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MITei’s eight low-carbon
energy centers (Image
courtesy of MIT Energy
Initiative) buted resources and enable significant cost sa- investments and novel operational expenditures (in-
vings. cluding payments to distributed resources).
• Granularity matters. The value or cost of electricity • Outcome-based performance incentives can re-
services can vary significantly at different times and ward utilities for improvements in quality of service,
at different locations in electricity networks. Progres- such as enhanced resiliency, reduced distribution
sively improving the temporal and locational granula- losses, and improved interconnection times.
rity of prices and charges for these services can deli-
ver increased social welfare. However, these benefits • Incentives for longer-term innovation are needed to
must be balanced against the costs, complexity, and accelerate investment in applied R&D and demon-
potential equity concerns of implementation. stration projects and learning about the capabilities
of novel technologies and practices that may have
• Care must be taken to minimize distortions from higher risk or longer-term payback periods.
charges that are designed to collect taxes, recover
the costs of public policies (such as efficiency pro-
grams, heating assistance, subsidies for renewable The structure of the electricity industry should be ca-
energy, cross-subsidies between different categori- refully reevaluated to minimize potential conflicts of
es of customers etc.), and recover residual network interest.
costs (i.e., those network costs that are not recove-
red via cost-reflective charges). • Network providers, system operators, and market
platforms constitute the critical functions that sit at
• Policy makers and regulators must be wary of the the center of all transactions in electricity markets.
possibility of societally inefficient “grid defection” if Properly assigning responsibilities for these core fun-
residual network costs and policy charges become ctions is thus critical to an efficient, well-functioning
too high. This may suggest an upper limit on the por- electricity sector. It is also critical to establish a level
tion of these costs that can be collected in electrici- playing field for the competitive provision of electrici-
ty tariffs rather than through broader taxes or other ty services by traditional generators, network provi-
means. ders, and distributed energy resources.

• As experience with restructuring in the bulk po-
The regulation of distribution utilities must be impro- wer system has demonstrated, structural reform
ved to enable the development of more efficient di- that establishes financial independence between di-
stribution utility business models. stribution system operation and planning functions
and competitive market activities would be prefera-
• Forward-looking, multi-year revenue trajectories ble from the perspective of economic efficiency and
with profit-sharing mechanisms can reward distribu- would facilitate more light-handed regulation.
tion utilities for cost-saving investments and opera-
tions, aligning utilities’ business incentives with the • If financial independence is not established, seve-
continual pursuit of novel solutions. ral additional measures are critical to prevent con-
flicts of interest and abuses of market power. These
• Several “state of the art” regulatory tools, inclu- include: stricter regulatory oversight of distribution
ding an incentive-compatible menu of contracts, an network planning and operation; legal unbundling
engineering-based reference network model, and and functional restrictions on information exchange
automatic adjustment factors to account for forecast and coordination between distribution system ope-
errors, can better equip regulators for an evolving rators and competitive subsidiaries; and transparent
and uncertain electricity landscape. mechanisms for the provision of distribution system
services (such as public tenders or auctions).
• Equalizing financial incentives related to capital
and operational expenditures can free utilities to • Maintaining a data hub or data exchange may
pursue cost-effective combinations of conventional constitute a fourth critical function. Such a hub or

46 Impiantistica Italiana - Gennaio- Febbraio 2018