DSOs are of vital importance for the resilience and adaptivity of the essential energy grids with continuously growing demand and consistently increasing complexity. Additionally, a substantial amount of energy technologies that are needed for the transition are still in the demonstration or prototype phase. The increasing pressure on DSOs to adapt to a plethora of fundamental challenges necessitates innovative frameworks to support sustainable development. This study set out to develop a new framework for guiding DSO innovation efforts with three key objectives: take into account the system context, provide tangible and actionable output and consider the regulatory environment. The framework was abductively constructed through a synthesis of five established innovation models and refined using expert interviews and case studies. The resulting diagnostic framework distinguishes three parallel levels for innovation: the project level, company level and ecosystem level. Each with their own respective more detailed factors. Another contribution of this research is the introduction of strategic alignment as a systemic factor in innovation in the literature. This research represents the first exploration of an innovation framework that holistically addresses the unique complexities and demands of DSOs, offering a foundation for further refinement and application.