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The impact of the different components of the regulatory framework on innovation is evaluated in a new paper by the DSO Entity’s task force in investment funding and finance.
The aim of the paper is to facilitate the innovation required to deliver long-term efficient grids that deliver for consumers while delivering affordable and competitive bills to support the European industry, it states.
In addition to including anticipatory investment to ensure a long-term view of the investments, it will be crucial that regulatory frameworks facilitate innovation.
Innovation will allow DSOs to obtain more efficient solutions and adapt its grids to future consumers’ needs. However, innovation comes with additional risks in terms of costs and outputs and therefore it is important to ensure that the regulatory framework does not hinder such innovation.
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To address the issue – which complements an earlier review of anticipatory investments – the paper ‘Innovation for regulated companies’ addresses three main components of the regulatory framework that are expected to provide stronger incentives for innovation – being predictable, supportive and providing stability for long term investments.
In practice this means that regulatory frameworks should be aimed at aligning the companies’ financial and operational interests with public and policy goals.
They also should avoid biases between different types of costs (e.g. opex and capex), technologies (i.e. be technologically neutral) and forecast horizon (i.e. use an anticipatory investment approach).
Considering the effect of both implicit and explicit mechanisms on innovation incentives, the paper recommends as a principle that they should be considered jointly in the development of a regulatory framework.
The effect of the regulatory framework in innovation will be the result of the combination of all its components. Therefore, the introduction of explicit incentives will only deliver innovation if they are supported by the implicit incentives contained in the regulatory framework.
Other principles are that totex regulation can create a better environment for innovation, with its effectiveness depending on the degree of implementation and the evaluation of the overall effect of different implementations can have, that output based regulation should complement the overall revenue framework to facilitate innovation and that benefit sharing mechanisms, totex and outputs should be carefully introduced to ensure the removal of potential regulatory biases.
Lastly, there also should be a European focus on regulation to support the delivery of the necessary innovation required for the energy transition.
Innovation being a fundamental driver to deliver an efficient energy transition could support a more active role of the European Union in the promotion of regulatory frameworks to support that innovation, the paper concludes.
Originally published on Enlit World.
