IEEE Power & Energy Magazine - September/October 2016 - 20

Incentives and Innovation

which have the potential to deliver benefits for current
or future consumers; the regulatory regime should not
favor any particular type of technology but should focus on the potential benefits for consumers.

Smart grid investments, mostly in services and technology,
can result in higher operating expenditures (OPEX) but can
also defer the need for acquiring traditional assets. However,
adapting the cost structure of the distribution activity to give
a higher weight to the OPEX component raises two issues:
1) there is often a rate of return paid on capital expenditures
(CAPEX) but not on OPEX, and 2) the payback period for
the smart grid investment may be different due to its shorter
lifespan compared to conventional investment, and this could
lead to a serious time lag until its recovery through tariffs.
The CEER highlights that regulatory incentives are
needed to encourage DSOs to be more innovative and
explore smart and flexible solutions. In this context, some
of the measures to promote smart grids and innovation are
as follows.
✔ reducing the regulated cost recovery period, more
specifically to take into consideration a shorter depreciation period
✔ taking into account the degree of risk in innovative
investments, due to new technology or other factors
✔ creating specific funds or incentives where necessary
to promote the development of innovative investments

Transitioning to DSOs:
The U.K. Perspective
The U.K. Context
There are 14 licensed DNOs in Britain owned by six
different groups: Electricity North West Limited (one area),
Northern Powergrid (two), Scottish and Southern Energy
(two), ScottishPower Energy Networks (two), UK Power
Networks (three), and Western Power Distribution (four).
There are also a number of smaller networks owned and
operated by independent network operators located in areas
covered by the DNOs. These are all regulated by Ofgem.
Thanks to the well-established renewables obligation
mechanism (particularly for medium-to-large-scale generation) and the more recent feed-in tariffs (FITs) (targeted at
small-to-medium-scale generation), the United Kingdom has
seen in the last few years a rapid growth in renewables, significantly reducing the generation from carbon-intensive plants. In

s
Ye

No

Are There Operators Other Than the DSO
That Currently Carry Out the Activity?

Is the Activity Potentially Open to
Competition?
No

Is the Market Sufficiently Developed?

Yes

No

No

Could the Activity be Carried Out by a
Different Entity Than the DSO?

Does the Activity Require
an Active Role in the
Operation of the Distribution Grid?

No

Is There a Special Justification or a Cost-Benefit
Analysis That Provides a Case in Which the
DSO Should Carry Out Such an Activity?

Yes

Activity Allowed
Under Conditions

No

Yes

Yes
Core Regulated
DSO Activity

Competitive,
Non-DSO Activity

Are There Compelling Reasons to Review the Outcome?

figure 3. CEER's conceptual framework to determine the tasks a DSO of the future might carry out.
20

ieee power & energy magazine

september/october 2016



Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - September/October 2016

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