Investing in smart grids within the market paradigm: The case of the Netherlands and its relevance for China

The introduction of market forces in the energy sector in the Netherlands and elsewhere in Europe has drastically changed the climate for investments in the electricity infrastructure. In contrast with the former public monopoly situation, many new uncertainties need to be taken into account in network investment decisions. Another marked difference is the fragmentation of energy markets and the entrance of new players on the energy market stage, often in new roles. The upgrading of electricity networks to create so-called smart grids has therewith become a multi-actor investment problem, which requires a well-designed and well-managed process.For the specific case of the Netherlands, the challenges of smart grid development are explored in depth. As several competing scenarios are possible for the realization of smart grids, it is likely that the scenario first entering the implementation stage will have a first-mover advantage. This, in combination with the split incentive issue for smart grids, results in the conclusion that the realization of smart grids needs public support.Similar outcomes are observed in other European countries despite markedly different local conditions and drivers for the smart grid. It seems that smart public policy intervention is needed to reduce the overwhelming uncertainties related to smart grid investments, which by far exceed the normal investment risk as encountered in network expansion. Finally, the relevance of these findings is discussed for the future of the electricity sector in China's emerging economy.