Energy Econ. 57, 192–203 (2016)

The rapid expansion of distributed electricity generation and the new functions that distribution system operators (DSOs) are called to perform will require €400 billion in Europe by 2020. However the capacity of incentive regulation, introduced in the electricity sectors across Europe, to foster investments of this size is still to be proven. Astrid Cullman and Maria Nieswand from the German Institute for Economic Research shed light on this question by analysing the investment behaviour of 109 DSOs in Germany, finding that the investment rate is higher after the implementation of incentive regulation in 2009 and that the design of the incentive scheme influences the investment decisions of the firms.

Using a microeconometric model that takes into account general and specific investment drivers, such as the number of connection points and the size of the service area, the authors collect financial, technical and regulatory firm-level data for DSOs operating in Germany between 2006 and 2012. The analysis shows that the implementation of incentive regulation through revenue caps had a significant and positive effect on the investments of companies, which tend to behave strategically and invest heavily in the base year. While the study demonstrates that DSO ownership (public or private) does not affect investment decisions, it reinforces that the entire design of incentive mechanisms must be taken into account to provide support to the energy transition process.