Digital versus grid investments in electricity distribution grids: Informed decision-making through system dynamics

Estimating the costs and benefits associated with investments in digitalization, as well as grid reinforcement, expansion, and renovation, is crucial for effective prioritization and decision-making in electricity distribution grids. In the context of the energy transition, new investments are essential to accommodate distributed energy resources, such as renewable energy and electric mobility, while meeting rising electricity demands. These investments involve complex trade-offs for distribution system operators (DSOs) and national regulatory authorities (NRAs). To enhance transparency in understanding the interdependencies between digitalization, grid investments, and their financial and societal benefits, this study introduces a system dynamics modeling approach. The proposed model simulates the DSO business, incorporating causal relationships with NRAs and end users. Using historical data from the primary Portuguese DSO and NRA spanning 2012 to 2021, the model is rigorously validated. Following validation, a sensitivity analysis investigates how variations in capital expenditures influence the net present value (NPV) of DSOs, their total allowed revenue, quality of supply improvements, and end-user tariffs. Additionally, a scenario analysis assesses the impact of different investment levels on DSOs and end users, considering factors such as reliability, unit investment costs, electricity demand, and regulatory frameworks. The findings reveal that digitalization substantially enhances grid performance and the NPV of DSOs while having a minimal impact on end-user tariffs. This outcome remains consistent across various investment levels and technology combinations. Ultimately, this model-based approach offers NRAs and DSOs a comprehensive tool for evaluating the net benefits of digitalization and grid investments.