Smart meter rollout should be left to DNOs
Central Networks managing director John Crackett tells Brendan Coyne the smart meter rollout should have been left to distribution network operators.
The utility networks business is likely to change radically over the next few years, but its core role, to provide a reliable, safe supply of energy, will remain constant.
The physics won't change and must be followed, says Central Networks managing director John Crackett.
Crackett is a chartered engineer who once ran TXU's fleet of power stations and previously headed Eon's Energy Services division. As a networks man, his policy is to "put yourself in the customer's shoes and follow the physics". This philosophy, he says, will be crucial in the move to smart grids.
"It is unchartered territory and it has to be based on engineering fundamentals," he says. "Don't try and construct a market which fights against the flow of electricity. If we engineer [the smart grid] in the interest of the consumer, we will have a profitable business and the regulator will beÂ happy."
That is what bothers him about a supplier-led smart meter rollout. "It means the communications and data will be engineered to suit the supplier's requirement," says Crackett. "Engineering communications to deliver automated meter readings is not sufficient to run a smart grid. If you need to monitor loads in a particular street, you need all the data from the meters in that street immediately. I worry that we may end up with something that is not integrated with smart grids."
The other issues, he says, are efficiency and cost. "There are 32 suppliers in the Central Networks area, so 32 firms might pull up in any one street over the next ten years to fit a smart meter. It doesn't make sense. It would be much more efficient street by street, and with the money raised under a regulated framework with a guaranteed low rate of return."
On rates of return, Crackett says the 4 per cent awarded by Ofgem for the next five-year regulatory period (2010-15) "is something we sucked our teeth over". Although confident Central Networks can outperform the deal and earn more money under the distribution price control's (DPCR5) efficiency incentives, Crackett thinks the bigger picture is less rosy.
"Four per cent sends a signal that the return from network investments will be low in the future," he says. "In a climate where firms have to invest more and more money, I worry that sends a message that the infrastructure of UK plc is not going to remunerate shareholder investment. [Investors] may well look to elsewhere instead."
The bottom line, says Crackett, is that distribution network operators (DNOs) would have liked to invest more money in their networks, and need to because the median age of network assets is half a century. In fairness, Crackett says the regulator achieved what it set out to do with DCPR5 and produced a framework that rewards companies for doing what it feels is important. Ultimately, all the DNOs accepted the settlement, "so we couldn't have been that unhappy".
Going forward, with RIIO (Revenue= Incentive+Innovation+Outputs) replacing RPI-X, Crackett says not much will change for DNOs because much of the thinking was incorporated into DPCR5. The prospect of fast-tracking the review, though, is something Central Networks may pursue. "[DPCR5] occupied a lot of management time and attention for two years, so the fast track is an interesting idea. How could you not support the idea of a less onerous review, provided that it is straightforward, business plans are clear and the company has a good track record?"
However, it poses a new set of problems. "We need to see the criteria as to who gets fast-tracked and who doesn't," says Crackett. "If you are not careful, the decision about fast-tracking introduces regulatory risks. We need to see how it works in practice, the criteria and how transparent that process will be."
Although frustrated by the short-termism necessitated by the low rate of return, Crackett says the Â£500 million low carbon networks fund (LCNF) created by Ofgem to allow DNOs to trial smart technologies is a "genuinely innovative regulatory step".
Central Networks is bidding for Â£21 million of the Â£64 million available this year under the second tier of the LCNF. Its MKSmart2020 project aims to develop a smart grid in Milton Keynes. Crackett says the town's geography and make-up - commercial centre, suburban and rural areas - will provide results representative of the UK as a whole.
From a technical perspective, the firm will fit seven primary substations with condition monitoring and dynamic rating equipment. Around 200 secondary substations will be fitted with sensors and overlaid with smart grid communications and Central Networks will invest in software to try out elements such as dynamic loading and operation.
Technology and geography aside, Crackett says what sets the Milton Keynes project apart is that the local council is already committed to a low-carbon living programme. "They are genuinely trying to model 2020 today. It is not like we have to cajole people - they are pushing us on many things and have established partnerships to help deliver their ambitions," he says.
Examples include the council's agreement with Renault-Nissan setting out the road map for electric vehicles, under which it will provide the charging infrastructure with funds from the previous administration's Plugged-in Places scheme. It also has plans to build 60 low-carbon homes fitted with smart appliances, with all resulting data passed to Central Networks. The firm itself is also bringing in partnerships, such as with Accenture and GE, as well as local businesses.
Whether MKSmart2020 gets the green light will not be known until December, but the LCNF competition is oversubscribed by almost Â£130 million. What if Ofgem's judging panel decides against it? "We wouldn't give up, because this is something the industry must do," says Crackett. "We cannot just throw more copper at the increased peaks that decarbonisation brings. On top of replacing ageing assets, the nation will not come up with the money to do that."
*Networks for sale?*
Crackett laughs at the suggestion that, following EDF's network sale, Eon might do likewise. "I'll give you Johannes Teyssen's [Eon chief executive] number and you can ask him," he says. "Eon is a big firm, I'm sure they look at their assets from time to time, but the last time I checked there wasn't a 'for sale' sign outside. I'm sure they would let me know."
*From DNO to DSO*
As DNOs move into dynamic management of the local system, they also have to facilitate the technical and commercial arrangements between generators, customers, National Grid and suppliers: they become more a distribution system operator (DSO) than a network operator. New arrangements, incentives and relationships aside, Crackett says the scale of the balancing challenge facing DNOs could dwarf that of the transmission system operator.
"National Grid has 30 bulk supply points in the Central Networks area. We have 97,000 substations and five million customers with even domestic loads potentially swinging widely from minute to minute. Potentially it could be three orders of magnitude more complex a problem, which is why we need to try these things ahead of time, and it is one of the key things we want to do in Milton Keynes."
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