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Improved Regulatory Approaches for the Remuneration of Electricity Distribution Utilities with High Penetrations of Distributed Energy Resources

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Under increasing penetration of distributed resources, regulators and electricity distribution utilities face greater uncertainty regarding the evolution of network uses and efficient system costs. This uncertainty can threaten revenue adequacy and challenges both cost of service/rate of return and incentive/performance-based approaches to the remuneration of distribution utilities. To address these challenges, this paper proposes a novel methodology to establish allowed utility revenues over a multi-year regulatory period. This method combines several "state of the art" regulatory tools designed to overcome information asymmetries, manage uncertainty, and align incentives for utilities to cost-effectively integrate distributed energy resources while taking advantage of opportunities to reduce system costs and improve performance. We use a reference network model to simulate a large-scale urban distribution network, demonstrate the practical application of this regulatory method, and illustrate its performance in the face of both benchmark and forecast errors.

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Energy Specializations: Electricity – Local Distribution; Electricity – Distributed Generation; Electricity – Markets and Prices ; Electricity – Generation Technologies; Energy and the Economy – Other; Electricity – R&D and Emerging Technologies

JEL Codes: L98: Industry Studies: Utilities and Transportation: Government Policy, L51: Economics of Regulation, G38: Corporate Finance and Governance: Government Policy and Regulation, L94: Electric Utilities, C53: Forecasting Models; Simulation Methods, G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity

Keywords: Regulatory Economics, Network Regulation, Electricity Distribution, Distributed Energy Resources, Incentive Regulation, Managing Uncertainty

DOI: 10.5547/01956574.38.3.jjen

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Published in Volume 38, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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