DNOs need to ‘dramatically’ raise flexibility ambitions

Electricity distribution networks need to “dramatically” raise their flexibility ambitions and “move further, faster” during the RIIO ED2 price controls, Octopus Energy has argued.

The company made the comments in response to the draft business plans of the distribution network operators (DNOs), which will submit their final plans to Ofgem on 1 December.

Octopus said although most DNOs have run flexibility tenders and there are frequent references to a “flexibility first” approach in their draft business plans, there are “significant gaps in the substance”.

It said the ED2 price controls, covering a five-year period beginning April 2023, will mark an “inflection point” in the transition to net zero emissions, heralding “an increased penetration of variable, distributed generation, an uptick in electric vehicle ownership, and the roll out of millions of heat pumps.

“Distribution network operators must decide whether to build systems and capabilities for the future network, utilising the potential of low carbon flexibility fully in their portfolios, or to rely on outdated methods of grid reinforcement that would slow down the integration of low-carbon technologies and lock in unnecessary costs for customers for years into the future.”

To ensure there is meaningful progress, the price controls should contain “ambitious, quantifiable targets” for flexibility: “Without concrete targets in the price control settlement it will not be possible for Ofgem to hold the companies to account for making good use of flexibility and market confidence will be lost.”

Octopus said only three of the six DNOs in Great Britain have included quantifiable targets for flexibility in their draft business plans, with only two – Scottish and Southern Electricity Networks and Northern Powergrid – giving financial targets for spending on flexibility services.

It also called for stronger mechanisms to hold DNOs to account, warning that uncertainty mechanisms could “soften the commitment to flexibility” if they are “too broad or loosely designed”. It said uncertainty mechanisms should not offer electricity distribution networks “an easy way out” and allow them to “revert to traditional methods except where those are more expensive.”

The supplier said DNOs should be required to take further measures to create a level playing field when comparing flexibility services to network reinforcements, arguing that the Common Evaluation Methodology they have adopted as an industry standard does not properly reflect the “option value, carbon reduction benefits and speed of delivery that flexibility solutions can provide over traditional asset-based solutions.”

They must also provide “clearer strategies” on their transition to distribution system operation (DSO) and ensure DSO functions have sufficient independence to end the “historical bias towards costly investment in wires”.

“We recommend that in the forthcoming DSO governance review, Ofgem considers not only the range of separation options for DSO functions but places sufficient focus on the behaviours and outcomes DNOs must display to ensure they play an active coordinating role facilitating flexibility markets and services in a neutral and non-discriminatory manner.”

Their plans for data and digitalisation should be accelerated, particularly with regards to low-voltage networks, where the impact the impacts of electric vehicle charging and heat pumps will be the most acute but there is the least monitoring and demand is usually inferred from higher voltages: “A lack of visibility and growing variability of demand from EVs and heat risk placing the distribution grid under severe stress.”

Octopus said DNOs must outline how they intend to make relevant data available to customers: “Access to more grid data would enable flexibility providers to anticipate and address areas of grid stress, plan their own investments around flexibility provision and develop new interventions that can help operators manage grids.”

Speaking to Utility Week, Octopus Energy business development and implementation manager Kieron Stopforth explained: “This isn’t an argument for targets for their own sake but for greater clarity on anticipated scale of flexibility provision.”

He said they would give providers “sufficient certainty that business can invest in flexibility services and be ready to deliver when needed” and prove that DNOs commitments “go beyond ‘flexibility first’ rhetoric and truly represent a shift in mindset”.

Stopforth said although the shift to total expenditure allowances under the RIIO framework was intended to put capital and operational expenditure on “an equal footing,” this has not been reflected in DNOs actions: “It seems that price controls are necessary but not sufficient to pull forward flexibility provision.”

He said newer technologies also face “other headwinds, aside from the price control, that are blocking uptake”.

According to Octopus, flexibility services are being put at a disadvantage by network and balancing charges: “Currently, the lack of locational or effective time-of-use signals at distribution level – and the recent decision to move to a shallow connection boundary – will exacerbate the pressure on networks in the transition to decarbonise electricity, heat and transport.

“These features mean that there is little in the way of price incentives to drive investment to where network capacity is abundant.”

It continued: “At the same time, many of these features mean that there is relatively little market-based reward and incentive for investment and provision of flexibility at distribution level. These features need swift attention – either reform of wholesale markets to provide locational real-time pricing at distribution level, or the introduction of locational and dynamic Distribution Use of System (DUoS) charging.

“Ofgem is consulting on changes to DUoS and we urge the regulator to consider how this fits with their plans for wholesale market reform and then proceed at pace.”

Randolph Brazier, director of innovation and electricity systems at the Energy Networks Association, said: “Britain’s electricity networks are already the smartest and most flexible in the world but we’re boosting plans to take this further. Our Open Networks project has brought standards in line across the country and supported world-leading levels of flexibility, around 3GW, being tendered out at a local level this year.

“As we further harness the power of data and digitalisation and drive the path to net-zero networks, we’ll need agile regulation that allows both flexibility and investment, along with the ability to make early investment where and when it’s needed the most.”