What is the business model that UK DSO should adopt?
As can be seen from the value chain set out in my previous blog, asset information and the ability to manage contracts and portfolios are the key enablers to creating a profitable organization. Therefore there is a potential advantage for the future DSO to separate into two entities: System Operator and Asset Owner. An illustration of how this separated DSO Operating Model would look and should interact with the market is illustrated below, with the DSO entities shown in green.
The main advantage of the above structure is that the System Operator is free to contract with privately built assets as well as its own area distribution assets. In addition, the DSO may choose to have more than one System Operator geographic business unit to allow it to most effectively manage the range of relationships and interactions driven by the changing market. This allows the DSO to deliver flexibility using the exchange of real-time system data. The range of new technologies that are becoming available to interact with the DSO customers, such as Smart Meters and the wider Smart Grid, offers the possibility to make the above model work commercially.
“There are a number of things that the DNO should be putting in place now to make the upcoming journey successful.”
This model would mean no change to current ownership of network assets and the Distribution Asset Owner could take on DER ownership if advantageous (and permitted by regulation) and become a supplier as well as a customer to the System Operator. The System Operator would remain familiar with its own geographical area’s power system, but it would need to be separated in such a way that it would be free to become an operator in other areas (controlling more than one physical network) without causing a conflict of interest. In addition, a single existing DNO could separate itself into a single Asset Owner and a number of System Operators to manage the power markets locally and create more flexibility to enter into contracts and joint ventures.
What is the journey to the UK DSO business model?
Many DNOs have limited visibility of the operation of their current network due to poor data. In addition, there is limited existing capability to control and execute balancing. This means that the starting point for the journey is some way from the destination, even from a functionality perspective. In addition, interaction with customers is currently not high—as most of this is done by the energy retailers—so customer experience is at an early maturity level. There are a number of things that the DNO should be putting in place now to make the upcoming journey successful.
First 24 months—operating as a DSO “Demand Balancing”
The DNO will need to develop a commonly agreed vision for the customer propositions it wants to offer to identify the capability, capacity, IT, process and knowledge gaps in its organization. This will provide a view of the size of the transformation to be undertaken.
As part of this transformation it will be essential to develop techniques to model the whole-system behaviour of the network and its new business interfaces. Given the increasing rise of DER and the rollout of Smart Meters there is already greater interaction and variety within the key processes such as operations, new connections, DER access, customer services and planning. This will require new skills, processes and systems to effectively manage and benefit from.
Out in the network, increasing amounts of DER will require investments to physically connect all new resources. SCADA, actuators and Intelligent Electronic Device (IED) will need to be deployed as part of the journey to creating a truly Smart Grid to manage the increasing volatility of net and peak demand. However, this investment should be offset by reducing the enhancement of existing facilities which are economic barriers to the integration of DER. So it is clear that asset planning and strategy will require a major review at an early stage of the journey.
Of course the Smart Grid in itself is only an enabler to operating as a DSO and, in order to operate the network more successfully, the DSO will require a control centre that works with embedded predictive analytics and AI. This center should be able to take the data and information coming from the system and make automatic changes as necessary to balance the system. In addition, it will need to provide relevant and timely management information to allow manual adjustments as necessary. This will require multi-way links to interface with the DER network, the TSO and other DSOs to manage the multi-exchange of balancing power. In addition, this center will need to be the “brain” that supports the DSO in making relevant market trades.
Of course there is more to say when it comes to the long-term future of the DSO, and the challenges it will face entering RIIO2. More on that topic next month.