A year in the life of DSOs | Setting up and growing

Electricity networks have now completed the first year of delivering distribution system operator (DSO) functions under the ED2 price controls. Tom Grimwood speaks to some of those networks to assess what progress has been made and how their approaches differ. Here he looks at how they have set up and then grown their DSO teams. 

The beginning of the ED2 price controls in April last year was a significant moment for electricity distribution networks. The development of their distribution system operator (DSO) functions has been going on for a while now, but with the start of the new regulatory period it has stepped up a gear.

Each of the distribution network operators (DNOs) has submitted their annual performance report – one of the requirements of a new DSO incentive – in which they set out their achievements and try to quantify the benefits to customers and the wider energy system.

They make interesting reading, not least for the different approaches taken by each DNO.

Take the issue of separation of DSO functions, for example. Prior to the commencement of the ED2 period, Ofgem considered splitting these off from the conventional activities of DNOs, mainly to avoid any inbuilt bias towards investment in physical assets rather than flexibility.

UK Power Networks has nevertheless made the unilateral decision to legally separate its DSO functions from the rest of the business, saying it is important to ensure decisions are made in the interest of customers rather than shareholders.

A key duty of the supervisory board is to approve the decisions they make through their distribution network options assessments. DSO director Sotiris Georgiopoulos explains: “They’re not just a scrutiny panel. They’re not just an advisory board. They actually sign off specific recommendations in terms of flexibility and investment decisions that we make.”

The board was convened last May and has since been meeting once a month. Georgiopoulos says they have been able to quickly build up a good understanding of UKPN’s operations and “go into the details.” In the first quarter of 2024, the board signed off on all of its flexibility and asset investment proposals for the next three years.

Georgiopoulos sits on the board but it is chaired by Michael Walsh, a former director of Eirgrid and now managing director of Springergy. Walsh says they reviewed £470 million of potential network investments across more than 400 projects.

He says in most cases UKPN was already planning to address the needs in question using flexibility, but there were 32 planned network reinforcements “where it looked like it might be a bit more unclear, and we asked the team to go back and do some additional analysis”. This led to a three-to-four-week delay in sign-off as team went back to investigate those projects in more detail, Walsh says.  It was decided that of those 32 projects, 21 could be deferred or avoided. Walsh says these adjustments could save consumers £81 million over the ED2 period.

“We do see with a lot of traditional networks around the world, they have been accused of over building and that their first answer as soon as they see any forecast demand growth is to start spending an awful lot of capital,” adds Walsh.

“And that whole dynamic was part of the reason for setting up an independent DSO – to try and break that cycle of being quite conservative in the engineering and that leading to more costs for consumers.”

In its first annual DSO panel performance report, UK Power Networks claimed to have realised a total of £91 million of net benefits for consumers through the use of flexibility services in 2023/24. Georgiopoulos says this figure represents the cost of the network reinforcements it would have undertaken during the year but decided to defer, minus the costs it incurred to instead procure flexibility services. He says UKPN does expect some of the deferred reinforcements to eventually be undertaken, although in most cases, this is unlikely to happen during the ED2 period.

The report says all of these benefits will be returned to consumers: “Unlike other DNOs, this saving is assumed within our RIIO ED2 settlement and is not subject to a 50% sharing factor. This means 100% of these savings flow to bill-payers rather than shareholders.”

This may seem like ‘counting your chickens before they’ve hatched’. But Georgiopoulos assures Utility Week that future benefits figures will be adjusted accordingly if these reinforcements go ahead at a later date. He says the same applies for the £106 million it claims to have saved for customers through the use of curtailable connections, of which £93 million relates to transmission constraints and £13 million relates to distribution constraints.

Georgiopoulos says the supervisory board was also heavily involved in the development of the operational agreement which “sets out in detail what the DSO functions are within UK Power Networks, …how they interact in all their areas with the DNO functions” and key performance indicators (KPIs)

He says they ended up redrafting the agreement based on the feedback of the supervisory board, which said it lacked clarity and had insufficient KPIs.

They also have the ability to run audits with the support of external assurance on specific areas that they want to look at on an annual basis.

Although they may not have gone as far as legal separation, the other companies Utility Week has spoken to all say they have sought to create a clear division between their DSO functions and their conventional asset management activities.

“We’ve been a functionally separate business unit since before the end of ED1 so we’ve really leant into that separation,” explains Ben Godfrey from National Grid Electricity Distribution (NGED). “That’s enabled us to have board level visibility and executive level accountability.” As DSO director, Godfrey heads up the department and reports to NGED president Cordi O’Hara.

Godfrey says Ofgem made the right call not to mandate full separation, saying this has allowed NGED to mobilise quickly and retain “a very close working relationship” between the DSO and the DNO. He adds: “We don’t want to put any additional unnecessary barriers in there.” He says the kind of separation that is already in place at the transmission level is unsuitable for distribution networks, which have a much larger number of smaller projects for which DSOs need to give direction and advice to DNOs.

Godfrey says the DSO unit is “fully accountable” for load-related expenditure and takes a “flexibility first” approach: “Before the DNO even gets their eyes on where the investment might happen, we as the DSO have identified what breaks when; we’ve looked at the various different options; we’ve been out to market; we’ve looked for flexibility options and used them where they’re available; where it’s technically feasible and where it’s economic.

“And it’s only after passing all of those things within the DSO that we would then direct the DNO to actually undertake any conventional reinforcement. That level of depth and integration I don’t believe is mirrored by other network operators.”

Godfrey says NGED convened a “diverse” panel of senior industry experts at the beginning of this year to oversee its activities and scrutinise its decisions. He says one message that has already emerged is the need for collaboration; to “pull up the whole industry” rather than “forging ahead on our own path.”

Andrew Roper from Scottish and Southern Electricity Networks (SSEN) says the company sought to be “pragmatic and purposeful” when setting up its DSO operations “so we have gone for functional separation of the DSO. What that means is there is a dedicated directorate within SSEN, which I am the director of”. He says they “want to get stuff done now” and “true separation” would hold things up: “I think we should recognise that a lot of the data that is needed to run the DSO is derived from the DNO”.

But Roper insists SSEN has put in place arrangements to provide transparency and ensure confidence in its decision making. These include a DSO steering group, for which he is the chair, and on top of this, an independent DSO advisory board chaired by former Cornwall Insight chief executive Gareth Miller. He says a “fully open” application process was held for the advisory board, which received more than 300 applications. Its members come from a range of fields including academia, technology, local government and commerce.

Roper says SSEN consulted on and amended its distribution network options assessment, for which there is also an audit process: “We’ve got a lot of checks and balances in place…  I think more than the other DNOs.”

A hiring spree

Since the start of the ED2 period, DSOs have been on a hiring spree. Georgiopoulos says the DSO business at UKPN currently employs 70 people – double what it was a year ago – in a wide range of roles: engineers, data scientists, project managers, communications staff, and commercial, flexibility and customer service experts.

“We continuously review the amount of work that is needed because obviously we want to keep the DSO efficient,” he reassures. “But at the same time, I think the fact that we’ve doubled in size has given us a scope to deliver for our customers in a way that we haven’t been able to before.”

UKPN has set up a dedicated operational team in the control room to look after service providers, storage operators and generators once they have accepted flexibility contracts or flexible connections. Georgiopoulos says these connections obviously come with potential downsides and “the purpose of our operational team is really to maximize the availability of the network for the customer and minimize curtailment”.

He believes having a dedicated team helps to create the right culture in the control room, which has historically been a “risk-averse” environment: “Once you start using something, once you understand the benefit, you want to find more ways and better ways to use it.”

He also points to a local net zero team set up to help councils develop energy plans and apply for funding. Georgiopoulos says he expects this team to be one of the growth areas going forward as the DSO business enters a phase of more incremental expansion in response to demand.

Godfrey says NGED likewise has around 70 people in its DSO department as does Paul Glendinning, director of energy systems at Northern Powergrid.

Glendinning says their headcount is expected to hit 105 by this Christmas and then rise by another five to ten over the following year before plateauing over the rest of ED2. He says the company is recruiting heavily into system forecasting – “a real fast-moving area” – as it prepares for the creation of Regional Energy Strategic Planners (RESPs) by the National Energy System Operator that will soon replace the Electricity System Operator (ESO).

The information gleaned from local authorities is being fed into Northern Powergrid’s Distribution Future Energy Scenarios, which it is trying to develop from the bottom up rather than just molding them around the ESO’s scenarios.

Roper says SSEN has “quite a large” DSO directorate, having increased the headcount by 40 over the last year to 140. He says a lot of the necessary skills weren’t readily available in the market so a lot of focus has gone into apprenticeships. He says 26 of the new hires came from a scheme with the University of Oxford “where we take people with general STEM degrees and send them on a top-up course… and then they spend six months working on specific projects, which they’re supervised on, so they can get up to speed.”

Roper says SSEN is now “relatively near where we need to be” in terms staff numbers but still intends to significantly increase its bandwidth “because those people are working on automation of our processes, and we will be redirecting some of those people.”

He gives as an example the launch of their LENZA (Local Energy Net Zero Accelerator) tool, which is available to any local authority in SSEN’s patch. He says this not only enables councils to boost their energy planning capabilities, but also “makes our processes more efficient for collating the data on what that means for the flexibility and investments required in our network.”

This is the first in a three-part series looking at how DSOs have evolved over the first year of the ED2 price controls. In the second part, we look at how they have been using flexibility services and curtailable connections to avoid network upgrades and cut connection times for customers.