Putting a value on network services

Networks need to embrace the spotlight and demonstrate their value in Ofgem’s RIIO2 plans.

Network companies are under pressures from politicians, regulators and the public, with performance, returns and executive pay all under scrutiny.

Networks are also having to deal with new distributed technologies – such as solar and hydrogen – as well as technical changes that will enable a wide range of possible future energy systems. The biggest of these will be the transformation of electricity distribution operators (DNOs) into distribution system operators (DSOs).

The cost of new energy technologies is falling rapidly, while the cost of the big centralised energy system is increasing. This is driving increasing engagement in alternative technology for heat and transport and offering individuals and authorities the chance to create their own energy systems made up of a mixture of sources such as solar, electric vehicles and storage. This offers opportunities to enhance consumer choice by allowing people to buy electricity from multiple suppliers and sell electricity back to the system.

In response, network owners need to highlight the different costs of these options using value-based pricing of their services. This would enable a more focused discussion with regulators about where it could be appropriate to introduce competition for infrastructure into the value chain. In particular it needs to look at where this would be most likely to drive innovation that would benefit consumers.

It will be important to recognise that in this new world there will not be a single solution that works for everyone and every region. National Grid’s new regional view of carbon intensity showed very clearly how different the electricity system is in different parts of the country and any new approach will need to reflect that position.

Customers need a clear understanding of the comparative value of the different approaches and uses of the network. That is difficult to provide because of the current bundled nature of the network. Unbundling the value chain into functional services would allow the value of different parts of the networks to be more widely understood.

This could be used to compare substitutes such as “non-network” and service-based alternatives as part of the RIIO2 business plans. Using these building blocks, networks could show customers their own whole system and provide evidence of how the regulated networks deliver overall good value for money in comparison to the alternatives.

This then opens up options such as offering customers lower bills if they accept lower reliability (disconnection during maintenance or faults). It would also enable new services to community energy projects. For example, a project might provide a reliable energy source and so only pay for local transport of energy (and have no capacity rights in the regional system) but would need the ability to access stored energy in the gas system as an insurance policy and so could be provided with a winter energy ­storage ­service from the gas network.

Then there are options for services without wires or pipes such as when a consumer supplies their own energy though their ­electric vehicle’s battery.

To enable these new approaches, companies will require incentives and Ofgem has already said it sees it as critical to RIIO2 that incentives are provided to reward the development of the energy transition. These would encourage companies to enable change, facilitate different models and change services to release opportunities for a lower carbon future. These incentives should also provide rewards for companies that ­create choice.

There also needs to be a better understanding of the cost of providing services. Looking at the value of the service from the consumer’s perspective requires a radical shift in thinking. Companies will need to improve their knowledge of the relationships between the service output and the underlying costs. Ofgem has been encouraging them to do this and Ofwat is supporting this approach by breaking the water industry into discrete services, water resources, wholesale transport networks, bioresources, and retail.

In addition, there will need to be a change in the way companies recover revenue. Where there is a potential for substitution, charging for service lines can provide a more competitive view of each of the services. Transitional regulatory charging structures have been used in the past, for example using a basket of tariffs to test out the market appetite for services.

What is clear is that there is a logical case for companies to disaggregate and use smart metering, artificial intelligence and the Internet of Things to provide more personalised services. By recognising what is possible, companies can promote viable alternative service models that give real choice as the energy transition progresses.

A focus on the value networks bring will sharpen the focus on the opportunities to support a faster transition and create a better informed public debate on their role and a better understanding of the contribution they make.