The Impact of Regulation on a Firm’s Incentives to Invest in Emergent Smart Grid Technologies

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 face many uncertainties.

Investing in Smart Grids: Assessing the Influence of Regulatory and Market Factors on Investment Level

“…Finally, the UK, which is the largest investor in smart grid projects after Germany, serves as another exemplary case. Since 2015, the UK has implemented the RIIO, a dynamic holistic approach that determined revenue based on innovations, performance based incentives and related outputs (Revenue = Innovations + Incentives + Outputs), which has served a strong incentive towards investing in smart grid projects (Costa, Bento, and Marques 2017;Connor et al 2014). These are just a few examples of how countries have taken advantage of innovation-based incentives to encourage the development of smart grid projects.…”

“…Finally, Costa, Bento, and Marques (2017) demonstrate how different regulations change a firm's interest to invest in smart grid technology, by developing a theoretical investment model evaluating incentives for a firm to invest in projects that have the potential to reduce both OPEX and CAPEX (such as in the case of smart grid technologies). Their model indicates that investment in smart grid technology is more attractive with incentives that put risk-premiums on the technology and increases on expenditures that accrue to the Regulated Asset Base (RAB), while investors will react negatively when cost-saving is passed to the consumer; and, that uncertainties in smart grid technology lead to lower investment opportunities because of increased financial risks.…”

“…Their model indicates that investment in smart grid technology is more attractive with incentives that put risk-premiums on the technology and increases on expenditures that accrue to the Regulated Asset Base (RAB), while investors will react negatively when cost-saving is passed to the consumer; and, that uncertainties in smart grid technology lead to lower investment opportunities because of increased financial risks. Furthermore, the authors found that a project becomes a more attractive investment as the duration of the time period between regulatory revisions increases, "as less frequent revisions lower the firm's risks of losing the gains realized with investments in cost reduction" (Costa, Bento, and Marques 2017).…”

Regulation, Innovation, and Systems Integration: Evidence from the EU

“…Focusing on economic efficiency can reduce R&D and innovation investments, as they carry risks [31,32]. To promote them, the regulator can provide firms with specific incentives [33].…”

Optimal Procurement of Distributed Energy Resources

“…11 Our study is not the first to analyze the design of regulatory policy to promote efficient network improvements, potentially including DER projects. 12 Costa et al (2017), for example, document a utility's reluctance to undertake investments that do not expand its rate base in the presence of a generous allowed rate of return on the authorized rate base. We abstract from different rate-base treatments of investment in order to focus on the difficulties created by asymmetric information about likely project costs and the efficacy of the utility's cost-containment efforts.…”