So far in our blog series on the DSO model, we’ve talked about how the nature of the UK power industry is changing (blog 1) and about the challenges and solutions for the DSO role (blog 2). In this blog, we will take a look at how the electricity markets actors will look in the next 5–10 years and why a separated System Operator (SO) is beneficial.
When separation becomes a legal requirement, the DSOs will need to be ready to accept and implement it. Experience from continental Europe suggests that resistance to necessary change benefits no one. The Dutch energy companies have been obliged to separate their grid operations from energy production and supply as of 2011. The law came into effect in July 2008, but companies were given time to implement the separation. Two incumbent integrated energy companies opposed the law and took the case to the European Court of Justice. They ultimately lost and completed legal separation early in 2017.
So if the separation of System Operator (SO) and Asset Owner (AO) is inevitable, what does the journey look like, and what timeline are we looking at? Some studies suggest that EVs will comprise the majority of new cars sold as early as 2027 and National Grid’s 2017 ‘Future Energy Scenarios’ report indicated that 34-40% of electricity generation will come from decentralised sources by 2025. This suggests that the technological tipping point for the new market model will be 2027 at the latest.
For the remainder of the blogs in this series, we will be referring to separation in terms of the 2027 end point of the below journey and the actors as defined below. The model shows the DSOs starting their separation process in 2022 as RIIO ED1 comes to a close. It then shows the DSOs reaching the destination point of their separation in 2027.
Separated SOs as market facilitators have the advantage of being able to consult the AO on distribution network changes, while remaining independent of network ownership to establish the trust of market participants. In such a model, the AO is likely to hold an advisory role, with a potential veto in some circumstances.
Proposed changes to the operating model that are being mooted for the DNO-DSO journey already represent a significant step forward in the way in which distribution is managed, but separation of AO-SO brings further benefits to the wider electricity system:
- The SO can take a more proactive role in managing the system for the benefit of wider group of stakeholders than today.
- Those wishing to invest in the industry will have confidence that the system across the country provides a level playing field for them to confidently put capital into the market for energy, capacity, and services.
- The SO will be better placed to respond to and facilitate the ongoing transformation of the electricity system based upon market demands (a long journey from where we are today).
- It will allow new business models to develop which are not possible/viable under the current industry model.
- It removes the problem of vertically integrated companies tending to hinder the entry of new competitors which is key to the efficient operation of the electricity system of tomorrow.
- The SO will be expected to actively communicate with DER providers and provide a level playing field for their market; there may be less incentive to do that if the SO is part of the body which owns the network.
There is a view that natural monopolies cause higher costs and lower capabilities and a system that promotes non-discriminatory distribution network access will challenge such inefficiencies. However, a full cost-benefit analysis will be needed to prove that AO–SO separation is the correct approach due to the potential loss of economies of scale and the potential for double margins as more parties will exist in the new market model.
In the next blog, we will delve a little deeper into the objective of a separated SO and what this separation will actually look like. In the meanwhile, I would be happy to discuss the DSO model. Feel free to reach out to me via my profile or on social media.