Demand patterns for energy consumption are changing faster than ever. Two-way power flow is changing the game, driven by renewables like solar and wind generation, as well as distributed energy resources like energy storage, electric vehicles and community grids.
These changes will fundamentally and structurally change the energy sector. This evolution will require contemporary transmission system operations leveraged across the electrical distribution system, create new opportunities for business models, allow consumers to monitor and manage consumption closer than ever, and allow for the market to deliver new and enhanced services to customers.
This revolution reflects a broader change in how consumers desire to interact with the electricity market. Depending on where your interests in the industry lie, some have benefited while others struggled to predict the uptake and scale innovations. For example, in the current price control period, utilities’ projections of technology adoption and renewable penetration were off by orders of magnitude in some cases. If you’re in the technology business or a consumer, this scale should excite you.
Consumers continue to receive much of the economic benefit of firm price controls, and the scale of adoption has brought down prices in many sectors, making participating in new markets easier and more attractive. But are utilities bearing undue risk in this market transformation with minimal upside benefit? Are they even the right party to bear that risk?
Balancing access, power reliability, risk and costs is an increasingly complex challenge facing utilities. To better serve these network flexibility challenges, the market must transform to a new model: distribution system operators, or DSO.
In theory, this is not a one-to-one correlation with the existing distribution network operator (DNO) role, as we know them in the United Kingdom.
The DSO model is an attempt to realign the market to maximize the available resources, foster competition and technology adoption, all while continuing to solve micro-level, day-to-day challenges throughout the network. This can’t be done in a vacuum, and various stakeholders will play roles in the transition. Innovation and change can benefit all, although the scale of change might seem overwhelming to a heavily regulated utility. Small steps can be taken to enable a future we can’t perfectly imagine today. But who is best suited to serve as the DSO?
Pros and Cons of Utilities as DSOs
The DSOs will need to take an active management role and serve as unbiased third-party arbiters of electricity throughout the network. They must accommodate for flexible supply and demand by being active in the planning and forecasting of the system’s future needs, as well as tied closely to delivering customer requirements — sustainability, reliability, affordability — through a deep understanding of network constraints and real-time asset interconnections.
By managing these assets, current and future network challenges can be resolved at the distribution level in real time, using network performance data to drive both efficient operation and future investment strategy. DSOs should plan the location of resources on the electric system for the benefit of all customers.
DNOs in the U.K. have an important role to play in the transition to the DSO model. As network owners and operators, they are uniquely familiar with their systems and where resources can be deployed to accommodate for the intermittency caused by renewable and distributed generation. They are responsible for monitoring and managing their systems and developing investment strategies for future growth. They also benefit from economies of scale that may be needed for sufficient adoption and cost distribution, while protecting the country’s most vulnerable.
There are reasons the DNOs might not be the right fit, either. As technology, communication systems and data creation continue to evolve and amalgamate, it’s challenging for a traditional utility to keep up with developments and the urgency the market faces. And as rapidly as the technology is changing, the broader transformation in the industry is bound to take time. Innovation is likely to outpace the ability to adopt and deploy. That transformation may be too slow for the market, paradoxically then passing the utilities by incrementally.
If we can get more out of the existing network and avoid costly and timely network reinforcement, consumers win. Moreover, the DSO could also take responsibility for parts of the transmission network, for example in a more collaborative environment where the existing TSO/DSO boundary coincides with the constraint being addressed. Blurring the boundary of traditional stakeholders could allow for electrical distribution system solutions to resolve transmission-level constraints.
The additional reliance on distributed generation solutions will also depend on data and cybersecurity controls to safely and effectively manage and deploy resources in real time. As the number of end-point connections increases by an order of magnitude, so do the threat vectors for bad actors. DNOs and DSOs will need to collaborate to implement robust security programmes to forecast demand, communicate about network needs, and control and dispatch resources.
Forging a New Path in the U.K.
As the electric industry works through the transition process, three catalysts stand out: stable regulation, utility consultations on what DSOs should look like, and price control periods.
Government regulators in the U.K. have moved to stop utilities from owning or developing new energy storage facilities. This fragmentation may put a further wedge in the DNO/DSO separation, but it doesn’t address how storage gets paid — which could still make or break the market. The intent is to make it easier for a DSO to serve as a neutral third party, protecting a level playing field for power aggregators to meet demand fairly. This will take further refinement and consideration of the role of storage on the network and associated legal and commercial considerations from the Office of Gas and Electricity Markets (Ofgem).
Starting in November 2016, the British utilities began conducting consultations to gain public input on the DSO model and how DNOs may adapt. Some recurring themes have emerged:
- Emerging business models and the role of the regulator as local market referee
- Need for licenses to support new market participants
- Need to work out the clearinghouse/settlement process for peer-to-peer and local markets
- Technology is advancing quickly, and adoption must be done at scale
- Energy forecasting and balancing
- Electric vehicles will bring solid load growth and support ambitious carbon goal attainment
- Innovation will continue as the barriers to entry lower; how will utilities be active participants?
- Social justice: Policy will be needed to protect the most vulnerable customers
The third catalyst is price controls as the RIIO (Revenue = Incentives + Innovation + Outputs) framework for gas and electricity transmission and distribution winds down, and plans for the RIIO-2 framework begin taking shape. The DSO revolution means planners will need to consider different metrics to incentivize the market to address system uncertainties while protecting customers. RIIO-2 will need to place bounds around and provide guidance for the pending uncertainty, including the role of storage, electric vehicles, the DSO (with a view toward solutions that benefit all of the UK system), and pathways to decarbonization. The outputs and inputs model is still appropriate, with allowances of targets and sharing. Effective incentives for uncertainty will be crucial for aligned customer and utility benefits.
Price controls typically reflect input-output metrics. As wealthier customers begin adopting technologies like rooftop solar and electric vehicles that alter their reliance on the grid, the traditional consumption-based model of rates skews against those who can’t yet afford those options. This is problematic because even as consumption is reduced in some corners, substantial fixed costs for physical infrastructure are spread across a smaller portion of the population. Maintaining fairness and protecting the vulnerable members of society is an important consideration in the conversation.
Extrapolating the Mile Markers
The network flexibility revolution is happening across the developed world. The ongoing changes in the U.K. provide an opportunity for analyzing and participating in the journey. The DSO is likely to have a defined owner for a few years, until the regulation, market or technology adoption catches up. At that point, potentially around RIIO-ED2, there will need to be further separation and independence in these roles. Customer needs and efficient asset investment and management must be at the center of the development. Moreover, stable regulation to support the evolving industry is necessary to promote investor confidence throughout the value chain. This will come from Ofgem aligning interests and providing upfront clarity on the allocation of risks to the appropriate stakeholders.
It is clear there must be collaboration with and among the existing stakeholders to holistically support the increasing flexibility at both the electrical transmission and distribution level. Utilities and anyone serving in the DSO role must leverage new technologies — including determining new methods like distributed generation to solve traditional challenges — while maintaining the expected levels of reliability and pricing. Regulators will have a delicate balancing act to incentivize investment while protecting consumers and competition. Finally, all parties must engage with the broad community to address and solve the challenges affecting us all.
Learn about a legal battle in the United States over how to value the grid in the era of distributed generation.