The energy sector is transforming, again. BEIS and Ofgem’s ‘Upgrading our energy system’ report last week is the latest welcome intervention to define a changing energy system.
After what could be described as a renewables revolution we are now embarking on a flexibility revolution. A combination of distributed generation, electric vehicles, demand side response and energy storage will begin to transform our energy system, yet this time the engine room may not be investments in big generation stations but the previously low-profile Distribution Network Operators (DNO).
In the past, the role of a DNO has been to provide efficient, reliable electricity supply by distributing power from centralised power stations down to homes and businesses. It’s a role they have fulfilled well but beyond that there has been limited involvement with the functioning of the energy market. But these days are gone. DNOs now have to transform into Distribution System Operators (DSOs). This is more than a change in name; it marks a complete change in role.
No longer will efficient supplies, connecting new sources of energy and transporting it be enough; the task will be to operate the network optimally and become a “neutral market facilitator”. New market models are emerging, for example “peer to peer” selling – akin to an Ebay for electrons – and the role of a DSO will be to provide the postal service and visibility to allow these new market models to operate. This will ultimately enable thousands, if not millions, of consumers and producers to buy and sell as they please.
A DSO will allow the creation of efficient and dynamic local energy markets, not only by providing the network visibility needed but also by making investment decisions that balance the whole systems cost of network constraints against the cost of removing or managing them. The DSO needs to be objective and open-minded, working with communities, stakeholders and the Transmission System Operator to deliver a whole-system approach.
The scale of this transformation requires a new mind-set and a commitment to change from network operators. This transformation could be described under the banner of three C’s:
- Customers
- Costs
- Collaboration
As well as efficient and reliable energy supplies, Customers, businesses and local communities will want more from their energy system.
They will need to be offered choice over where they source their energy and how their lifestyles are integrated into the network. The challenge for DSOs is that engaging in this transformation may not be for everybody. A flexibility revolution driven by rooftop solar panels and energy storage is welcome, but careful consideration is needed to ensure that this doesn’t result in unintended consequences, not least some communities falling behind.
That’s why ensuring reliability and the resilience of the network cannot be compromised. DSOs must therefore transform their role, protect the most vulnerable and continue to deliver a resilient and reliable network for all. It’s a tough ask but our customers will expect nothing less. At SSEN we have experience of meeting these customer challenges when we introduced the UK’s first smart grids into Shetland, Orkney and the Isle of Wight. We are taking forward the lessons from these projects and sharing them with other network companies.
Cost is paramount and the transition must be efficient for bill payers. As part of its Industrial Strategy this government is seeking the cheapest energy prices in Europe. In support of this aim, I am proud that network charges related to electricity distribution have reduced by 17 per cent since privatisation despite significant investment taking place. One of the major successes of the RIIO regulatory framework is that customer service has improved as costs continue to reduce. Indeed, distribution costs have fallen by 6% since RIIO began and are predicted to remain flat for the remainder of this decade.
Ofgem has signalled that energy networks should prepare for tougher future price controls and, despite the scale of the transformation, customers will not accept a huge bill for the DSO transition. However, again, I am optimistic: our Orkney smart grid has been delivered for around £500,000 and using Active Network Management we have connected over 20MW of renewable energy, this is extremely good value when compared to a cost of around £30 million for conventional connection, upgrading and reinforcement. Of course, a dramatic increase in electric vehicles and heating won’t be cost-free, but if we are smart we can control these costs.
The last of the three C’s, collaboration, cannot be underestimated and will be vital to achieving the goal of efficient regional DSOs. That’s why we support the ENA’s Open Networks Project and welcome BEIS and Ofgem highlighting it as a “key initiative” in their report this week. The RIIO framework provides the right conditions for the evolution of DNOs and this collaborative project builds on this to bring together all of the network operators with the aim of realising the DSO transition through a unified approach, where new systems, trials and learnings can be shared. Collaboration clearly also extends to working with stakeholders locally, nationally and across our industry.
In conclusion, I see big challenges ahead, but also huge and exciting opportunities. Though the transformation will be complex and highly technical, if we look after and listen to customers, efficiently manage costs, and collaborate across the industry, we can be the engine rooms for the flexibility revolution.
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