From distribution networks to smart distribution systems : rethinking the regulation of European electricity DSOs (topic 12)

This report was produced as part of the THINK project. Technological advances are reshaping today's electricity markets. More mature technologies for local renewable generation and decreased investment costs thereof, joint with national support schemes, led to a significant market penetration of distributed generation in many EU countries. Not only distributed generation but a newly emerging broad range of distributed energy resources (DER), including local storage, electric vehicles and demand response, are driving or at least allowing for potentially significant changes in the planning and operation of power systems. These changes also pose challenges for the regulation of power systems. Today, some challenges are only a possibility, and might arise once technologies mature and be more widely deployed, as for instance with electric vehicles. Other challenges, foremost related to distributed generation, are already established facts and observable in many EU distribution systems. However, the same technologies that are causing substantial challenges can - with the right regulation and market design - be exploited to establish a more efficient and also cleaner electricity system than our current one. In the light of these changes, this THINK report discusses regulatory implications of changing local electricity markets and to this end sets the focal point on electricity distribution system operators (DSOs) as regulated local entities and local market facilitators. First, we shed light on where the current regulation of DSOs needs updates to allow for welfare-enhancing DER technologies to be adapted efficiently and in a timely fashion. We find that a major challenge is to update regulation such that distribution companies are not negatively affected by the development of DER and are incentivized to foster the integration of viable new technologies into the market. Moreover, we find that updates are needed to provide the right regulatory tools to DSOs such that they can also benefit from the services DER can offer for system operation and planning. Ultimately, the priority task of regulation is not to try to predict what the future will be, but to design DSO incentives that make possible all welfare-enhancing business models under any future market development.