Locational signals to reduce network investments in smart distribution grids: What works and what not?

Locational pricing can reduce the investment needs arising in distribution networks from the transformation towards smart grids with high shares of renewable generation. We analyse different approaches. Locational signals in a general tariff plan for either energy or network pricing require substantial system reform which impedes feasibility. We propose smart contracts with locational elements as hybrid form. System reform is only modest since contractual solutions emerge in smart grids anyhow. The responsibility for tariff setting stays with the network operator. The regulator's task is limited to incentivizing efficient network investment and allowing network operators maximum flexibility in contract design. (C) 2011 Elsevier Ltd. All rights reserved.