Discussion Papers

Christine Müller, Andrea Schweinsberg

The Interface of Smart Grid and Smart Market

No. 373 / May 2013

(full version only available in German)


The transformation of the energy system modifies the interface between market and regulation. The distribution network operator (DNO) is supposed to integrate increasing bi-directional and fluctuating feed-in from renewable energies. Prospectively, alternatives arise to conventional network expansion. Due to an ICT-based convergence over the value chain, new patterns of interaction develop. These activities are part of the market sphere. Prospectively, smart markets emerge and offer the DNO connection points to flexible loads at the generation and end-user side. This involves opportunities for an intelligent network capacity management.

This discussion paper deals with the interaction patterns of the regulated network operator and smart markets. To start with, examples of intelligent network capacity management are presented. Most of them still require a legal basis. Subsequently, a regulatory economic analysis examines under which conditions market-based action or conventional network expansion constitute the better alternative for the DNO to manage network capacities. This is followed by a discussion of the impacts on incentive regulation.

Weighing up the alternatives leads to the following conclusion: From a nominal perspective, interactions with a smart market constitute the economically better alternative and allow for an optimal network dimensioning. Integrating the factor frequency regarding the necessity to interact with the smart market, the ratio changes depending on the costs, which are driven by volatile feed-in.

Under incentive regulation, the effects of investing in conventional network expansion are quite predictable whilst they are not for the option intelligent network capacity management. Further research should address to what extent the current incentive regulation regime already incentivises interactions with a smart market instead of conventional network expansion and how it deals with volatile cost resulting from intermittent feed-in. The emphasis should be on neutral incentives leaving the optimisation calculus in terms of network dimensioning to the network operator.

Discussion Paper is available for download.

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