Regulation for Smart Grids EURELECTRIC Paper on Regulation for Smart Grids Pierre Schlosser, Advisor for Networks at EURELECTRIC Belgium – Session 6 – Paper 0292

EURELECTRIC represents the EU electricity industry, across the whole electricity value chain ENERGY POLICY & GENERATION MARKETS ENVIRONMENT & SUSTAINABLE DEVELOPMENT NETWORKS & DISTRIBUTION The voice of the European Electricity Industry in Brussels, the heart of Europe

In February, EURELECTRIC published its report on Regulation for Smart Grids, which assesses the regulatory framework for Smart Grid investments in Europe

In April, EURELECTRIC published its 10 Steps to Smart Grids which outlines the key elements of a 10 year Smart Grids Roadmap

Currently, EURELECTRIC DSOs is working on two main policy papers: The EURELECTRIC response to the European Commission Communication on Smart Grids – to be published in the second-half of June 2011 The EURELECTRIC report on Smart Grids and Flexible Loads – to be published during summer 2011 + EURELECTRIC is closely monitoring the discussions on the upcoming Directive on Energy Efficiency

Smart Grids: the key regulatory challenges 1. DSOs must be given a chance to invest in a smarter infrastructure 2. A sound retail market design with clear roles and responsibilities for regulated (network operators) and competitive players (suppliers & ESCOs) must be established

1.The smart meter roll-out is currently hampered by a lack of mandate clarity and by the limited possibilities to recover associated costs Source: EURELECTRIC, Regulation for Smart Grids Report 7

1. In most of the surveyed European countries the smart meter penetration level is still relatively low Source: EURELECTRIC, Regulation for Smart Grids 8

Example for illustration 1.The split-incentives problem: Smart Grids will benefit the whole society though most costs will bear on DSOs Here is an example for an investment in smart grids that delivers overall net benefits However the investments are only borne by the DSO whereas it only receives part of the benefits lower that are lower than the investments. Without any further incentives it would not be reasonable to invest. adapting the grid to the new mission means increasing investment risk and benefits for others on DSO expenses Other stakeholders profit from DSO investments without paying: Consumers will profit from selling power and new ways to save energy Suppliers will be able to offer new products The main reason why benefits of suppliers and customers do not reach the DSO is the functional and information DSO unbundling Society as a whole benefits from environmental aspects creating positive externalities. Example for illustration Source: EURELECTRIC, Regulation for Smart Grids

1. Appropriate regulatory incentives need to be put in place 1. Appropriate regulatory incentives need to be put in place. Only 3 countries offer DSOs strong incentives for investments

1. Recommendations on Regulation for Smart Grids Grid tariff models should be updated by Member States/NRAs Stronger focus on long term overall benefits of DSO investments rather than narrow, short term cost optimization Encourage innovation, RD&D expenditures and the use of new technologies with a new risk-reward balance Encourage capital expenditure on Smart Grids in the areas where this approach is preferable to a business as usual Stability in terms of the principles that underlie it but is capable of adapting to changing circumstances Leverage on best practices 11 11

2 A proper retail market design is needed for demand response Suppliers activities focus on selling energy and on related services and products. They are the main point of contact to customers DSOs physically deliver the energy and are focused on grid stability and security of supply. They play the role of neutral market facilitators and perform load management when grid stability is at risk New contractual agreements will be needed to ensure that the mutual interests of both market and system operators are met

Thank you for your attention Pierre Schlosser – Belgium – Session 6 – Paper 0292