Ofgem considers introducing IDSOs to oversee local networks

Ofgem is considering introducing independent distribution system operators (IDSOs) as a way of meeting the needs of the future energy system.

The proposal is one of four solutions the regulator is currently considering as part of its review into local energy system operation.

Ofgem said it believed the current arrangements for operating the local grid and planning for future demand “have gaps, lack co-ordination and could create potential conflicts of interest” which could add unnecessary costs to customers and delay the transition to net zero.

The regulator explained that new local markets could play a bigger role in future to balance power supply and demand flexibly, yet if distribution network operators (DNOs) are responsible for these new markets, they face a potential conflict of interest as building new grid capacity would boost their revenues.

In a call for input published today (26 April) Ofgem defines three energy system functions; energy system planning, market facilitation of flexible resources and real time operation of local energy networks.

Ofgem said it is important identify and recognise the synergies that exist both within and across these functions and to understand where best draw lines in regard to roles and responsibilities.

The regulator outlined four sample framework models it has developed for alternative institutional and governance arrangements.

The first framework involves the internal separation of DSO roles within DNOs. Under this model DNOs will continue to perform all DSO roles and potential conflicts of interest would be mitigated by internal governance measures. By introducing separation measures, Ofgem said this relatively “low-change” model focuses on improving the credibility and transparency of the DNO delivering the DSO roles.

Framework model two would see the creation of fully independent DSOs which will perform some of or all of the DSO roles currently performed by the DNOs. This model goes further than any internal, including legal, separation of the DSO function from the DNO in framework model one by requiring separate parent company ownership.

The third framework would see regional system planner and operator(s) established to perform the three energy system roles, with a broader vector coverage for planning. This would include taking on DSO roles of flexibility market facilitation and parts of the operation role, as well as whole-system regional energy planning, including electricity and gas.

Meanwhile the fourth framework would involve dispersing roles and responsibilities to “maximise the strongest within-function synergies”, while allowing institutions to focus on delivering functions under their core competencies.

Ofgem said a base model could include local area planning remaining with local government bodies, supported by the energy system planning capability based in the future system operator (FSO). The market facilitation role could sit with the FSO so that local, regional and national markets for flexibility are developed in a similar way with similar rules.

Finally, responsibility for local system operation (including security of supply) could remain with the DNOs. Ofgem said this base model would minimise the proliferation of new institutions as functions would be placed with existing institutions best suited to deliver them.

The call for input will close on 7 June and following a series of stakeholder workshops Ofgem aims to issue its decision by early 2023.

Charlotte Ramsay and Richard Smith, co-directors of energy systems, management and security of Ofgem, said: “To reduce our reliance on expensive imports of gas and bring down customers’ energy bills, we need to accelerate our transition to net zero. This will require a transformation of our energy system, in particular at a local level.

“This review will ensure that local energy systems across Great Britain are set up for a huge increase in green, more affordable and homegrown power.”

Polly Billington, chief executive of UK100, a network of local government leaders for delivering net zero, said: “This review is extremely timely and welcome.

“It is great to see Ofgem recognise the vital role of local communities and authorities in creating the kind of future-proof net zero energy systems we need, which have flexibility at their core. UK100 members are keen and ready to play their part.”

Also welcoming the news was Nicola Medalova, managing director of National Grid Interconnectors, who said: At National Grid, we’ve already been working with government and regulatory stakeholders, developers and several European partners to identify the best technology, locations and regulatory models for MPIs.

“We would like to see the accelerated delivery of a pilot regime to enable MPIs pre-2030. This would allow us to ‘learn by doing’ and establish a platform for future investment in MPIs to help the UK achieve its offshore wind ambitions.

“Bringing offshore wind and interconnector assets together makes sense. It will maximise the deployment of renewable generation and speed up connections. Using interconnectors in a smarter way will also reduce the amount of grid reinforcement needed, and the impact of new infrastructure on local communities.”