Incentivising Network Innovation


Electrification creates a growing challenge for power network companies in serving their customers reliably. The requirement to provide service at lowest cost necessitates consideration of alternative solutions to traditional network capacity expansion. However, remuneration of network companies typically not only lacks incentives to adopt these innovative solutions but leads them to disregard these options. Reform to eliminate capital expenditure bias (CAPEX-bias) and introduce performance-based regulation (PBR) will help align the interests of these companies with delivering the energy transition at least cost.


Establishing innovative network companies


Remove CAPEX-bias and introduce PBR


National regulatory authorities



The use of flexibility offered by network users is key to reliable and cost-efficient network operation. It is not enough, however, to require network companies to fully consider demand-side resources (demand response and energy efficiency) and storage in network planning and operation as set out in the Electricity Directive. If they are not incentivised to move away from a copper-solutions-only approach, change is unlikely to materialise. It is the task of the national regulator to reform the current remuneration regimes to that end. Potential regulatory reforms include:

Allowing for revenue-capped cost recovery based on total expenditure rather than applying a rate of return regulation on capital investments and a revenue cap on operational expenditures (hybrid remuneration schemes).

Rewarding distribution system and transmission system operators (DSOs/TSOs) with increased revenues for specific performance outputs that facilitate the energy transition and, conversely, penalising them with reduced revenues for failure to perform (PBR).

Although some trends are clearly identifiable in the current power system transformation, many technology and price developments are not yet foreseeable, especially not by the regulator. Performance-based regulations are not only agnostic about the way network companies deliver the outputs but can alleviate the problem that network companies may underestimate the value of delayed investments and the reduced risk of stranded assets because, as they are regulated, these costs are passed through to consumers.

This is the direct application of the Energy Efficiency First principle as it requires and incentivises the use of demand-side resources whenever they are at lowest cost or provide larger net benefits to society. By enlarging the pool of options, it drives down the cost of network service.


Peak load will increase with every additional new EV and heat pump.

The Reality

The smart integration of new (and old) load via time-differentiated tariffs can decouple load increase from overall increase in electricity consumption due to electrification. In case network capacity needs to be extended, network owners need to receive smart incentives to invest into additional capacity at the right time and in the right amount.


Decoupling revenues from kWh distributed is sufficient.

The Reality

Most electricity DSOs in Europe have an ex ante revenue cap, so their revenue is decoupled from the kWhs they distribute. This leaves untouched, however, the revenue-earning advantage of capital investment (agreed rate of return) and provides no incentive to try innovative alternatives with higher (perceived) risk. Similar revenue-earning capabilities are essential for creating a level playing field for OPEX-heavy, smart solutions.

Good Practice Case Study

It was in expectation of increasing grid investment and the availability of smart grid solutions that the UK regulator replaced existing network company remuneration schemes during 2010-2013 with RIIO (Revenue = Incentives + Innovation + Outputs), an incentive regime based on total expenditures (TOTEX-based). RIIO is an output-based incentive system. Network companies are expected to achieve agreed-upon primary outputs and secondary deliverables. They submit and justify their business plans and adjacent revenue requirements in relation to these outputs. The six key output categories are safety, environmental impact, customer satisfaction, social obligations, connections and reliability/availability. Some of these outputs are only monitored, but others have financial consequences: failing to reach the predefined target results in penalties. The price control regime of RIIO is coupled with innovation schemes (Network Innovation Allowance and Network Innovation Competition) to fund investment in innovative solutions. All electricity distribution companies continue to perform strongly against output targets and are on track to meet or exceed these by the end of RIIO-ED1.

The objectives of Hawaii’s transition

GoalPriority Outcomes
Enhance Customer ExperienceCOS RegulationAffordability
Performance RegulationInterconnection Experience
Customer Engagement
Improve Utility PerformanceCOSCost Control
Performance RegulationDER Asset Effectiveness
Grid Investment Efficiency
Advance Societal OutcomesCOS RegulationCapital Formation
Customer Equity
Performance RegulationGHG Reduction
Electrification of Transportation

Key Recommendations


Email us at: [email protected]

Welcome to the Power System Blueprint!

Climate neutrality requires the full decarbonisation of the power sector. As this is one of Europe’s biggest challenges today, there is a need for speed.

The Power System Blueprint lays out how to design the regulatory context to achieve a clean, reliable, equitable and affordable European power system by 2035. The Regulatory Assistance Project (RAP) pulled together the latest insights to support regulators, NGOs, governments and anyone pursuing a decarbonised European power system.

Quick guide on how to use this website:

  • The Blueprint is a schematic of regulatory solutions linked to six important central principles.
  • In the suite of regulatory solutions (also known as factsheets), you will find comprehensive information, the most important regulatory steps and further reading.
  • You can systematically work through the whole Blueprint, only select specific solutions or start from one of the eight main barriers (see barriers menu at the bottom of the homepage). Choose your own path!

You can start exploring the Blueprint right away or read more about the context.