Regulating electricity distribution networks under technological and demand uncertainty

The regulation of electricity distribution networks faces new challenges, as consumer preferences for network services change, distributed energy resources are connected in increasing number, and advanced information and communication technologies become ubiquitous. This work discusses how, within this new context, national regulatory authorities in Great Britain and Italy already employ advanced regulatory instruments for establishing firms' allowed revenues under technological and demand uncertainty. Identified areas of improvement are then addressed via the proposal of an original regulatory approach. This builds on elements from practice and academia and formulates the ex-post regulatory estimate of efficient total expenditures in a modular manner. As illustrated with an example and thoroughly discussed in the paper, this approach preserves the desirable features of the existing mechanisms and adds to them in several ways. The main contribution regards the efficient treatment of benchmark errors, which occur when regulators fail to anticipate the emergence of a new cost saving technology or network management practice. Providing incentives for cost efficiency while granting firms the freedom to innovate is, indeed, crucial at a time when, as described by EU Directive 2019/944, the complexity of the tasks carried out by distribution operators continues to increase.

Automated summary

This paper discusses how national regulatory authorities in Great Britain and Italy use advanced regulatory instruments to determine firms' allowed revenues under technological and demand uncertainty, and proposes a more efficient regulatory approach that focuses on addressing benchmark errors while encouraging cost efficiency and innovation.