DSO investment on increase in EU but ramp-up must better serve customers

ACER, in a new report, has found that with the need for significantly more grid capacity for electrification and renewables’ growth to accelerate decarbonisation, annual distribution grid investments have increased by over 50% to €35.3 billion in 2024, up from €23.5 billion in 2021. 

With further growth of one-third by 2027, distribution grid investments are projected to approach €47 billion in that year. 

However, progress is uneven in grids digitalisation, modernisation through technological advancements and unlocking flexibility via demand response, ACER adds – i.e. the approaches that complement traditional grid buildout. 

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The question further arises with these developments if DSOs are prepared to deliver high-quality services to all customers, given the diverse distribution landscape with 2,674 DSOs across Europe serving from as little as one customer up to almost 40 million. 

ACER states that DSO sizes affect the quality of distribution services to network users.  

DSOs must be equipped to deal with evolving responsibilities for grid planning, flexibility solutions, grids’ digitalisation and resilience, to ensure all customers have equal access to high-quality and cost-efficient distribution services. 

Robust system planning and efficient regulatory scrutiny should not be compromised by fragmented and uncoordinated network development, ACER notes. 

DSOs should also adopt the most efficient solutions for network development, whether grid-based or non-grid. Thus, the regulatory focus must expand beyond cost-cutting and maximise the benefit for society. 

Regulatory innovation 

Commenting on a broad consensus on the challenges, limited and uneven progress in regulatory innovation, ACER says that as the distribution system evolves, regulatory frameworks must adapt. 

Without regular assessment of DSO revenue methodologies and incentive schemes, there is a risk of ‘navigating blindly’ through the energy transition. 

Drawing on prospective practices put forward by national regulatory authorities and other analyses, ACER presents in its report a set of 10 recommendations for legislators, regulators and system operators to consider to manage the ramp-up of distribution grid investment to better serve grid users.  

These are: 

Ensure adequate competences:
1. Ensure a strong and effective national regulatory authority mandate on DSO revenue setting;
2. Have adequately resourced national regulatory authorities and DSOs;  
3. Remove regulatory barriers and incentivise DSO mergers where better services or other efficiency gains are expected;
4. Expand DSO system planning to national or subnational level. 

Ensure proper transparency: 
5. Strive to publish yearly DSO capital and operational expenditure estimates at least five year ahead;  
6. Monitor and report on existing and forecasted grid.  

Unlock efficient investments:
7. Avoid a grid build (capex) bias;  
8. Allow DSOs to collect revenues partially based on their planned expenditure; 
9. Avoid unjustified cost deferral that is not aligned with future utilisation;  
10. Eliminate rigid expenditure caps lacking adjustment mechanisms.