Impact of Reward and Penalty Scheme on the Incentives for Distribution System Reliability

Performance-based regulations accompanied by quality regulations are gaining ground in the electricity distribution business. Several European countries apply quality regulations with reward and penalty schemes (RPSs), where the distribution system operator (DSO) is rewarded (or penalized) when fulfilling (or not fulfilling) an adequate level of reliability to its customers. This paper develops a method that the regulator can use before enforcing a regulation to get an understanding of the impact different RPS design solutions have on the DSO's financial risk and incentives to invest in reliability. The proposed method also includes a sensitivity analysis to identify which are the most important parameters in an RPS. The new method is applied to three regulatory challenges to evaluate their RPS design solutions. Results show that the choice of scheme design and cost model used to decide the incentive rate have a large impact on the DSO's financial risk and incentive to invest.

I. Introduction

In the aftermath of the reregulated electricity markets, network ownership is privatized and the need for regulation of distribution system operators (DSOs) has been accentuated by the natural monopoly status of these entities. The regulations of DSOs are in many countries based on their performance referred to as performance-based regulation.