Innovation by regulation: Smart electricity in Great Britain and Italy

With the rise of renewable and distributed energy sources, electricity distribution and transmission utilities are facing increasing demand by regulators to innovate and adopt new technologies and transit to smart grids. However, these regulated natural monopolies often lack economic incentives to develop and adopt new technologies. To overcome this barrier, some regulatory authorities have introduced the so-called “innovation-stimuli” regulations to foster experimentation, technological adoption and innovative solutions. We analyze and compare the effectiveness of two different innovation-stimuli regulations, the cost-pass through and WACC approaches, in Great Britain (GB) and Italy, respectively. To assess the impact of these different regulations on innovation, we use synthetic control (SC) and synthetic difference-in-differences (SDID) methods, which constitute causal inference techniques for small-n case study design and, for the first time, are employed to assess the impact of regulations on innovation outputs. Our panel data encompasses 13 European countries covering 1995 to 2013 and used smart grid projects and patent applications as dependent variables. Meanwhile, cost-pass-through significantly and positively affected patent applications in the GB. In Italy, WACC did not affect patent applications, and European Commission-funded projects mostly drove the increases in smart-grid projects. • Compare cost-pass-through in GB vs WACC in Italy on electricity innovation. • Use SC and SDID methods to evaluate innovation-stimuli regulations. • Cost-pass-through regulation increased patent applications in Great Britain. • Long-term and consistent regulations are key to fostering innovation in grids.