Solutions
Behind the Term ‘Out of the Box’: What Energy Companies Need to Know About IoT Solutions
November 2025
Sweden's electricity grid regulation is facing a potential change that could have significant consequences for how grid companies plan their investments and operational strategies. The Swedish Energy Markets Inspectorate is currently investigating the possibility of transitioning from the current separate regulation of operating and capital costs (OPEX/CAPEX) to a so-called TOTEX model, where total costs are treated as a single entity.
TOTEX, or total cost regulation, means that authorities set efficiency requirements on companies' combined costs instead of treating ongoing operating costs (OPEX) and capital costs (CAPEX) separately. The model is already used in several European countries and has shown promising results in promoting cost efficiency and innovation.
In practice, this means that grid companies gain greater freedom to decide for themselves whether to solve a capacity challenge by investing in new infrastructure or by purchasing flexibility services, optimizing existing assets, or using smart grid solutions.
The United Kingdom has been a pioneer in TOTEX regulation through its RIIO framework (Revenue = Incentives Innovation Outputs). The model has led to increased innovation and greater focus on customer benefit, although complexity has increased and the framework has needed adjustments through several iterations. These experiences provide valuable insights for other countries considering similar changes.
Other European countries have introduced elements of total cost regulation or incentives that reduce CAPEX bias. Germany and Finland have made adjustments to their incentive frameworks and tested certain total cost elements, building experience for potential broader implementation.
In Austria, a related approach is used where differentiated return requirements are based on company efficiency. The most efficient companies receive higher returns on their capital, while less efficient companies receive lower returns – a system that has created strong incentives for improvements.
The current Swedish model, where OPEX and CAPEX are treated differently, can create distorted incentives. Grid companies may be disadvantaged if they choose cost-effective solutions that increase operating costs instead of capital costs, even when this would be best for the system as a whole.
A concrete example is flexibility services. Instead of building a new power line (CAPEX), it may be more cost-effective to purchase flexibility services from customers (OPEX). But under today's regulations, this may be economically less attractive for the grid company, despite being better for society.
As the Swedish Energy Markets Inspectorate noted in its memorandum from 2020: "There are therefore complementary incentives that balance the incentive to invest and also steer toward alternative solutions."
A transition to TOTEX requires careful planning and adaptation. For Swedish grid companies, this involves several development areas:
Enhanced Benchmarking Methodology
Comparing companies' total costs requires more sophisticated models than comparing operating costs alone. Differences in geographical conditions, customer composition, and infrastructure age must be weighed in new ways.
Adapted Investment Strategies
Companies that currently plan based on CAPEX/OPEX separation need to develop new analysis methods and decision criteria to maximize the value of the new flexibility.
Management of Ongoing Investments
Grid companies plan their investments many years ahead based on current regulations. A transition to TOTEX therefore requires clear transition rules and a sufficiently long implementation period to avoid jeopardizing calculations for already decided or planned investments. This is particularly important now when the industry faces record investments of up to 1,000 billion SEK through 2045.
Maintained Investment Incentives
A central question is ensuring that a potential TOTEX model provides sufficient incentives for the large grid investments that the energy transition requires. European examples show that this is achievable with the right design of the regulatory framework.
Clear Regulatory Guidance
As Copenhagen Economics pointed out in its report on smart grid incentives (2017): "Uncertainty about regulation itself constitutes a source of risk that increases the costs of investments." A successful TOTEX implementation therefore requires clear communication and stable guidance.
The electricity grid industry is undergoing a comprehensive transformation. Increased integration of renewable energy, growing need for flexibility, and new technologies such as energy storage and smart grid solutions require more nuanced regulatory models.
The current regulatory model was created for a simpler electricity system with few, large producers and passive consumers. Today's system, with thousands of solar installations, batteries, and active consumers, requires more flexible regulatory tools.
In this environment, predictive maintenance and data-driven decision-making become crucial. When TOTEX regulation gives companies the freedom to optimize between different cost categories, the value of solutions that can prove their cost-effectiveness through concrete data on maintenance needs, component condition, and system performance increases.
For Swedish grid companies, it's important to follow developments closely and prepare for potential changes:
Begin analyzing investment alternatives from a total cost perspective, not just CAPEX/OPEX separation.
Investigate opportunities to use demand flexibility, energy storage, and smart grid technologies as alternatives to traditional grid reinforcements.
TOTEX regulation increases the need for real-time data and predictive analysis to optimize both operations and investment decisions. Comprehensive solutions that unite sensors, data collection, and analysis – from sensor to work order – become increasingly important for demonstrating cost-effectiveness.
Develop the ability to measure and analyze how different maintenance strategies affect both short-term operating costs and long-term asset lifespan.
A TOTEX model can increase incentives to work with customer flexibility and innovative services.
While the Swedish Energy Markets Inspectorate continues its evaluation, it's clear that Swedish electricity grid regulation stands at an important crossroads. TOTEX regulation offers potential for increased cost efficiency and innovation, but requires thoughtful implementation and clear guidelines.
For grid companies, it's now about being proactive in development and seeing the opportunities that a more flexible regulatory model can create. As several European examples show, TOTEX regulation can be a powerful catalyst for positive change – but only if implemented correctly.
The new regulatory form will likely favor companies that have invested early in digitalization and data-driven solutions. When cost efficiency is measured across the entire system, and not just in separate CAPEX and OPEX buckets, companies with a strong data foundation and predictive capabilities gain a competitive advantage. This aligns well with the Swedish Energy Markets Inspectorate's ongoing focus on improved benchmarking and higher data quality requirements, where reliable data becomes central to proving cost-effectiveness.
The continued dialogue between authorities and the industry will be crucial to finding a model that both promotes efficiency and ensures supply reliability in an increasingly complex electricity system.
This article is based on publicly available information from the Swedish Energy Markets Inspectorate, CEER, Energiforsk, and other sources.