Network Regulation under Climate Policy Review

Climate change policy, in particular in Europe, will affect the energy sector through the exposure to massive penetration of distributed energy resources or decentralized generation into electricity distribution and transmission grids. As the prerequisites for infrastructure regulation still prevail in the future, the question arises whether the current regulatory model is still valid. In this paper, we characterize some of the effects of climate change policy on the network tasks, assets and costs and contrast this with the assumptions implicit or explicit in current economic network regulation. The resulting challenge is identified as the change in the direction of higher asymmetry of information and higher capital intensity, combined with ambiguities in terms of task separation. Methodologically, we argue that this may require a mobilization of the literature related to delegated and hierarchical systems, e.g. team performance, as the externalities are joint products from multiple independent stages where individual regulation may introduce distortions. To provide guidance, we present a model of investment provision under regulation between a distribution system operator (DSO) and a potential investor-generation. The results from the model confirm the hypothesis that network regulation should Ond a focal point, should integrate externalities in the performance assessment and should avoid wide delegation of contracting-billing for climate change technologies.