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Innovation in regulated electricity networks: Incentivising tasks with highly uncertain outcomes
, Article Competition and Regulation in Network Industries ; Volume 21, Issue 2 , 2020 , Pages 166-192 ; Peng, D ; Mirnezami, S. R ; Sharif University of Technology
SAGE Publications Ltd
2020
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...