Performance-based utility incentives change how network companies are rewarded so that improving the use of existing infrastructure can generate financial value alongside conventional capital investment. Under traditional cost-of-service regulation, utilities can earn returns from approved network assets, which may weaken the commercial incentive to choose flexibility or other lower-capital solutions even when they reduce total system costs. Performance-based regulation addresses this by linking part of utility revenue to defined outcomes, such as efficient network operation, use of flexibility, avoided or deferred reinforcement, or measurable savings.  

Regulators establish the performance measures, baseline expectations and reward or penalty mechanisms, while network companies demonstrate the outcomes they deliver. In some models, utilities retain a share of the savings created when flexibility costs less than the network investment it replaces; in others, broader performance assessments determine financial rewards for how effectively distribution companies plan and operate their networks. The approach aligns utility financial incentives more closely with system outcomes, giving network companies a commercial reason to consider flexibility and asset optimization alongside traditional reinforcement.  

Main Outcomes of the Solution 

• Reliability & Flexibility: Incentives encourage network companies to integrate flexible resources into planning and operations, increasing the range of tools available to manage constraints and changing demand while maintaining secure network operation.  
• Institutional Efficiency & Transparency: Defined performance measures, baselines and reporting requirements improve visibility of utility performance and support more efficient use of existing network assets. 
• Business Value: Financial rewards for flexibility, efficient network operation and avoided investment can strengthen the utility business case for alternatives to conventional capital investment. 

Key Deployment and Scaling Factors 

1. Rewards need to be material and appropriately calibrated relative to the financial incentives associated with traditional capital investment. 
2. Performance measures must be measurable and attributable so regulators can verify delivered outcomes and avoid double counting. 
3. Baseline expectations, counterfactual investment assumptions and calculation methodologies need to be clear before rewards or penalties are determined. 
4. Regulatory reporting, data availability and independent assessment support transparency and accountability. 
5. Savings-sharing mechanisms can align network company and consumer interests when flexibility avoids or defers investment. 
6. Regulatory frameworks should define how performance incentives interact with cost recovery and existing revenue mechanisms to avoid unintended incentives. 

Case Studies

Ofgem (2023-2028), Great Britain 

Under the Revenue = Incentives + Innovation + Outputs (RIIO) framework, Ofgem’s RIIO-ED2 electricity distribution price control for 2023–2028 includes a Distribution System Operation Output Delivery Incentive. The incentive encourages Great Britain’s distribution network operators to develop and use their networks more efficiently, including by considering flexible alternatives to network reinforcement. Performance is assessed through a stakeholder satisfaction survey and an expert performance panel, with financial rewards or penalties linked to performance.  

Across the first two years of RIIO-ED2, distribution network operator groups received approximately £58.1 million (~ USD 78.3 million as of September 2026) in rewards under the incentive – £18.48 million ( ~USD 24.9 million as of September 2026) in 2023-24 and £39.62 million (~USD 53.4 million as of September 2026) in 2024-25. Ofgem’s assessment considers areas including flexibility services, forecasting, network visibility, coordination with other system actors and stakeholder engagement. By attaching financial rewards to these aspects of distribution system operation, the mechanism gives network operators a commercial incentive to improve performance beyond conventional network investment. 

Commission de régulation de l’énergie / Enedis (2025), France 

France’s energy regulator, the Commission de régulation de l’énergie (CRE), introduced a financial incentive for distribution system operator Enedis under TURPE 7, the Tarif d’utilisation des réseaux publics d’électricité (tariff for use of the public electricity networks). TURPE is the regulatory framework through which CRE sets network tariffs and associated regulatory arrangements for France’s electricity network operators. TURPE 7 covers the 2025–2028 regulatory period, with the new tariffs entering into force in August 2025.  

The incentive encourages Enedis to use local flexibility where it is economically preferable to network reinforcement. Enedis applies its CritFlex methodology to determine the value of flexibility by calculating the savings it can generate relative to network investment, taking into account investment costs, additional network losses and residual impacts on quality of supply. For network areas where flexibility allows investment to be deferred, CRE awards Enedis a bonus equal to 20% of the economic gain calculated through CritFlex after deducting the costs of reserving and activating the flexibility. The remaining 80% of the economic gain accrues to network users. The incentive is calculated and reported annually and has applied since January 2025, giving Enedis a direct financial interest in using cost-effective flexibility where it can avoid or defer conventional network investment. 

References: 

1. Distribution System Operation Incentive Annual Report 2024–2025 | Ofgem  
2. Changes to the Distribution System Operation Incentive Governance Document | Ofgem  
3. TURPE 7 Distribution Tariff Decision | Commission de régulation de l’énergie  
4. TURPE 7 HTA-BT Decision Proposal | Commission de régulation de l’énergie