## 3 Regulatory Barriers to Implementing an EU-Wide Grid Digital Twin
### Economic Regulatory Barriers and Incentives Misalignment  
A critical regulatory barrier to the implementation of a pan-European grid digital twin lies in the misalignment of economic incentives within existing regulatory frameworks. Most electricity network operators in the EU are regulated under models that prioritize capital investments in physical infrastructure rather than digital and data-driven innovations [16]. These models, particularly those based on the Regulated Asset Base (RAB) approach, allow TSOs and DSOs to earn returns on capital expenditures such as substations or transformers, but often provide no comparable incentive for investments in software platforms, analytics tools, or cloud-based services that support a digital twin [23]. Digital solutions frequently fall under operational expenditures (OPEX), which are either excluded from the RAB or treated as cost-saving measures rather than strategic investments [16]. As a result, even when digital tools could deliver superior grid efficiency or defer costly reinforcements, operators face a paradox: spending less may reduce their allowed revenue. Several studies, including a comprehensive assessment by [PERSON] et al., have confirmed that this CAPEX-OPEX bias is among the most significant deterrents to grid digitalization in Europe [24]. Regulatory frameworks often overlook or undervalue intangible benefits, such as improved system observability, predictive maintenance, or enhanced integration of renewables, especially when these accrue over a longer timeframe or benefit parties beyond the investing operator [16]. Some regulators have begun to address this misalignment. TOTEX, or total expenditure approaches, treat capital and operational expenditures equally within a unified regulatory framework and are being piloted or implemented in selected jurisdictions, including the United Kingdom and parts of the Nordic region [16]. In addition to cost neutrality between CAPEX and OPEX, recent studies also highlight the role of profit-sharing mechanisms under TOTEX schemes, which allow utilities to retain part of the cost savings if actual expenditures fall below regulatory forecasts [35]. This strengthens the incentive to deploy efficient digital solutions, including digital twins, and aligns utility behavior with long-term system optimization objectives. These approaches aim to shift the regulatory focus toward overall performance and outcomes rather than specific input categories. Innovation allowances and funding mechanisms, which offer additional revenue or cost recovery for pilot projects, are also emerging as tools to support experimentation with digital technologies [23]. However, adoption remains uneven across the EU, and many national regulators still lack a formal framework for incentivizing innovation. In several member states, digital investments continue to be categorized as non-allowable or are expected to deliver efficiency gains without corresponding remuneration [24]. Another regulatory challenge involves the cost allocation and financial justification for a cross-border digital twin. While a pan-European grid twin would provide system-wide benefits such as reduced curtailment, improved reliability, and accelerated renewable integration, these gains are diffuse and accrue to multiple stakeholders across national boundaries [4]. However, there is currently no regulatory mechanism to equitably distribute the costs of such a shared digital infrastructure. Unlike physical interconnectors, which are governed by specific EU-level cost allocation rules, digital platforms are not covered by established frameworks [36]. This creates uncertainty for TSOs and DSOs considering large-scale investments in digital twin capabilities, particularly when national regulators may not acknowledge or compensate costs that primarily benefit systems in other countries [16]. Furthermore, the time horizon used in regulatory evaluations adds to the problem.