GEODE lists revenue regulation principles for DSOs to enable grid investments

Revenue regulation principles that should enable investments in the development of the next generation of European local electricity grids are presented in a new paper by GEODE.

The paper points to the need, with the integration of renewables and electrification as the most important drivers for distribution grid investments, for revenue regulation to ensure the necessary cash flow for these as well as the financial incentives for owning and operating a DSO.

As DSOs also need a long-term planning horizon and reliable economic framework conditions for their investments, revenue regulation also must ensure those investments are sufficient to serve customers’ needs and at the same time drive for efficiencies in networks to ensure the grid costs are justified.

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GEODE recommends seven principles for revenue regulation in its paper.

1. Long time predictability. Operating an electricity grid is a long-term commitment and as such, regulation must be long term in order to facilitate the most efficient long-term developments of the grid while at the same time there should be flexibility within the regulatory period to adapt quickly to unforeseen changes.

2. Anticipatory investments. DSOs must be incentivised to implement anticipatory investments in-line with their network development plans, looking beyond immediate needs and addressing expected developments with sufficient certainty.

3. Sufficient cash flow. DSOs’ cash flow must be sufficient to allow them to handle investment peaks created by current electrification trends.

4. Competitive weighted average cost of capital (WACC). The WACC set must give a reasonable rate of return on investments, be competitive in comparison to other similar investments and give compensation for relevant risks.

5. Balanced incentives between capital and operational expenditures. The most efficient solution for customers must be rewarded.

6. Promote efficient operation while safeguarding consumer interest. Efficiency must be rewarded in a fair and transparent way but at the same time it’s important to maintain a balance to ensure efficiency goals do not hamper improvements that would increase customer satisfaction, such as digitalisation and security.

7. Incentivise innovation. DSOa ahouls be able to adopt new technologies and new smart solutions in the years to come so R&D projects and innovation pilots must be incentivised.

GEODE states in the paper that revenue regulation differs a lot across Europe, with some national DSO revenue regulations being more focused than others in incentivising DSOs’ investments, which are crucial for the energy transition.

The principles presented have proven to create a strong foundation for grid investments and other development features such as digitalisation and high security standards, all of them intended to serve customers’ needs.