Unlocking the value of DSOs

Research shows that unless there is effective co-ordination between DSOs and TSOs, introducing more flexibility on the system could raise consumer bills instead of lowering them. David Cox and Gareth Davies explain why.

Decarbonisation and technological advances are transforming our electricity system, driving growth in distributed energy sources and making demand-side response a more accessible and flexible energy resource.

As we move towards a net zero energy system, we are seeing two broad trends asserting themselves in the electricity sector: first, the demand for flexibility is on the rise as renewables are contributing more and more to the energy mix. Second, more of this flexibility will be located at lower voltage levels as the flexible, “on demand” resource is provided by distributed generation and storage, electric vehicles and smart heat solutions.

In a recent study for the Energy Systems Catapult in the UK, Afry analysed how to efficiently and effectively manage this changing system in order to minimise operation costs.

Potential for rising costs

As electricity systems evolve, we found that there is potential for electricity costs to rise for consumers. This is a result of a divergence in the timing of local and national electricity demand peaks, which leads to an increased risk of an inefficient system (see graph).

In this system, there will be more competition between the transmission and distribution system operators for flexibility services, which may only be operational for short time periods, for example, as batteries take time to recharge. Without effective co-ordination between TSOs [transmission system ­operators] and DSOs [distribution system operators], this divergence may increase overall network and generation investment requirements, generation costs and system balancing costs, ultimately increasing costs for consumers.

Afry contrasted the effect of prioritising the use of distributed flexibility to meet national peaks, local peaks and having a fully integrated system. Our outcomes showed that frameworks which enable a more co-­ordinated use of resources could reduce ­system costs by up to £7 billion by 2050.

When considering how best to manage new grid systems, we also found that the largest savings arise in frameworks where distributed flexibility sources are used primarily to address local network issues. This enables DSOs to avoid a greater level of costly network replacement and reinforcement, because there are limited close alternative flexibility options at the distribution level.

Managing the transition

It’s clear that there are large potential savings to be had; it’s just a question of how to get there.

Any new arrangements should transparently reveal and respond to the true value (and cost) of using flexibility on the transmission and distribution systems. As we transition to a more decentralised energy system and active DSO model, this means fundamental changes in the roles and responsibilities of TSOs and DSOs and the frequency and extent of information and data exchange between system operators and users to keep system costs down.

Such changes can be introduced gradually, reflecting the evolution in the TSO-DSO relationship over time.

In the short term the transition should focus on establishing a framework where the TSO can co-ordinate more effectively between the needs of local DSOs and the national system, improving information flows from DSOs on the local effects of national actions.

Then, in the longer term, wider changes, such as the emergence of local or regional flexibility markets, may emerge naturally as greater transparency and understanding of the value and accessibility of flexibility emerges.

Within this framework, it remains important to encourage more flexible resource use. Regulatory incentives should continue to encourage DSOs to consider innovative non-asset solutions to network issues. Harnessing the opportunities from electrification of heat and transport will be an important part of this innovation. For example, smart charging for electric vehicles could help to manage increases in demand and will help to balance the grid.

All in all, a managed and considered shift towards a more co-ordinated transmission and distribution system will ensure that we shield consumers from expensive and inefficient systems. By moving towards new models of interaction there is opportunity for significant savings, but we recommend a careful and phased shift in the roles and responsibilities for DSOs and TSOs.