Electricity distribution companies and their contribution to the energy transition

Frontier Economics (in co-operation with IAEW/RWTH Aachen) has been commissioned by E.On to analyse the economic value of electricity distribution networks for the energy transition and to identify and show the consequences of "regulation with uncertainties".

The whole energy industry is facing enormous challenges in relation to the energy transition. To reach the goal of  a carbon-free energy economy will  require the phase-out of CO2-emitting power generation plants and these will need to be replaced with CO2-neutral alternatives, such as wind and PV plants. Most of these plants will be connected to the distribution networks. In addition, decarbonisation from other sectors such as heating and transport will lead to an increasing number of heat pumps and electronic vehicles – which will again come  with additional requirements for electricity distribution networks.

Frontier Economics and IAEW/RWTH Aachen have been commissioned by E.On to analyse the economic costs of under-investments into electricity distribution networks. The bottom line shows that a long-term under-dimensioning of distribution networks will lead to system costs to the tune of € 0.1 bn in 2030, which will further increase to €  4.2 bn by 2050. Therefore, avoiding under-investments is always advantageous from a general economic perspective.

From a regulatory perspective, this comes with the practical challenge of regulation under uncertainties, i.e. the regulator does not have a “crystal ball” to make decisions for the upcoming regulatory period and needs to make its decision without knowing what the future holds (irrespective of any asymmetric exchange of information between network operator and regulator). As a consequence, the risk of an unintended “too strict” or “too light” regulatory framework prevails – and has consequences for investment decisions taken by network operators.

In our study, we have analysed the economic costs of an "unintended too strict“ regulation (that may result in under-investments into electricity distribution networks) and compared them to an “unintended too light” regulation (that may result in over-dimensioned electricity networks).

The results of our study show that the distribution of economic costs resulting from uncertainties is asymmetric, i.e. in the case of an unintended deviation from the ideal point, the costs will be higher than the optimum in both cases. However, costs associated with under-dimensioning are considerably higher compared to those of over-dimensioning. In general, congestion costs are “stepwise fixed costs”, i.e. once the capacity limit of a network is reached, there will be a quick and disproportional increase in system costs along with the degree of under-dimensioning over time.

At the E.On Digital Energy Talk, Dr Christoph Gatzen (Frontier),  Univ-Prof. Dr-Ing Albert Moser (IAEW/RWTH Aachen) and Dr Thomas König (COO-Networks, E.ON) presented the results of the study (short version) to a large audience.

Frontier regularly advises companies on regulation, renewables and strategic questions.  

For further information, please email to media@frontier-economics.com or call +44 (0) 20 7031 7000.