Without reform of our energy networks, the Energy Transition is in jeopardy of failure

System operation of distribution networks is becoming increasingly critical to the GB energy transition. More distributed, decentralised generation is being connected to the grid to decarbonise our fuel mix as part of the drive to net zero in 2050. Consumers of electricity are becoming more active and more diverse with EVs, prosumers and demand-side response creating a complex challenge to be balanced second-by-second. Today’s electricity network relies on the Electricity System Operator (ESO) to balance the system centrally and keep the lights on. As demand and supply side complexity increases, it is becoming increasingly apparent that centrally managed balancing is not enough for our future electricity network. System balancing at local scales is needed with Distribution System Operators (DSOs) required to take up this role.

Despite the clear industry need, the situation becomes murkier on how DSOs will be established. Should DSOs be an extension of the existing Distribution Network Operators (DNOs)? Should they be carved out of DNOs? Or could new organisations be set up?

The unfortunate reality is that this is another example of how modernisation of the energy networks sector has not moved fast enough. Old ideas are being revisited and little clarity has been provided on the sector’s direction of travel and the answers to key questions such as the DNO-DSO transition – more needs to be done now.

In this blog series, we will cover:

1. The case for sector-wide reform of our energy networks
2. The pros and cons of the proposed DNO-DSO models
3. The technology and infrastructure challenges facing DSOs
4. How open data will be critical to the success or failure of DSOs
5. The impacts of the DNO-DSO transition on the workforce
6. The role of cross-sector coordination – will it accelerate or hinder the transition?

In this blog, we look at the case for wider reform of the energy networks sector to enable a successful Energy Transition in the UK. In responding to Ofgem’s Future Systems and Network Regulation open letter, we’ve highlighted 6 reforms we believe are needed:

1.Whole system thinking and regulation

The current energy crisis has highlighted the interconnectivity of our system. Gas shortages, caused by the Covid-19 rebound and the war in Ukraine have hiked energy prices across the globe, leading to a cost-of-living crisis and forcing businesses to rethink their business models, e.g., VW are looking for alternative battery technologies to combat the increased cost of raw materials. The distribution network in the UK must be viewed as part of this interconnected system, to establish a holistic flow of energy, money, data, and agreements for our future networks.

The current regulatory regime was designed in 2010 – it is no longer fit for the energy system of 2030s+. Ofgem & BEIS’ reviews of network regulation and electricity markets arrangements must incentivise whole system coordination, wielding their regulatory might to drive gas and electricity operators, retail companies, generators, flexibility providers and local and national government entities to collaborate to deliver the decarbonised energy system needed to achieve net zero. Practically, significant upgrades to the electricity network are needed for this future system and the future of gas needs to be clarified, along with how the gas system interacts with the electricity system. Without this whole system mindset, the funding to modernise our energy networks will be wasted as siloed working continues and transitional ‘debt’ and stranded assets build up.

2.Consumer focus

The end-consumer must be at the heart of future energy networks. The energy crisis has delivered a heightened level of awareness of the role of energy networks in the public. They have never been more interested in the drivers behind energy prices, how to use less energy or even how to help to avoid a blackout.

Energy networks’ customer strategies cannot be shelf-ware. These strategies must guide activity across their organisation to harness this public engagement in support of their modernisation agenda through active participation in consumer-focused schemes such as EV charging rollouts, connection of embedded renewables or accessing local sources of flexibility. Network companies should look to adopt best practice from their retail counterparts, investing in software-as-a-service platforms (such as ENSEK or Krakenflex) to manage their relationships with their customers as key and active cogs in their network. Without this engagement, interest will wane, and consumers will become a blocker to modernisation.

3.Regulatory plan duration and agile governance

The current regulatory periods consist of lengthy review cycles and require high levels of detail. This moves us too slowly in the right direction. It drives an over-reliance on existing technologies, ways of working and market arrangements at time of writing. This all translates into delivery based on past decisions, rather than adapting to market challenges and developments.

The next regulatory framework must be more agile to drive the modernisation needed and keep pace with changes to supply and demand. It should include more frequent review cycles and standardised submissions that enable consolidation and benchmarking. Performance metrics of network build should be regularly reviewed against forecasts and clearly reported regionally and nationally. Iterative implementation targets must be used to ensure large programmes of work respond to evolving external factors, while still delivering strong outputs. Without this agility, continuing with current regulatory approaches will trap the energy networks sectors in 2022 while the rest of the system accelerates further ahead.

4.Regional network control

The future structure of DNOs and DSOs is yet to be decided. What is the best solution for reorganising these operators? Ofgem has outlined four frameworks for consultation:

1. Internal Separation;
2. Independent DSOs;
3. Regional System Planner/Operators; and
4. Interacting Organisations.

With Ofgem’s final decision pending and expected in the next 6 months, all 6 DNOs have outlined in their ED2 business plans how they will adopt framework 1. This is no surprise given the uncertainty, but we implore Ofgem and the DNOs to increase their ambition. Framework 1 will implement local system operation and will bolster market facilitation and planning. However, it won’t drive a whole system mindset as DSOs will solely focus on electricity. It also won’t establish a strong link between regional and national networks, with joined up network investment and safeguards in place to reduce issues across network boundaries. And it will not fully address the need for independence for the DSO from network operator functions and could just be a steppingstone to full separation, as is ongoing with the ESO being carved out of National Grid to become the Future System Operator. This opportunity cannot be squandered while the need for major organisational changes is clear.

5.Digitalisation and open data

The future network will have millions of automated actors interacting and balancing the system in real time. This will require a wholly digitised system, capable of moving vast amounts of data. This will require Network companies to upgrade their physical and digital infrastructure to implement a smart digital grid. They will need to refresh or upgrade their SCADA, GIS and digital asset management systems, implement dispersed sensors and adopt open data to enable automation and coordination of operational assets. Today’s energy system is plagued with data quality issues, complicating operational processes and impeding decisions by policy makers and regulators. Network companies will need comprehensive data strategies, underpinned by robust data governance, to avoid this continuing.

DSOs will need to build many of the digital capabilities required for system operation from scratch. While daunting, this also presents an opportunity to adopt a digital first mantra and avoid the costly retrofitting impeding other actors today.

6.Network companies of the future

Finally, DNOs’ workforces must be realigned to future needs, with an increasing focus on digitalisation, customer management and whole energy system planning and operations. Organisations must identify the capabilities they need to modernise and deliver strategic workforce plans and sourcing strategies to grow, secure and retain those capabilities, through upskilling, reskilling, hiring or via their supply chain. A fundamental shift in organisational cultures and employee value propositions will be critical as the demand for new talent increasingly outgrows the industry’s ability to attract it and employees will look elsewhere for more attractive roles. If the sector does not quickly adapt, it will lack the resources needed to enable the energy transition.

Conclusion

The case for network reform is clear. DNOs and other network companies face a broad range of challenges – organisational, technology, people, regulatory – to achieve a successful DNO-DSO transition and adopt future system operations roles. This could seem daunting or insurmountable, but we believe there is cause for optimism. We have highlighted key solutions that DNOs and other sector players can implement to achieve the needed reform, which we will explore in more depth with our experts in the run up to April 23. After years of slow progress, let’s hope 2023 marks the start of the rapid modernisation we need!