Flexible Connection Agreements and TOTEX Incentive Regulation for Efficient Network Infrastructure Deployment: The Spanish Case

Abstract

The decarbonization of the energy system, which involves the electrification of end uses, is causing local congestion and delaying access to electricity grids for new connections. This, therefore, results in a sharp increase in grid investment needs.This paper assesses the combined application of two regulatory instruments: flexible connection agreements for demand and an incentive-based TOTEX regulation for distribution system operators (DSOs). Based on its application to the Spanish case, it is concluded that, in a scenario with flexible connections, the annual distribution remuneration margin would increase from 76 to 324 million euros compared to the scenario without them. Under the proposed profit-sharing scheme, half of this margin would be allocated as direct incentives to DSOs, increasing the effective rate of return on new investments by more than 1%, from 6.58% to 7.65%, and the other half would be dedicated to reducing grid tariffs. The combination of these two regulatory instruments offers an efficient way to accommodate rapid electrification by improving grid access, providing DSOs with strong incentives to use existing grids, and protecting users from potential increases in grid tariffs that would occur if the investments were not accompanied by the expected growth in demand.