the opinions and actions reported by media may give a better representation of the relationship between the stakeholders and the company compared to a third-party evaluation. Furthermore, media reports would also provide a clear view of how the stakeholders perceive the company.
Dependent variables
In this section, six possible dependent variables are discussed. The dependent variables are further classified based on their relevance to a company or societal benefit.
Company-specific dependent variables
An econometric analysis that is conducted from a firm’s perspective requires dependent variables that measure the impact on the firm’s performance. Such quantification would help the investors and the management while deciding on the allocation of resources for stakeholder engagement activities.
Company stock prices
External investors use several criteria including the stock market value of the company under consideration while making their investment decisions. Thus, an inter-relationship between stakeholder engagement and company stock prices could prove to be an important indicator for project developers. However, this variable would be applicable only to TSOs listed on the stock market. For companies listed on a sustainability index[2], the company’s sustainability index ranking as the proxy for gauging the impact of stakeholder engagement. This variation is applicable for stock-market listed as well as unlisted companies
Brand valuation
A positive impact on brand valuation would be indicative of a positive company perception by the public and vice versa for adverse effects on brand valuation. Brand valuation too can impact the access to finance from external investors as this may form part of the investors’ assessment criteria.
Regulatory asset base
The regulated asset base is a key determining factor for a TSO’s annual revenue and consequently the performance of the firm. An essential element in calculating the value of RAB is the investment in new projects that are to be included. Therefore, RAB can be considered as a dependent variable to assess the impact of stakeholder engagement on the company’s performance.
Societal benefit
An econometric analysis can also be conducted from a regulator’s perspective to evaluate the need for and the level of incentive required to enable stakeholder engagement activities. In such a case, the assessment requires dependent variables that provide insight into societal benefit.
Congestion management costs
A key dependent variable from the societal benefit perspective for assessing the impact of stakeholder engagement is the congestion management cost. When the capacity of the grid to carry electricity is constrained, the TSO is required to carry out congestion management by taking steps such as re-dispatching. The avoided costs of re-dispatching may be a benefit of timely implementation of infrastructure projects.
Project delays
Suboptimal stakeholder engagement by project developers may be a cause for delays in project implementation[4]. Although there is no (publicly available) quantitative data on the matter, it may be cautiously presumed that there are financial and societal costs attached to these delays. Thus, evaluating the impact of stakeholder engagement activities on the timelines for completion of the project is relevant.
Project costs
Any savings that may occur due to a reduction in the project costs is a societal benefit and vice versa. Therefore, the use of project costs as an output for an econometric analysis can provide useful insights about the societal impact of stakeholder engagement activities.
Limitations of the quantification approach
The first limitation is that a statistical correlation is not necessarily indicative of causality. This is due to the presence of what literature refers to as disturbance variables that may not be accounted for in the analysis but have a strong effect on the dependent variable. Secondly, even if the same methodology is applied for conducting the econometric analysis for all TSOs, the results may not be easily comparable. This is because most TSOs operate in different institutional settings. This would reflect several aspects of project development such as project delays and project cost. The third limitation is the difficulty in the monitoring of the data.
Hypothetical example for understanding the utility of quantification
To better understand the utility of this quantification, consider the hypothetical example of a project developer building a transmission line with an estimated cost of € 100 million to alleviate congestion. The project is expected to be commissioned in ’n’ months
An econometric analysis provides a correlation between stakeholder engagement activities and saving in project development time (see Table 2). It can be assumed that cost of the activities increases depending upon the required resources, skills as well as the comprehensiveness of the activity and innovation. Note that any additional stakeholder engagement activity would impact the project cost. The other dependent variables used is congestion management cost. The analysis considers four different scenarios of congestion management costs that are incurred in the absence of the line (see Table 3).
Table 4 provides insight into the change in societal benefit in the four congestion management cost scenarios for the five approaches to stakeholder engagement. Such quantification would give the NRA greater insight while deliberating the trade-off between higher project costs due to stakeholder engagement vis-à-vis improvement in societal benefit.
For a deeper insight into our research on “Enlarging incentive regulation to improve public awareness and trust in electricity transmission infrastructure development”, read the last report!
This essay was originally published as a series of fully referenced blog posts on the FSR website which can be read here.
