Energy UK flags concerns over network monopolies competing in flexibility markets

Energy UK has flagged concerns over the participation of regulated network monopolies in markets for flexibility and ancillary services.

The trade association warned that the involvement of network companies will deter competition and undermine confidence in their neutrality as market operators, negating any cost savings that might be achieved over the short term.

The organisation drew attention to the balancing service developed by Electricity North West (ENW) as part of its CLASS (Customer Load Active System Services) innovation project, whereby the voltage on the distribution network is lowered slightly to reduce demand at the transmission level.

Ofgem issued a direction in 2016 placing CLASS outside of the RIIO price controls and allowing the distribution network operator (DNO) to sell the service to National Grid Electricity System Operator (ESO) and share any profits with its customers.

Then in February of this year, the regulator issued a consultation on how the service should be treated during the RIIO2 price controls for electricity distribution beginning in 2023.

Ofgem said its preliminary view is that DNOs should be allowed to continue selling the service under the current arrangements and that the alternatives would be to either require the DNOs to provide the service to the ESO as part of their price controls or completely prohibit its use as a balancing service. The consultation closed in March and the regulator has not yet issued its final decision.

Responding to Ofgem’s draft determinations on the price controls for transmission, gas distribution and the ESO, which will begin two years earlier in 2021, Energy UK took the opportunity to restate its opposition to the proposals, saying they would allow DNOs to “leverage their unique position to compete in ancillary services using network assets”.

“This departs from the level playing field of undistorted competition,” the trade body remarked.

Charles Wood, head of new energy services and heat at Energy UK, told Utility Week flexibility markets need to be “robust, competitive and able to react to the changing needs of the system”, adding: “If we have this conflicting view from Ofgem that monopolies should be able to play in those markets, confidence in the markets will drop and it has done in the past few years because of this.

“That will continue and by the time we need more flexibility that networks cannot provide, we won’t have a market for it.”

Although the association said it has similar concerns over proposals by network companies to participate in the new stability service being trialled by the ESO, Woods said the voltage management service developed by ENW is particularly problematic: “We certainly have issues across the board with CLASS.”

“The limits on voltage are in place for a reason,” he explained. “They’re there as the absolute limits within which you can operate safely.

“And if you’re messing around with those and going from one limit to another as much as you are able to in order to play into competitive markets; and if there’s an incentive there saying if you do this you will get paid more; then it’s entirely possible that the network will do so and possible that in doing so it will also cause some damage to the existing assets, meaning that the replacement cycle is sped up and consumers end up having to pay more.”

ENW claims the service has a negligible effect on the power delivered to its customers but Woods said the only available evidence was compiled by Baringa as part the DNO’s innovation project: “Ofgem has not done a cost benefit analysis or an impact assessment on what would be the actual impact on consumers and how is CLASS impacting things like supplier imbalance.

“If your energy is being slowly curtailed by the DNO, you may find that you’re out of balance and what happens in that situation? Does the DNO then have to pay the imbalance cost?

He continued: “The issue for industry is that we don’t have the ability to look at all the network data and some of the information that we would need to look at if we were to do an assessment.

“It’s really just Ofgem and the networks that can provide the information about what the impacts are so it’s been very difficult for industry to come up with an argument that’s fully backed up with evidence.

“The explanation Ofgem has given is that this is effectively opening up competition by allowing a cheaper technology to compete. And that’s slightly difficult to argue against when a regulated monopoly is naturally able to bid in a lot cheaper than the next lowest competitor.”

Woods said the preference of most of its members would be for CLASS to only be used by the ESO as a last resort: “Once you’ve gone to the market and found all the flexibility you can, you apply this as if putting on the emergency brakes”.

Responding to the comments, ENW said in statement: “The service works within the existing voltage limits, just as assets on all distribution networks across the UK and across the world move inside the voltage limits several times every day.

“Experts from the University of Manchester and University of Liverpool conducted the study of the effects on our equipment, proving it to be negligible and these reports are all published. Electricity North West is a new entrant into the national balancing markets and we get no advantage in this market because we are a regulated DNO.”

The company’s regulation and communications director Paul Bircham added: “CLASS is good for customers and good for the environment. It offers balancing services to the ESO at a lower cost and with lower carbon than the alternatives. It is a fantastic example of innovation and of Ofgem’s commitment to enabling decarbonisation through innovation.

“The service was used by the ESO to balance the UK’s energy system 219 times in August – our busiest month to date – demonstrating their confidence and need for the service. It’s right that all customers in the North West receive rewards for providing this service to the UK.

“CLASS should be championed by industry, although it is not surprising that those who seek to criticise it are those who have vested interests and don’t like the new competition it brings to the balancing market. CLASS has had international interest from networks and governments across the world and we are in active discussions about the technology with balancing market participants spanning three continents. We are proud of our innovation delivering for customers.”