Changing the Regulation for Regulating the Change: Innovation ‐ Driven Regulatory Developments in Italy: Smart Grids, Smart Metering and E‐Mobility

Abstract

For a long time considered as technologically mature, electric systems are now facing a period of rapid changes. The advent of smart grids, smart meters and electromobility is creating new challenges not only in terms of technological innovation but also in terms of economic and technical regulation. This paper focuses on the latter and, taking Italy as a case study, analyses how energy regulation can change to embrace and to stimulate innovation in power systems and electricity markets.

Accordingly, we describe the most relevant and recent regulatory decisions on technical innovation, keeping the focus on the regulatory process. Indeed, the Italian case is interesting for a number of reasons, that go beyond its well-known leadership position in the area of smart metering and the related mandatory introduction of Time of Use pricing for a large share of consumers. Italy is facing a dramatic increase in RES (Renewable Energy Sources) penetration: several regulatory developments were introduced to favour the integration of intermitted generation and the transformation of distribution grids in active networks, capable of accommodating DG (Dispersed Generation) units. The paper details the regulator’s commitment to provide the right economic incentives for distribution network operators to invest in demonstration projects for smart grids (and, in perspective, for a wide roll-out of active grids, on the basis of an output-based incentive scheme). Significant steps forward have also been made to ensure an efficient development of Electrical Vehicle recharging infrastructures.

We found that several lessons of experience can be drawn from this case study and we believe them useful for other national regulatory authorities. By looking at the regulatory process, more than at the specific solutions and mechanisms adopted (often related to country-specific factors), the main messages are the following. Power system will be profoundly impacted by technological innovation and regulators should invest in building a robust and up-to-date technical knowledge over which to ground their proposals; Key indicators are necessary to cope with RES integration: this paper presents two of them (Reverse Power-flow Time, RPT, and Psmart) that can be used elsewhere; In an initial phase, regulators can get valuable information from demonstration projects, that are an intermediate step between laboratory tests (and prototypes) and full deployment of innovative solutions; Moving to output-based regulation is the efficient choice for full deployment of innovative solutions; The role of regulation is crucial in ensuring that value for the customers is extracted from innovative investments (such as in smart metering) Innovation creates new challenges: regulators have to identify the new border between regulated companies and the competitive market (for instance in the case of electromobility Integration of the different innovations (smart grids, smart metering, electromobility and storage) is probably the hardest challenge for regulators in the next future.

To make this case study more easy to read, all technical details are given separately in six different Annexes, each devoted to a specific topic more briefly mentioned in the main body of the paper.

Keywords: Incentive regulation, Smart grids, Smart metering, Electromobility, Innovation, Italy

JEL Classification: L51, L94, O33