Abstract
This paper analyzes the implementation of new technologies in network industries through the development of a suitable regulatory scheme. The analysis focuses on Smart Grid (SG) technologies which, among others benefits, could save operational costs and reduce the need for further conventional investments in the grid. In spite of the benefits that may result from their implementation, the adoption of SGs by network operators can be hampered by the uncertainties surrounding actual performances. A decision model has been developed to assess the firms’ incentives to invest in “smart” technologies under different regulatory schemes. The model also enables testing the impact of uncertainties on the reduction of operational costs, and of conventional investments. Under certain circumstances, it may be justified to support the development and early deployment of emerging innovations that have a high potential to ameliorate the efficiency of the electricity system, but whose adoption faces many uncertainties.
Highlights
The adoption of innovations in energy network industries, a historically conservative business performed in a monopoly environment, can be hindered by the technological risk associated to new technologies
This paper aims to contribute to understanding the factors that affect investment in new technologies in regulated network industries
A decision model is developed to assess the economic incentives of the investment in Smart Grid (SG) projects
Summary
The adoption of innovations in energy network industries, a historically conservative business performed in a monopoly environment, can be hindered by the technological risk associated to new technologies. The performance indicators that monitor and reward system’s operators for reliability of service are likely to evolve to grasp the new constraints of the system (e.g. higher share of distributed generation) (Cossent, 2013) This creates more uncertainties for the regulated firm in terms of the evolution of costs and revenues in the future. The first results show that the scheme was unable to increase investment in such assets and reveal the difficulty of balancing more stringent efficiency requirements in order to incentivize network investments with practical obstacles faced when implementing SGs. Thirdly, the complexity of smart technologies requires the coordination of the decisions of many actors and the internalization of potential benefits (i.e. externalities) for the electricity system. 10 The opposite effect (i.e. excess of momentum) can happen when the private incentives for technological change are higher than social incentives and the transition to the new standard is made too rapidly that creates stranded costs associated with the older infrastructure (Farrell and Saloner, 1986)
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