Driven by technology and innovation and set against a backdrop of carbon reduction targets, there is increasing interest in distributed energy schemes across the world in both developing and mature markets. Projects often involve smaller scale generating plant connecting either to a private wire network or to the distribution networks and supplying the energy generated to local users. Some schemes are not connected to a utility’s distribution system at all and operate as islanded systems.
This is a fundamental shift from the traditional energy market model which involves large, often fossil-fuelled, power plants connected to a high-voltage transmission network. Typically designed in the first half of last century, these systems are reliable and secure and large enough to mitigate the effect of transmission losses. They were designed to operate most efficiently under central despatch with very limited generation or demand-side response on the lower voltage distribution networks to which most customers are connected.
Crucially, generation was disassociated with demand. Now, however, the world is changing. Renewable energy constitutes an ever-increasing proportion of installed capacity. Many forms of renewable generation are intermittent, and because of their size are connected to distribution networks rather than the transmission grid. Windfarms are located where it is windiest and solar plants where it is sunniest, which may mean a remote location. Energy storage is developing fast, using innovative and creative techniques that encompass a far wider range of tools than just batteries, and which when coupled with smart metering mean that energy islands employing a mix of technologies are becoming a reality in remote areas.
The development of distributed energy means the operators of distribution networks must play a more active role than they have traditionally. They are already having to adapt to increased levels of distributed energy connecting to systems that were not designed for it. They must manage flows on to as well as from their networks, they must manage intermittency, and they are increasingly likely to be given a role in facilitating market development for new technologies.
Innovations in the technology of data collection and management make this role all the more important. Smart meters clearly have a very important place, providing a much higher degree of granularity than has been previously available. Greater volumes of data means greater complexity in network operation, but the increased amount of data also means that, with appropriate management tools, system reliability can be improved and real-time constraint management introduced.
It is not just the technical arrangements that need to adapt to meet the challenges posed by distributed energy. The commercial and regulatory environment mirrors the traditional technical model, and will need to adapt as well.
In Great Britain, licensed distribution network operators (DNOs) were created from the unbundling of the public electricity suppliers and have de facto monopoly distribution rights in their local area. Any other licensed operators in that area have tended to be associated with housing or industrial estates with multiple customers buying energy from licensed suppliers. Other sites with no domestic customers, or below a certain capacity threshold, have operated private wire networks under a statutory exception from the requirement to hold a licence.
The wire network clearly plays an important role in any distributed energy scheme. Private wire networks directly connect generation and demand via privately-owned micro-grids, which can vary in complexity from a simple direct connection to a complex network on a hospital or industrial site. The private wire network has a single connection to the DNO’s system. Managing import from and export to the distribution network is managed by a local operator, who is particularly important where that single connection is export limited.
So-called virtual private wire networks differ from private wire networks in that there is more than one connection to the DNO and power flows between them via the DNO’s network. The net contribution to the DNO’s system is the same as a private wire network, and is netted across the various connections to a single point. Duplication of infrastructure is avoided by use of the DNO’s system, rather than having to build private connections between separate sections of the network.
Commercial and contractual arrangements are complex, and because electricity is flowing across the DNO’s system a licensed supplier will need to be involved. Management of the virtual private wire network operator is also more complicated because the operator must manage the imports and exports at the various connection points and the net position with the DNO. It may also be useful to employ a demand aggregator to manage demand-side response within the distributed energy scheme.
The benefits of these schemes include potentially lower bills for end users as a result of the reduction in transmission and distribution charges and reputational benefits. Distributed energy schemes may also help to alleviate congestion on the grid, which may help DNOs by deferring infrastructure investment. On the other hand, DNOs may find themselves with stranded assets as customers go off-grid, or having to manage intermittency across a virtual private wire network with reduced visibility of what is going on inside that private wire network.
Certainly, active network management is going to become the norm, involving generators having a different relationship with the DNO through connections that are managed to optimise the distributed energy scheme operation as a whole, rather than giving each generator firm entry capacity up to its rated capacity. All this will require changes to the current licensing arrangements (particularly around exemptions) and to the DNO price controls. Ultimately, however, it is innovation and technology that will drive the necessary regulatory changes – not the other way round.
Elisabeth Blunsdon, counsel, Hogan Lovells