Regulator must keep an eye on DSO laggards

Ofgem should be rigorously monitoring electricity networks’ fledgling distribution system operations rather than waiting until they are forced to report on progress in a year’s time, a senior energy retailer has urged.

Octopus Energy’s Rachel Fletcher said the “scale of transformation is so big and the prize is so important that it needs active Ofgem management”.

Her warning is in relation to the various models being adopted by electricity distribution network operators (DNOs) to deliver local distribution system operator (DSO) functions. The comments came at the launch of UK Power Networks (UKPN)’ DSO. This has been set up as a legally separate entity, with its own board but under the UKPN umbrella.

The other five DNOs are pursuing different degrees of separation for their own DSO functions.

Octopus’ director of regulation and economics said she was pleased to see DSO incentives “hardwired” into the current five-year price control, RIIO-ED2, which began in April.

However, she added: “It will be not until this time next year that we have any idea how the six DNOs have done against their DSO incentives, which is way too late. Engagement with stakeholders from Ofgem is absolutely vital.

“Just as with the problems we’ve had with connections, which began long before net zero was even a phrase, Ofgem has the opportunity to hear from stakeholders about what’s happening around the country and start picking up on laggards, and indeed shine a light on best practice.

“That’s my plea to Ofgem – don’t leave ED2 on the shelf and think ‘thank God we got that done’ – but really roll up your sleeves and own this.”

Ofgem’s chief executive Jonathan Brearley also spoke at the launch, where he was asked how he would enforce consistency across DSO functions.

He said: “At this stage we’ve got to get the balance right between standardisation and different models because we are growing something new.

“Over time we want that standardised and the reason we emphasised this in ED2 is because we want the change to happen. I don’t think we’ll need to in this case but if we need to we’ll have to get involved more.”

Independence Day

The event saw UKPN unveil the board that will oversee the DSO:

• Michael Walsh of grid optimization specialist, Smart Wires
• Professor Goran Strbac of Imperial College, London
• Dr Joanna Wade of the Association for Decentralised Energy
• John Hargreaves, economist

The network’s chief executive Basil Scarsella described the role of the independent board as akin to that of pension trustees – working within an organisation to protect the interests of a particular group, in this case consumers.

He added that he had also formally invited an Ofgem representative to sit on the board to aid transparency.

Scarsella said UKPN’s approach to legally separating DSO functions was “certainly a first for the UK and we’re pretty confident it’s the first globally”.

On the rationale for the move, he said: “Everyone talks about electricity demand being set to double by 2050. If left to the traditional way of delivering the extra capacity, we will be investing in additional assets, either above or below ground, which customers will pay for. The reality is that our network is less than 60% utilised at peak demand. So we’ve got to turn the way we look at utilising spare capacity on its head.

“The role of the DSO is to ensure that UKPN makes offers to customers that first utilise the spare capacity, secondly explores flexibility services both on the demand and supply side….. then only as a last resort will we reinforce.”