Abstract
The regulation of electricity distribution networks faces new challenges, as consumer preferences for network services change, distributed energy resources are connected in increasing number, and advanced information and communication technologies become ubiquitous. This work discusses how, within this new context, national regulatory authorities in Great Britain and Italy already employ advanced regulatory instruments for establishing firms’ allowed revenues under technological and demand uncertainty. Identified areas of improvement are then addressed via the proposal of an original regulatory approach. This builds on elements from practice and academia and formulates the ex-post regulatory estimate of efficient total expenditures in a modular manner. As illustrated with an example and thoroughly discussed in the paper, this approach preserves the desirable features of the existing mechanisms and adds to them in several ways. The main contribution regards the efficient treatment of benchmark errors, which occur when regulators fail to anticipate the emergence of a new cost saving technology or network management practice. Providing incentives for cost efficiency while granting firms the freedom to innovate is, indeed, crucial at a time when, as described by EU Directive 2019/944, the complexity of the tasks carried out by distribution operators continues to increase.
Highlights
Technological innovations, often driven by de-carbonization pol icies, are transforming the way electricity distribution networks are operated and utilized (Burger et al, 2019)
Anecdotical evidence shows that two national regulatory authorities, OFGEM in the UK and ARERA in Italy, have already responded to the new challenges, by adopting advanced regulatory instruments, and introducing specific incentives for innovation
The methodology for establishing the allowed revenues of electricity distribution networks proposed in this work builds on the observed experience, i.e., it is designed to respond to the traditional regulatory challenges linked to information asymmetry
Summary
Technological innovations, often driven by de-carbonization pol icies, are transforming the way electricity distribution networks are operated and utilized (Burger et al, 2019). The integration of Information and Communication Technologies (ICTs) into more traditional activities of the electricity sector modifies the way networks are operated in real-time, making distribution grids increasingly similar to transmission grids. The number and amplitude of these changes is so large that the EU Parliament has recently redefined the tasks of distribution system op erators – Articles 31 to 39 in the EU Directive 2019/944 (EU, 2019a). A rather large number of studies has looked at the problem of designing efficient distribution tariffs in this new context (Perez-Arriaga and Bharatkumar, 2014; Nijhuis et al, 2017; Abdelmotteleb et al, 2018; Azarova et al, 2018; Brown and Sappington, 2018; Pollitt, 2018; Schittekatte et al, 2018; Küfeoglu and Pollitt, 2019)
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