Last week saw the publication of a government-commissioned review into the cost of energy by prominent Oxford economist Dieter Helm. Helm called for a drastic overhaul of the UK’s energy policy, regulation and market structures, which he described as “not fit for purpose”. Unsurprisingly, the review garnered plenty of attention both inside and out of the energy industry.
Surprising, though, was that relatively little attention was paid to his proposals to revamp electricity networks, particularly by national media. Although these were arguably the most radical of his many recommendations, several outlets referenced them only in passing, or indeed failed to mention them at all.
Helm argued the RIIO regulatory framework is no longer up to scratch, claiming the price controls have been too generous the distribution networks operators (DNOs). He said DNOs have secured returns that would be the envy of their much-criticised counterparts in the retail sector and that the eight-year gap between settlements is too long given the breakneck speed of technological developments.
According to Helm, not only should the national system operator (NSO) be completely separated from National Grid and taken into public ownership, the government should also create a series of publicly-owned regional system operators (RSOs) which would be handed many of the current responsibilities of the DNOs and Ofgem.
These RSOs would be given the task of securing local energy supplies and would do so by holding tenders for specific system requirements. The DNOs would effectively be relegated to contractors – “one of a number of competitive suppliers”.
There would be no more benchmarking, no more allowances and no more periodic settlements: “At a stroke, much of what Ofgem currently does in respect of network regulation is no longer needed.”
“I think it needs to be thought about much more deeply than saying just because we’ve done it at the transmission level, we should also do it for distribution.”
Catherine Mitchell, professor of energy policy, University of Exeter
Catherine Mitchell, professor of energy policy at the University of Exeter, shares Helm’s concerns over network returns and the length of the RIIO periods. That said, she has several reservations about the solutions he has put forward.
Mitchell tells Utility Week that the “grid edge” companies which are seeking to disrupt the energy industry from the outside will “absolutely” want distribution system operators (DSOs) – as the DNOs are set to become – to be “separated out from the wires”. They fear that DSOs will otherwise favour network reinforcements over innovative alternatives.
However, Mitchell argues that this need not be the case, provided that the right incentives can be provided through performance-based regulation. DSOs which are “intimately involved” with network infrastructure could in fact be better placed to introduce non-wire alternatives.
Furthermore, she says separating system operation from network infrastructure at the distribution level could work out to be “very expensive” when compared to doing the same thing at the national level. “I think it needs to be thought about much more deeply than saying just because we’ve done it at the transmission level, we should also do it for distribution.”
She opposes the suggestion that RSOs could effectively act as both regulator and operator, adding there “needs to be more oversight”.
If Helm’s proposals were to be enacted, Mitchell says it would better to hold back for the time being. She envisions an energy system which is optimised from the bottom-up rather than the top-down. Before this can happen, she says DNOs need to be given the chance to build up a more granular picture of the distributed energy resources connected to their networks.
Her support for such a change would also depend on what exactly is meant by regional, as this bottom-up optimisation needs to begin at a truly local level. Without further clarity over what exactly Helm intends and more evidence to support his recommendations, her position is that of an “agnostic”.
Dan Roberts, director of the energy practice at consultancy firm Frontier Economics, is similarly unsure about the benefits of separating system operation from network infrastructure at the distribution level.
The Helm review cites the Offshore Transmission Owners (OFTO) regime as an example of where competitive tendering has already been introduced for network infrastructure. But Roberts says the benefits of introducing a similar system for distribution networks is far from obvious.
Ofgem is currently working to introduce competitive tendering for onshore transmission infrastructure through the Competitively Appointed Transmission Owner (CATO) regime.
Roberts says Frontier Economics’ analysis of the new CATO regime found that while there are definitely advantages to competition, there are downsides too. “It’s actually quite complicated to set up tenders for a piece of infrastructure… There’s a lot of fixed costs,” he argues.
He says the overall benefits are greatest when dealing with larger projects: “If you’re doing it for small investments then the cost-benefit assessment is going to look different and you might find the benefits of competition are outweighed by the fixed costs of the tendering process and managing tendered contracts afterwards.”
Whether competitive bidding at the distribution level would be a “net win” for consumers is unclear. “I think you’ve got to do more digging,” he adds.
“The separation of network ownership from its operation is clearly a direction of travel being seen in networks across the world.”
Mike Kay, member, Future Power Systems Architecture project
Along the same lines, Roberts says the Helm review fails to provide evidence that publicly-owned system operators would make better decisions. “The whole purpose of privatisation and liberalisation was to remove political and associated interference in the energy sector and inject some degree of commercial incentive,” remarks Roberts. “It may be that public ownership is better. It may that it’s worse.”
He says, with no profit incentive and facing increased media scrutiny, they could be “unduly risk averse” – prone to “gold-plating” the power system and therefore adding to energy bills.
Roberts says there needs to be “a lot more careful thinking”, not just about whether the proposed model would be better than the status quo, but also “whether the pros outweigh the cons by enough to justify what would be a massive restructuring of the sector, when the sector’s got so much else on its plate”.
Mike Kay is a member of the Institution of Engineering and Technology and Energy System Catapult steering group for the Future Power Systems Architecture project. Speaking on behalf of FPSA, Kay says separating networks ownership from their operation is “probably appropriate” given the need to develop alternatives to reinforcements: “The separation of network ownership from its operation is clearly a direction of travel being seen in networks across the world.”
At the same time, he says the FPSA is “wary of supporting this as an overriding principle”. “The counter view is that, if at the local level the flexibility and services never grow enough to provide sufficient liquidity of services to allow a true substitution of services for network assets, there is little point in the separation,” he adds.
Kay says Helm’s model represents a “radical proposal” which would be hard work to implement – probably “at least as complex” as privatisation in the late 1980s. “Helm doesn’t suggest a big bang to be undertaken in a very short time period, but nevertheless the scale of market redesign he is proposing by the early 2020s still seems very challenging to the current resources of Whitehall and the existing licence holders.” Although “probably by design”, the review “does not delve into the practicalities of implementation”.
Energy and Climate Intelligence Unit director Richard Black writes in a blog that while the Helm review presents a “plethora of ideas”, his review suffers from a lack of supporting evidence. Channelling a school maths teacher, he implored Helm to “show your workings”. This criticism seems to be as true for Helm’s proposals regarding networks as for any other part of the paper.
As Roberts notes, Helm presents his view of the best way to reform the energy system as “incontrovertible truth”. Yet, without evidence to back up his reforms, the review can, at best, “only ever be a catalyst to further thinking”.
Helm may be sure that he’s got all the right answers but, as things stand, he’s got a long way to go to convince others.