Innovation in regulated electricity networks: Incentivising tasks with highly uncertain outcomes

Rahmatallah Poudineh, Donna Peng and Seyed Reza Mirnezami
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Rahmatallah Poudineh: Oxford Institute for Energy Studies, UK
Donna Peng: Oxford Institute for Energy Studies, UK
Seyed Reza Mirnezami: Sharif University of Technology, Iran

Competition and Regulation in Network Industries, 2020, vol. 21, issue 2, 166-192

Abstract: Traditional regulatory models of natural monopoly network utilities are designed to incentivise cost-efficiency, subject to the firm achieving a certain level of reliability. With the rise of decarbonisation as a key policy goal, facilitating innovation in electricity networks has become of vital importance. Innovation and cost-efficiency may overlap and exhibit the same risk profile. However, we show that when there is a difference in their risk profile, incentivising these two tasks using the same incentive scheme is ineffective. This means incentive regulations need to be enhanced with additional modules that take into account the level of risk to which companies are exposed to for their stage of innovation activity. We also demonstrate that the issue of risk can distort the outcome of a competitive scheme for allocating innovation funds when bidders are heterogeneous in their risk attitude and there is uncertainty about recovering initial investments needed to prepare the project proposal. Thus, competitive schemes need to be designed such that they factor in risk attitude heterogeneity among bidders.

Keywords: Electricity networks; economic regulation; cost-efficiency incentive; innovation incentive; innovation regulation (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:crnind:v:21:y:2020:i:2:p:166-192

DOI: 10.1177/1783591720906582

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