• An emerging broad range of technologies for distributed energy resources (DER) is causing significant changes in the planning and operation of power systems. These changes cause challenges for power systems and regulators alike. However, DER – with the right regulation and market design – can at the same time be exploited to establish a more efficient and cleaner electricity system than our current one. To this end this THINK report discusses how adjustments to the regulation of European DSOs can incentivize the latter to effectively integrate DER into electricity markets and system management. • A sound regulation that incentivizes DSOs to exploit DER for a more active system management has to take account of changing OPEX and CAPEX structures, the optimal choice among both, and of how to incentivize DSOs to favor innovative solutions. Furthermore, as grid users are becoming more complex and sophisticated agents, distribution cost should be recovered via grid tariffs that reflect the true costs (or benefits) of different types of load and generation for the system. • As the complexity of the system increases with an increasing DER penetration, an insufficiently unbundled DSO could either stay with a restricted set of traditional system tasks, or the DSO could expand its portfolio of activities, but be accompanied with stricter requirements for unbundling. • The general responsibilities of network operators with respect to grid management do not change, but the set of tools available to perform their tasks is enriched by DER. Products that system operators use to ensure reliable grids should be clearly defined in terms of geography and timing. Procedures of coordination between DSOs and TSOs have to be updated. • In the European context, regulation should be kept at minimum level. We see neither the justification nor even the convenience for an EU-wide harmonization of the regulation of DSOs. However, we recommend setting clear minimum requirements in a few key regulatory aspects, as well as the publication of EU guidelines to spread, encourage, and monitor good regulatory practices in some of the critical areas identified.