In my previous blog, I examined the DSO business model, and in this last blog in the DNO-DSO series I look at the steps to achieve this, and the challenges to manage, in order to thrive as a DSO.
Two to three years from now the DSO should look to separate the system operator and asset owner businesses. There would be clear strategic and organizational steps to undertake in order to make this a reality:
1. Decide where the organization wishes to be with respect to a DSO maturity level, by when, and then clearly define a strategy/roadmap to get there and any innovation projects needed to support the journey.
2. Set out the approach for regulatory engagement and driving regulatory change to support the vision, including incentives modifications and social equitability strategy.
3. Agree on the approach for industry engagement, including licences, code modifications, and how DSOs can work together and with the TSO for wider industry advantage.
4. Design the internal organizational boundaries encompassing the role and relationships of the system operator and asset owner for day-one separation.
1. Define the target operating models comprising the organizational scope or the separation and executive reporting lines and structure.
2. Design the external organizational boundaries with external interfaces, including shared services, for day-one separation.
3. Develop the business case for both entities including the markets to enter and avoid now and in the future; e.g. electric vehicle charging, CHP ownership, street lighting, consultancy, and modelling.
4. Develop the market model and contractual framework regarding how the new entity will address the market and what contractual terms it wants to promote.
5. Developing the capabilities required to operate the new model such as new contractual, commercial, and asset management/operation capabilities will be critical.
6. Design the information architecture to operate the new model, including systems and data flows/usage.
7. Develop the future service offerings, e.g. demand-side response.
8. Develop a model of socio-economics and demographics against energy intensity/use to identify and target interaction with likely prosumers.
9. Develop customer-focused views of some of the key processes with high customer interaction, such as provisioning of new connections.
Of these tasks, the one which should be planned and executed first is the regulatory strategy. In order to create the landscape required for a successful transition, DNOs will need to work with the regulatory bodies to ensure that regulation is updated so the existing business model is not negatively affected by the proliferation of DER over the next 24 months. In fact, DNOs should push for incentives that promote the integration of new technologies and generate R&D funding, thereby showing clear system planning and operational benefit from DER as early as possible.
DSOs are certain to remain as regulated organisations well into RIIO2 and their activities could become limited by an overly restrictive regulatory framework. It is therefore important that the DNOs do not try to predict what the exact DSO business model will look like. DNOs should be working to help refine RIIO2 incentives that enable them to design the optimum model to create a profitable business which meets the needs of the customer and the wider electricity system/market and can react to changing technology and consumer behavior.
What are the challenges?
There are further complications that the DNO will need to understand and manage:
1. Access to finance for capital investment.
2. Increasing numbers of participants becoming involved in the sector, including potential long term disruptive plays from companies such as Tesla and Google.
3. Changing nature of energy use by both the public and corporations.
4. Environmental concerns and regulations.
5. Increasing competition for appropriately skilled resources.
6. Increasing customer access to information and the increasing data security requirements.
The above demonstrates that there is a long journey ahead for the UK DSOs, and it is one which cannot be taken lightly. So planning the next steps over the next few months will be crucial