Ofgem has reached a minded-to decision on the funding model for an innovative demand-side response service that unlocks spare power on electricity distribution networks by lowering the voltage by imperceptibly small amounts.
The regulator said it intends to continue allowing distribution networks operators (DNOs) to sell the service to the electricity system operator (ESO) beyond the end of their current price control period in 2023.
The service emerged from an innovation project called CLASS (Customer Load Active System Services) undertaken by Electricity North West between 2013 and 2016, which found the voltage on distribution networks could be reduced by up to five per cent without customers reporting a noticeable effect on power quality.
The DNO installed new voltage controllers at 60 of its substations serving 485,000 customers and trialled the service for a year.
It has since incorporated the service into its day-to-day operations and is in the process of rolling out the capability to 260 primary substations serving around 2 million customers.
Work has now been completed at 243. The service can currently provide up to 40MW of flexibility during the summer and up to 110MW during the winter.
In 2016, Ofgem issued a direction that DNOs should not receive additional price control revenues to cover the costs of providing such a service. They should instead be should be allowed to sell the service to the ESO and split the profits and losses with customers. It would be included in the category of directly remunerated services within the RIIO ED1 price control.
Electricity North West has so far used the capability to provide frequency response and fast reserve services, submitting its first bids to the ESO in March 2018 and April 2019 respectively.
It remains the only DNO to date offer the service to the ESO. The company has previously estimated that it could provide up to 3.3GW of demand-side response and 2GVAr of reactive power absorption if rolled across the whole of Great Britain.
Ofgem’s minded-to decision concerns the funding model for the service under the RIIO ED2 price control, which is set to begin in April 2023.
The regulator explored three options: continuing to include it within the directly remunerated services category and allowing DNOs to sell the service to the ESO; covering the costs through the price control and requiring DNOs to the service to the ESO for free; and prohibiting its use by the ESO.
Ofgem has stated previously that as a general rule DNOs should not undertake activities that could be done by third parties as new roles are created as part of their transformation into distribution system operators.
It was for this reason the regulator chose to bar DNOs from owning and operating storage assets, arguing this would “impede the development of a competitive market for storage and flexibility services”.
In a document explaining its latest decision, Ofgem noted that this new service by its nature cannot be provided by anybody other than DNOs.
Whilst acknowledging the potential for it to affect the neutrality of DNOs in other areas, the regulator said the risk does warrant prohibition of the service, which would “reduce the ESO’s ability to utilise balancing services from the widest range of technologies and providers, ultimately precluding consumers from benefitting from potential efficiencies.”
Ofgem said it has seen “no substantive evidence” that the service has distorted competition or led to worse outcomes for consumers and emphasised its powers to inflict harsh punishments on any company leveraging its monopoly position to gain an unfair advantage.
It said requiring DNOs to provide the service to the ESO as part of their price control would be inefficient, reducing the volume of balancing services procured through competitive markets. If the service was more expensive than the alternatives, then costs to consumers would increase.
By contrast, continuing to allow DNOs to sell the service to the ESO – Ofgem’s preferred option – would incentivise them to invest “only where it is expected to be competitive and therefore assist in delivering lower balancing costs”.
The regulator is consulting on its minded-to decision and has given interested parties until 23 March to submit responses.