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The Impact of Regulation on a Firm's Incentives to Invest in Emergent Smart Grid Technologies

Abstract:
This paper analyzes the implementation of new technologies in network industries through the development of a suitable regulatory scheme. The analysis focuses on Smart Grid (SG) technologies which, among others benefits, could save operational costs and reduce the need for further conventional investments in the grid. In spite of the benefits that may result from their implementation, the adoption of SGs by network operators can be hampered by the uncertainties surrounding actual performances. A decision model has been developed to assess the firms' incentives to invest in "smart" technologies under different regulatory schemes. The model also enables testing the impact of uncertainties on the reduction of operational costs, and of conventional investments. Under certain circumstances, it may be justified to support the development and early deployment of emerging innovations that have a high potential to ameliorate the efficiency of the electricity system, but whose adoption faces many uncertainties.

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Energy Specializations: Energy Investment and Finance – Corporate Strategy; Energy Investment and Finance – Other; Electricity – Local Distribution; Electricity – Generation Technologies; Electricity – Distributed Generation; Electricity – Transmission and Network Management

JEL Codes:
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
G39 - Corporate Finance and Governance: Other
D44 - Auctions
Q2 -
L94 - Electric Utilities

Keywords: Incentive regulation, Infrastructure, Investment, Smart grids

DOI: 10.5547/01956574.38.2.pcos

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Published in Volume 38, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.