Innovation, incentives and integration in Europe’s energy market

The new energy market development requires innovation incentives for distribution systems operators, writes Hans ten Berge


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Hans ten Berge

Innovation is vital to European competitiveness in the global economy.

A successful low-carbon energy transition depends on new technology, creative business models and innovation moving forward.

Distribution systems operators (DSOs) will face many challenges when large-scale distributed generation will be integrated, with high numbers of electric vehicles (EVs) connected to the grid and prosumers interacting in the market. More active grids will require a more advanced monitoring and management of the grid, for which innovation technologies are needed.

In the future evolution of energy networks towards a smarter grid concept, DSOs must play an active co-ordinating role between all market participants, facilitating markets and services in a neutral and non-discriminatory manner.

DSOs will have to position themselves in both existing and emerging fields, notably data handling, flexibility and storage, while respecting market signals and priorities and without interfering with them.

The growth of distributed generation presents a challenge for DSOs, especially as it affects their ability to maintain and upgrade their grid infrastructure. According to the European Commission, 95 per cent of renewable energy sources are connected to DSO grids and revenue allowances from regulated activities in the distribution sector are in the order of €62 billion ($64 billion) per year Europe-wide. To keep up the pace, €400 billion worth of distribution network investment will be needed by 2020 in Europe.

Investment in smart grid technology – such as smart metering, integration of decentralized renewables and Demand Side Management/Response – will allow DSOs to become central platforms for the energy transition by connecting active consumers, renewables and flexibility sources. However, it is important to highlight that these investments imply a revised asset base, operating costs and revised business models.

Regulatory incentives

In 2016, EURELECTRIC conducted a survey among 20 Member States to show the status of regulatory incentives for innovation in Europe. The survey showed that regulators in 11 out of 20 countries do not offer any specific mechanism to incentivize innovation. Moreover, incentives for operational expenditure (OPEX)-related innovation are only implemented in four out of 20 countries. When asked if the regulatory framework fosters or hampers innovation, half of the surveyed countries mentioned that the regulatory framework rather hampers innovation.

The conclusion of the report was that there is a clear positive correlation between regulatory mechanisms and innovation incentives. In cases where the regulatory framework treats costs for innovation/research & development like any other costs, the system hampers innovation.

DSOs play a key role in implementing innovative ideas to improve the functioning of electricity distribution networks with the ultimate goal of benefiting customers. Because DSOs are natural monopolies and regulated businesses, they have to develop innovative concepts under a certain regulatory framework that incentivizes them.

To encourage the development of innovative DSOs, the European Union needs a co-ordinated innovation strategy together with wider co-ordination between Member States.

To foster smart grid innovation and transition towards a new DSO business model, the European Commission should create a robust legislative framework that recognizes the need for innovation incentives, while leaving the specific design to national regulatory authorities.

To achieve an efficient development of the distribution grids, companies will have to invest in both conventional and innovative technologies. In this context, most DSOs have to change their business models and internal processes in order to implement innovative solutions and technologies, to help the transition to the new energy market.

Policymakers should encourage national regulatory authorities (NRAs) to give DSOs appropriate incentives to implement the necessary innovative initiatives. Meanwhile, it is important that NRAs monitor whether DSOs achieve scheduled goals.

The implementation of innovation incentives should also target the reduction of financial risk for DSOs while increasing their participation in pilot research & development (R&D) projects and innovative programmes.

Innovation investments for smart grids are hard to predict before the establishment of a regulatory period. Moreover, they depend highly on the regulatory scheme, which is constantly evolving. A lot of R&D and innovative projects have to be conducted and, finally, only a few of these technologies will evolve from the pilot stage to commercial use on the market.

In order to help DSOs innovate, the implemented specific regulatory mechanisms should be predictable and stable in the outcome. Regulation that efficiently incentivizes DSOs to engage in active system management has to consider the changing OPEX and capital expense (CAPEX) structures, acknowledging the shift from a higher share of CAPEX to OPEX in the deployment of new innovative network technologies.

On top of this, regulation has to find the optimal balance between using distributed generation and building new infrastructure, and how to incentivize DSOs to be innovative and find solutions (e.g., for ICT, data handling, but also system services) in-house or by outsourcing.

As the discussion on the role of the DSO in the future gains momentum, it is important to provide DSOs with an updated toolbox with which it can integrate new technologies and operate under smart(er) grid-oriented regulatory frameworks.

Innovation-oriented policies can motivate DSOs to be actively engaged in the shift towards smarter and sustainable network management, whilst ensuring the security and high quality of the distribution service. Therefore, fostering innovation at the DSO level remains an essential strategy which needs to be pursued in due course.

Hans ten Berge was Secretary General of European electricity industry association EURELECTRIC for ten years. At the beginning of January he stepped down and was succeeded by Kristian Ruby, who was previously Chief Policy Officer for WindEurope.

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