Innovation in regulated electricity networks: Incentivising tasks with highly uncertain outcomes

Abstract

Traditional regulatory models of natural monopoly network utilities are designed to incentivise cost-efficiency, subject to the firm achieving a certain level of reliability. With the rise of decarbonisation as a key policy goal, facilitating innovation in electricity networks has become of vital importance. Innovation and cost-efficiency may overlap and exhibit the same risk profile. However, we show that when there is a difference in their risk profile, incentivising these two tasks using the same incentive scheme is ineffective. This means incentive regulations need to be enhanced with additional modules that take into account the level of risk to which companies are exposed to for their stage of innovation activity. We also demonstrate that the issue of risk can distort the outcome of a competitive scheme for allocating innovation funds when bidders are heterogeneous in their risk attitude and there is uncertainty about recovering initial investments needed to prepare the project proposal. Thus, competitive schemes need to be designed such that they factor in risk attitude heterogeneity among bidders.

The participation of small-scale variable distributed renewable energy sources to the balancing services market

“…Despite the great attention to the topic and the political commitment in pursuing new markets to integrate renewables, still a coordinated and effective regulation lacks ( [21]). In this sense, main issues are related to how to regulate the sector in presence of high innovation and high uncertainty ( [22]). The network needs to be upgraded with new investments that can reduce uncertainties and foster small producers' participation, increasing competition level ([23]).…”

A Data-Driven Analysis on Sustainable Energy Security

“…In addition, the strategies should be constructed on actual objectives, clear time-frame and framework for accurate assessment (Adelaja, 2020). Despite the inordinate courtesy, the politically aware dedication in engage in new assimilate renewables markets lacks of effective and coordinated regulation (Poudineh et al, 2020). Main issues are how existing policy deal with high uncertainty and high innovation.…”

“…Inherent uncertainty is a vital factor of decision-making process, especially at the personal efficacy investment level such as system planning and policy establishment. Thus, how to legalize the RE security in high modernization and high uncertainty is urgent (Poudineh et al, 2020). The future study can focus on tariffs design and regulating the new and old representatives, particularly for system aggregators and operators (Cambini and Soroush, 2019).…”

OPEX-risk as a source of CAPEX-bias in monopoly regulation

“…To the best of our knowledge, this has not been covered in the literature so far. Only Poudineh et al (2020) point out that innovative activities face higher risks than conventional network activities. For risk-averse companies, the higher risk profile requires a move away from types of regulation, which allocate a large part of the risk to the company (such as pure efficiency-oriented incentive regulation).…”

“…Although not explicitly done, supposedly, their approach nicely fits into a CAPEX-OPEX-setting and, thus, can be reformulated such that the CAPEX-bias results. A driver of the result in Poudineh et al (2020) is the assumption of risk-averseness, whereas in our approach below, which is very different as such, we rely on risk-neutrality.…”