Competition in smart distribution grids. (October 2020)

• Record Type: Journal Article
• Authors: Bertolini, Marina; Buso, Marco; Greco, Luciano
• Is Part Of: Energy policy. Volume 145(2020)
• Publication Date: 2020-10
• Subjects: C61 -- D81 -- L52 -- Q41 -- Q42 -- Q48; Electricity markets -- Smart grids -- Investment regulation -- Risk aversion -- Distribution system operator; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2020.111729
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: Smart grids are often considered a cornerstone of energy transition and market liberalization in electric industries. From a critical reading of the interdisciplinary academic and governmental literature, we draw a new definition of grid smartness that is based on the reduction of the volatility of market prices and flows. Then, relying on a simple industrial-organization model of the electric market, we analyze the impact of smart grids on competition among energy suppliers and on the incentives of distribution system operators to invest in it. We show that the risk-reduction effect of smart grids pushes firms to supply more energy. However, the latter can be compensated by an indirect competition effect of investments in smart grids which prevents the entry of firms into the market, though the aggregate effect on energy supply is always positive. We also find that distribution system operators under-invest in smart grids because they fail to internalize positive externalities on energy consumers and producers. Highlights: Grid smartness is based on the reduction of volatility of both prices and flows. Smart investments on the distribution grid contribute to reduce investments' risk. Relying on input-based regulations, DSOs underinvest in SGs. Output-based regulations shall rely on grids' smart performances. Output unverifiability could be overcome with other forms of regulation (e.g. PPPs).