Smart system benefits may ‘slip through our fingers’

Fears have been raised that billions of pounds of smart system benefits may “slip through our fingers” due to policy, regulatory and governance issues.

The comments were made at the Utility Week Live conference in Birmingham last week.

Speaking during a session on network innovation, John Scott, former Ofgem technical director and now director of consultancy firm Chiltern Power, said the evidence of progress is “weak – disappointing in fact”.

“Please tell me why £300 million has been spent on energy innovation but Ofgem still has as a major theme about network companies not converting innovation to business as usual deployment,” he asked the audience. “Why is that after so long?”

Elaborating on his frustrations, Scott pondered why the work of the Energy Networks Association had focused so much on distribution and transmission and had paid so little attention to developments at the grid edge.

He also questioned why the process for changing governance codes is “still operating in siloes”, and why the government’s consultation on smart appliance standards is taking place in a “bubble”.

“Why don’t I read anything in the RIIO2 consultation about engagement beyond the meter?” he remarked. “Why isn’t Ofgem at least posing questions about what their role is across the meter?

“What is Ofgem’s role within those connected home standards, for example? Is Ofgem going to encourage the network companies to invest good-quality resource in standards development so that beyond the meter standards are fully-integrated and seamless with the network companies… Where is that going to happen? Whose job is it?”

He continued: “We need much less short-termism… And we need less incremental development… within licensed siloes.

“We need much more truly whole-system end-to-end inter-silo collaboration. We need urgent facilitation for interoperability.”

Without changes, Scott said the energy system transformation will “stall”, the power grid will be put at risk of “crashing”, and network costs will be higher than they need to be.

He worried that the billions of pounds of potential benefits highlighted in the government and Ofgem’s smart systems and flexibility plan could be allowed to “slip through our fingers”.

His concerns were shared by University of Exeter energy policy professor Catherine Mitchell, who said the current plans to transform distribution network operators (DNOs) into distribution system operators (DSOs) are “not sufficient”.

During a subsequent seminar on the transition, which was also attended by Scott, Mitchell said DNOs instead need to become “distribution service providers” in order to minimise costs and enable the UK to meet its emissions targets.

Under this model, network operators would use local energy markets to balance the energy system at the grid supply point level, before buying and selling remaining imbalances in national markets.

The energy system would be optimised from the bottom up rather than the top down, uncovering the “true value” of distributed energy resources.

Industry Inertia

When asked by Utility Week why the changes they sought had not materialised, Mitchell attributed to the problem the UK’s political system: “Ultimately in Britain there is a failure of consensus-based, transparent decision-making… For some reason we find it very difficult to take these very long-term decisions in a sensible way.”

Mitchell said Ofgem needed to be “stripped back” to a purely economic regulator. She said its current duties are “not fit for purpose” and many of them should be transferred to a fully independent integrated system operator. She urged chief executive Dermot Nolan to make this argument to government.

She also pinned some of the blame on networks themselves, who she claimed had promised much, but delivered little.

Scott responded that there is “something fundamentally wrong” with the current processes for reform, which were designed for a “silo-based world”.

“If you remember at privatisation, unbundling was the smart idea,” he explained, “but all that did was put generators, transmission, distribution and somewhere customers all in very tight legally defined siloes.”

He continued: “I think BEIS [the Department for Business, Energy and Industrial Strategy] and Ofgem are enormously influenced by the messages they get from the present big companies. If the network companies… put a serious message into government, then that would really get attention.”

Scott said networks needed to “shake the cage” otherwise the great ideas they came up with would be left to “sit on a shelf”.

The response from the networks

Energy Networks Association head of innovation and development Randolph Brazier said it is not the responsibility of networks to determine policy and governance structures.

He said when they argued for changes they received “pushback” from people who accused them of “designing the market” for their own benefit and “stitching it all up”.

“We’re walking a tightrope there in some respects,” he added.

Paul Bircham, network strategy and technical services director at Electricity North West, likewise said: “We have two things that are waved in our faces every time we open our mouths on this. One is the competition act and the other is our licence, which says we have a duty to facilitate and not distort competition in both electricity supply and in generation.”

“We’re stuck in a point of saying what you’d like us to do is breach our licence and try and disrupt the market. It isn’t our job to disrupt the market. It our job to serve customers and provide the obligations that we have to them.

“We need a different form of governance to allow us to have these conversations.”

The response from Ofgem

In a statement provided to Utility Week after the event, a spokesman for Ofgem said: “We are listening to a wide range of views on the RIIO2 consultation and we will continue to talk to all interested parties. We especially want to give consumers a stronger voice by setting up independent user and consumer groups to challenge the companies’ business plans.”

He said the consultation has been “deliberately broad” and responses have suggested “a range of initiatives that would help ensure the delivery of new smart services”.

“We are taking forward other work to change regulation to bring about a smarter energy system,” he added. “This includes for example changes being made through the joint flexibility project with government to make sure that storage can compete on a level playing field with other forms of generation in the market.

“We have also been asking whether the supplier hub model is right for the future as it could be holding back entry of new business models into the market.”