Investing in Smart Grids: Assessing the Influence of Regulatory and Market Factors on Investment Level.

AuthorGwerder, Yvonne Vogt

    Countries around the world are committing to combat the effects of climate change in order to reach a low-carbon future. This effort is demonstrated by the worldwide support of the 2015 Paris Agreement, of which 184 of the 197 Parties invited to the convention have ratified the agreement in their countries (United Nations 2018). Europe in particular has been incredibly focused on these goals, which is highlighted by their aim to become a global market leader in the clean energy transition.

    In 2015, The European Union (EU) set lofty energy goals, pledging to reduce carbon emissions by 40%, increase renewable energy penetration by 27% and increase energy savings by 27% by 2030 (European Commission 2015b). In November of 2016, the European Commission (EC) presented the Clean Energy for all Europeans package, a piece of legislation whose three-fold goals include: increasing energy efficiency, leading in the deployment and integration of renewable energy, and maintaining a fair deal for consumers (European Commission 2016a). Through this package, the EU plans to mobilize both private and public investments to 177 billion euros per year by 2021 (European Commission 2016a).

    Reforming the electricity sector has become a key part of the EU's transition to a clean energy future. Central to this goal is the need to invest in, and upgrade, the electricity grid in order to increase the share of Renewable Energy Sources (RES) from 21% today to 45% by 2030 (European Commission 2015a). Smart grid technology allows for an increased flexibility of distribution grids so that they are able to handle the influx of RES, along with their variable loads, and are a central technology in achieving EU energy goals (European Commission 2006). While this technology addresses many challenges that come with the clean energy transition, cost is a major barrier, and heavy investment is needed (Marques, Bento, and Costa 2014). Tailored regulations can create the framework to incentivize these investments (Cambini et al. 2016; Marques, Bento, and Costa 2014).

    The objective of this study is to assess how market and regulatory factors influence stakeholders' investments in smart grid technology in Europe. We focus on investments by Distribution System Operators (DSOs), universities, and technology manufacturers because they are the leading investors in smart grid projects, with a cumulative 2286 million euros invested since 2002 (Gangale et al. 2017). Furthermore, they represent diverse stakeholder interests, as they each have different structures, goals, and relationships with the electricity sector. In order to fulfil this objective, we first provide an analytical review of existing methodologies in the literature; and then apply a selected methodology to compare a dataset of direct investments by these three groups in the EU-28, Norway, and Switzerland from 2008-2015. The work aims at evaluating the relationship between market mechanisms and investments by DSOs, universities, and technology manufacturers to determine how to best design policies to incentivize smart grid investments.

    The outline of the paper is as follows: Section 2 provides an overview and definition of smart grids, investment trends, and regulatory policies, along with a review of the existing literature on regulation and smart grid investments. This is followed by the chosen methodology and application of data and statistical tests in Section 3. In Section 4 the analysis and discussion of the results is provided, and Section 5 concludes with some policy recommendations.


    The traditional electricity grid is made of a large network connecting generation (power stations), transmission, distribution, retailers, and end users. In order to integrate more RES, the grid will have to be updated to be able to handle increased and variable load, and smart grid technology has the potential to upgrade the traditional grid to achieve just that.

    While there is no one global definition of what a smart grid is, the literature points to the technology as a modernization of the traditional electricity grid (Connor et al. 2014; Elzinga 2015). The International Energy Agency (IEA) defines smart grids as "an electricity network that uses digital and other advanced technologies to monitor and manage the transport of electricity from all generation sources to meet the varying electricity demands of end-users. Smart grids co-ordinate the needs and capabilities of all generators, grid operators, end-users and electricity market stakeholders to operate all parts of the system as efficiently as possible, minimizing costs and environmental impacts while maximizing system reliability, resilience and stability," (Elzinga, D., Heinen 2011,6).

    This definition of the smart grid demonstrates a key shift from the traditional grid in the sense that it stresses the importance of technology in facilitating communication and efficiency to better serve the environment. While the traditional grid has no feedback loops, the smart grid allows for an exchange of information from end users back to the grid operator, allowing for an increase in grid efficiency and access to real time prices (Zame et al. 2017). According to the IEA, smart grid technologies are deployed in all stages of the electricity network and include technology areas such as (but not limited to): information and communication integration, distribution grid management, and advance metering infrastructure (Elzinga, D., Heinen 2011). In order to upgrade to the smart grid, there will be many infrastructure changes, thus, a heavy focus on investment on these technologies is necessary (Marques, Bento, and Costa 2014).

    2.1 Smart Grid Investment in Europe

    The EU has been increasing its focus on smart grids, investing [euro]4.97 billion in 950 projects since 2002 (Joint Research Centre 2018). Due to investment priorities, market-size, and availability of co-funding, there is a wide geographical distribution of investment by different member states (MS): Germany leads with 809 M[euro] invested over 303 projects, followed by the United Kingdom (UK) with 774 M[euro] in 197 projects, and France with 680 M[euro] in 159 projects (Gangale et al. 2017). Investments range from innovative projects to improve the technology, to replacements and upgrades of the physical infrastructure of the grid, to the integration of Information Communications Technology (ICT) infrastructure in distribution (Cambini et al. 2016). According to the Joint Research Center (JRC) database, of the 950 smart grid projects, 540 of them have been Research and Development (R&D) projects and 410 have been Demonstration projects, which fall under the main domains of: smart network management, demand-side management, integration of distributed generation and storage, e-mobility, integration of large scale RES, and others (Joint Research Centre 2018; Gangale et al. 2017).

    Figure 1. presents the investment in smart grid projects per stakeholder category. Of these investors: Distribution System Operators (DSOs) have invested the most with [euro]833 million, followed by universities ([euro]790 million), and technology manufacturers ([euro]663 million) (Joint Research Centre 2018).

    The fact that DSOs are the leading investor-groups in smart grid projects in the EU is quite unsurprising, considering that smart grid technology will directly affect the distribution segment of the electricity industry, and will require massive changes that will influence the role and operations of DSOs (Pereira, da Silva, and Soule 2018). Smart grid technology is important for DSOs because they equip them with the ability to be flexible, which in turn will allow them to keep electricity reliable, affordable, and create more active consumers (Eurelectric, 2014). Universities are also extremely relevant stakeholders because as thought-leaders, their investment interests will fall in line with innovative technologies in their field of study. Smart grids have held a focal interest in the energy space, which explains why universities have invested so much in R&D and demonstration projects in this area. Finally, technology manufacturers have a significant interest in this technology because of the hardware that will need to be developed in order to support smart grids.

    Regulations can create a framework that incentivizes investment in smart grid projects (Marques, Bento, and Costa 2014; Cambini et al. 2016). Nevertheless, the cost is still an important obstacle for the transformation of the current electricity system into a smarter one. Regulation can have an important role in setting up a favorable framework that fosters investments. Thus, it is important to understand what regulations are currently in place in Europe related to smart grid technology.

    2.2 Smart Grid Regulation in Europe

    Because the electricity market is not a traditionally competitive market (only generation and retail are truly competitive, while transmission and distribution are still considered natural monopolies), the regulator holds a very important role in maintaining the balance of these markets. In the EU, each member state is responsible for creating their own energy policy, while the regulator is responsible to create a framework enabling "the integration of new services in the electricity network while apportioning any extra costs in a fair way among stakeholders who benefit from the solutions" (Crispim et al. 2014, 88).

    The EU provided a general policy framework for member-states to follow in terms of smart grid deployment. In 2007, the EU created the Strategic Energy Technology Plan (SET), whose focus was to develop the technologies that Europe needed to achieve their 2020 goals (Crispim et al. 2014). Included in the SET plan is to "enable a single, smart European electricity grid, able to accommodate the massive integration of renewable and decentralized energy sources" (European Commission 2007). In an...

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