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Greater than the sum: On regulating innovation in electricity distribution networks with externalities

Vítor Marquesa, Paulo Moisés Costa, Nuno Bento

Utilities Policy

To modernize distribution networks and enable the energy transition, we need to understand the most appropriate regulatory approach. A set of new technologies with positive externalities challenge the traditional regulatory models. We develop a decision model to assess firms' incentives to invest in new technologies under different regulatory schemes that consider externality effects. Results show that regulatory schemes under which companies retain the gains (or losses) of achieving (or not) efficiency targets more effectively promote innovation investments that reduce network costs. However, a case-by-case approach should be preferred for technologies whose benefits go mostly beyond the network activities.

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