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

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.

The Smart Paradox : Stimulate the deployment of Smart grids with effective regulatory instruments

The concept of SG (Smart Grids) encompasses a set of technologies that raise the intelligence of the electrical networks, such as smart meters or instruments of communication, sensing and auto-correction of networks. Nevertheless, the cost is still an important obstacle for the transformation of the current electricity system into a smarter one. Regulation can have an important role in setting up a favorable framework that fosters investments. However, the novelty with SG is the disembodied character of the technology, which may change the incentives of the regulated network companies to invest, affecting the effectiveness of the regulatory instruments (“cost plus” or “price cap”). This paper demonstrates that the solution to this “Smart” paradox requires strong incentive regulation mechanisms able to stimulate the adoption of SG technologies. Moreover, the regulation should not jeopardize conventional investments that are unable to be substituted by SG. Thus, a combination of performance regulation and efficiency obligations may be necessary.