Electricity network companies can innovate their own network business or stimulate system innovation, including by facilitating market activities and the integration of renewable energy sources. Regulation is essential to turn this potential into reality by providing adequate incentives to network companies. Regulators can change the mandate of network companies, allow commercial activities that go beyond the regulated ones, or provide financial rewards and penalties associated with input or output-based measures of innovation. Regulators can also introduce sandboxes, where specific rules are relaxed and innovation can be tested. Experience accumulated in Europe and elsewhere after the liberalization of the electricity industry suggests that the type of targeted innovation matters: a regulatory measure can be effective in promoting one type of innovation but less so in promoting another one.