Unveiling regulatory feedback effects in power grid digitalization and network operation: A system dynamics analysis of regulatory incentives and investment behavior

Digitalization plays a critical role in the transformation of electricity distribution systems, enabling greater efficiency, flexibility, and integration of renewable energy sources. However, Distribution System Operators (DSOs) often face regulatory and economic barriers that hinder investments in digital technologies. This study adopts a qualitative System Dynamics (SD) approach to explore the complex, feedback-driven interactions between regulatory incentive structures and DSOs’ investment decisions in digitalization. Focusing on the Australian regulatory framework, the SD model was developed and validated through expert interviews with representatives from National Regulatory Authorities, academia, and industry. The analysis identifies elevencritical feedback loops that either reinforce or obstruct digital investment decisions. These loops reveal how incentive structures, cost-recovery rules, information asymmetries, and risk perceptions interact to create self-reinforcing dynamics that often favor conventional grid expansion over digital alternatives. The model provides a structured mapping of regulatory feedback mechanisms, and serves as a diagnostic tool to support policy design by highlighting where regulatory interventions can be most effective. The findings show that incentive structures, investment choices, and grid-performance outcomes are linked through feedback dynamics that shape long-term infrastructure trajectories, potentially locking systems into conventional asset expansion or enabling digitally driven modernization. This study lays the groundwork for future research by offering a structured method to trace and compare regulatory-investment dynamics, and by providing actionable insights for designing more coherent incentive schemes that support DSOs’ digitalization efforts in diverse regulatory settings. • Economic incentives to drive power grid digitalization are currently insufficient. • A system dynamics model is used to unveil regulatory factors hindering digitalization. • Impacts of CAPEX-OPEX, performance and innovation schemes on investments are analyzed. • Eleven key feedback loops impacting digitalization are identified and validated. • Regulatory tools are proposed to redirect incentives and support digitalization.