‘Standard’ incentive regulation hinders the integration of renewable energy generation

• Published in: Energy policy Vol. 47; pp. 222 - 237
• Main Authors: Nykamp, Stefan, Andor, Mark, Hurink, Johann L.
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.08.2012; Elsevier; Elsevier Science Ltd
• Subjects: Alternative energy; Alternative energy sources; Applied sciences; assets; case studies; Data envelopment analysis; econometric models; Economic data; Electric energy; electricity; Electricity generation; Energy; Energy economics; Energy policy; Exact sciences and technology; General, economic and professional studies; Grid innovation; Incentive regulation; Innovations; markets; Methodology. Modelling; Natural energy; Profitability; renewable energy sources; Renewable resources; Smart grids; Studies; Germany; Incentive regulation; Grid innovation; Smart grids; Performance evaluation; Incentive; Profitability; Electric energy transportation; Energy policy; Return rate; Electric utility; Smart grid; Innovation; Electricity; Renewable energy; Critical study; Stochastic Frontier; Data envelopment analysis; Investment; Firm strategy
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2012.04.061

The connection and distribution of growing, decentralized electricity generation from renewable energy sources (RES-E) is leading to massive investment needs. Besides investing in additional ‘conventional’ assets (e.g. cables), grid operators can also invest in innovative ‘smart solutions’ like local storage capacities or voltage regulation appliances, which may be a more suitable way of integrating RES-E. This paper investigates the influence of incentive regulation on the investment decision of grid operators to integrate RES-E. We describe the technical and regulatory background, explain the advantages of ‘smart solutions’ and present an approach for comparing investment scenarios. As an example, we calculate the profitability of investments in a case study of the German electricity market. We apply Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) to show the influence of the investment alternatives on grid operator efficiency objectives. We demonstrate that under current ‘standard’ incentive regulation, the grid operators gain profitability by avoiding investments and – if they are forced to invest – by not implementing ‘smart solutions’. The results highlight the need to consider innovation in the regulation design. Further research should investigate specific instruments that can be used to account for innovation. Our brief discussion of such instruments provides a starting point. ► We measure the influence of investments on efficiency by applying DEA and SFA. ► We compare the profitability of alternative investments under incentive regulation. ► Incentive regulation gives incentives to refuse investment at all. ► If DSOs are forced to invest, reinforcement is preferable to smart solutions. ► Ways to consider innovation in incentive regulations are required and discussed.