Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Network flexibility to provide new opportunities for business

Distribution Network Operators (DNOs), the companies that own the local wires and pylons that flow power to the majority of homes and businesses, are starting to trial a new suite of services to help them more actively manage their networks.

These services, driven by a greater penetration of renewables and other inflexible generating technologies, are tendered out to flexible market participants such as peaking generators and consumers. While the nature of the services will vary depending on the specific challenges facing each region, businesses may be able to earn revenues by reducing demand during periods of peak system usage.

Adapting to a changing system

Increased penetration of small-scale distribution connected renewables such as solar PV and wind farms is driving technological change at the distribution level. Increasingly the network operators are having to intervene in the network, much like National Grid’s does at the national transmission system level, or offer constrained access to new connections to ensure the system operates within tolerable ranges.

This has led to some regions enforcing a hiatus on new generation connections to ensure grid stability in constrained areas. This is particularly relevant in the south west where solar PV penetration is high and north Scotland with onshore wind deployment.

To help meet the challenges of managing resulting local system imbalances, DNOs are now beginning to transition to becoming Distribution System Operators (DSOs) to take a more active network management role.

The Energy Networks Association (ENA) published a roadmap in July 2017 outlining how a DSO model can be introduced.

The Open Networks Project is an industry-wide initiative to drive progress towards a smart and flexible energy network. It is designed to deliver policies set out in the Ofgem and BEIS Smart Systems and Flexibility Plan, the government’s Industrial Strategy and the Clean Growth Plan.

Initiated in 2017, the project has now entered the impact assessment and early implementation phase, with distribution networks trialling a range of services with local users. While the Open Networks project is designed to create an open forum for discussing these changes, there is no obligation that DNO/DSOs create a common or standardised suite of services for users to engage with.

The project recently opened a consultation – closing 11 June – to identify gaps in the management process and create and action plans to facilitate the promotion of storage where it can assist quicker and cheaper connections.

Opportunities for business

The move towards DSOs, and therefore smarter and more flexible systems, is expected to provide revenue opportunities for businesses.

In April the ENA launched Network Innovation Strategies that set out the areas of focus where network operators can provide benefits to customers through innovation.

Some networks are already taking action in this area. For example, Electricity North West (ENW) has asked companies in its operating region to generate more power or reduce their energy usage at times of high demand to help it manage system peaks. The new flexibility service will provide payment to those who are able to adjust their production or consumption of electricity. Where there is sufficient interest and availability ENW will run a competitive tender for contract delivery in winter 2018-19 and winter 2019-20.

Scottish and Southern Electricity Networks (SSEN) is trialling a smart grid system that it says could help “unlock new revenue streams” for businesses by allowing opportunities for energy trading between users. The network operator is partnering with software company Open Utility, which has developed a smart grid flexible trading platform called Piclo. The move is part of Open Utility’s trial of its Piclo platform, which will take place throughout 2018 as part of a BEIS-funded project.

ENA CEO David Smith said: “Decarbonisation, digitisation and decentralisation are driving revolution in the energy sector, and our energy networks are on the frontline of delivering the kind of world-leading innovation that is making that happen.”

Access to revenues

DNO revenues are subject to the electricity distribution price control (RIIO-ED1). This is a negotiation between the network companies and Ofgem to determine funds to maintain networks and invest in new assets.

DNOs can offer the flexible DSO services going forwards because asking users to use the network in a more effective manner outweighs the costs of reinforcing the current network and investing in more assets. However in recent weeks network operators have come under criticism from Citizens Advice. The consumer advocate called on DNOs to pass on what it described as excess profits to consumers. The statement said that consumers were “overpaying” on energy bills by an average of £285/ household over the eight-year price control period.

But recently Western Power Distribution (WPD) – voluntarily returned £77mn of its price controlled revenues to consumers, following the government’s decision to reduce its rail electrification programme. This was welcomed by Citizens Advice but said consumers “shouldn’t have to rely on firms voluntarily returning money”.

The ENA responded, describing the claims as “misleading”. An ENA statement read: “The calculations underpinning this analysis […] run directly counter to the conclusions of the independent regulator and the Competition and Markets Authority.” It also said that network costs are down 17% under the current ownership model, which has delivered £9bn of savings for consumers through efficiently running a “world-class” system of energy networks.

ENA also criticised Citizens Advice for not fully understanding the way capital costs for network companies are forecast, underestimating the risks that network companies must take and misunderstanding the way the price control system works. It also said that “energy networks are accommodating a period of rapid technological change, which will create uncertainty around how network companies will make money the future.”