The Policy of Delivering Electricity

Policymakers, spurred by the use of widespread electrification to achieve low carbon economies, have used varying policy approaches to bring about a more digitized, decentralized, and decarbonized grid. Bringing about a cleaner and smarter electrical system can involve increased engagement and participation of customers in the electricity sector, deployment of new communication technologies, and development of more electricity systems that are increasingly reliant on renewable resources and energy efficiency. Examples of these changes include the generation of electricity from sources such as solar and wind, new electric mobility options, and extensive deployment of smart meters. There are myriad ways in which the electric grid can be upgraded; however, there is a general consensus among policymakers that policy and regulatory reforms to facilitate these improvements will involve electricity distribution system operators.

A recent study by Guillermo Ivan Pereira and colleagues published in the journal Energy Policy evaluates the roles of market, regulatory, investment, and firm-level factors in the transformation of the European Union’s electricity distribution system operators. The authors of the study analyzed data of 124 distribution system operators, collected through a questionnaire distributed to nearly 2,400 firms across the European Union. This questionnaire measured electricity distribution system transformation using 18 survey items related to a firm’s ability to respond to change generally, and to adapt to electricity-distribution-system-specific changes in regulation, technology, and operations. The analysis showed statistical associations between market, policy, investment, and firm-level factors and distribution system operator adaptation; analysis did not focus on causal impacts of specific policy measures on distribution system operators.

The study’s findings offer policymakers with several key insights that can help them incentivize the movement towards a smarter, more decarbonized electric grid. The European Union’s policy of strongly discouraging system operators from owning generation, storage, and electric vehicle charging assets may dispirit operators’ innovation and adaptation. However, this policy does not seem to have this expected effect in practice. Moreover, market concentration of distribution system operators, determined by the number of firms delivering a certain percentage of the total electricity in a market, showed no significant association with distribution system operator innovation and adaptation. Therefore, there is no apparent need on the part of policymakers to focus on fundamental market structure issues. In contrast, system operator size—as measured by number of customers—does significantly impact system operator adaptation. The authors find that larger firms are generally better able to adapt to a changing electricity sector. This finding should give policymakers pause before pursuing changes that would break up large distribution system operators into more local systems.

The impacts of potential regulatory policy frameworks are also discussed in the study. Contrary to expectations, the study finds no significant relationship between regulatory models providing dedicated innovation supports, such as increased authorized rate of return on smart grid investments, and investment and innovation outcomes. However, the results do show that hybrid regulatory models that combine the financial discipline of cost-based with incentive-based regulations are associated with distribution system operator adaptation. Such models thus contribute towards business model, organizational, and technological adaptation. Furthermore, the data shows that a greater level of investment in smart grids also contributes to better adaptation in these three areas. This finding strengthens the notion of the effectiveness of devoting funds towards research and development of smart grid technologies.

Facilitating the adaptation and transformation of electricity delivery systems and the entities operating them is critical to the success of decarbonization and modernization strategies that envision dramatic energy system transitions. It is, therefore, important for policymakers to understand what policies may promote or hinder electricity system operators from transitioning into and adapting to modern energy systems. The results of Pereira et al.’s study suggest that the fundamental structure of electricity generation markets should not be a major concern when considering the ability of firms to evolve and adapt. Instead, policymakers should concentrate on deciding whether the existing regulatory models are appropriate to a changing market scenario, and reassess the need for legislative policy to facilitate research, development, and demonstration investments. Finally, the authors specifically suggest that bigger may be better when it comes to integrating each of the various decarbonization measures available into a reliable energy delivery system.

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Pereira, Guillermo Ivan, Patrícia Pereira da Silva, and Pedro André Cerqueira. 2020. “Electricity distribution incumbents’ adaptation toward decarbonized and smarter grids: Evidence on the role market, regulatory, investment, and firm-level factors.” Energy Policy 142. https://doi.org/10.1016/j.enpol.2020.111477.