Network

ROUNDTABLE D istribution network opera- tors (DNOs) could meet the challenges of decarbonisation under the current model, one speaker explained. But doing so would be "horrendously expensive", requiring huge investments in new capacity to meet peaks in demand. To save money for consumers, DNOs must leverage flexibility to help maximise the usage of existing capacity, which remains plentiful outside of peak times, and take on the more active role of distribution system operator (DSO). The common thread tying together much of the discussion was the importance of price signals and incentives, both in terms of how network companies earn money under the RIIO framework and how they recover these revenues from users through network charges. Attendees said policy-makers and regula - tors must decide what exactly they want networks to do and then reward or penalise them accordingly. They said the first set of RIIO price controls have worked well, mainly because of the strong incentives they offer. The shi† to totex spending allowances has provided a finan - cial justification for network companies to consider operational solutions to constraints as an alternative to building new assets. Some thought it unfair that Ofgem has received so much "flak" from those who con - sider network profits excessive. Far from being a sign the price controls are overly generous, attendees argued they instead demonstrate the success of networks in responding to incentives. They praised Ofgem for maintaining the core tenets of the RIIO framework for the second set of price controls starting in 2023 for electricity distribution and urged the regulator to avoid unnecessary "tinkering", which they feared could create costly uncertainty. Suggested improvements Then again, they had plenty of ideas on how to make improvements. They firstly drew attention to the absence of cross-sector incentives for actions that in - crease network costs but nevertheless benefit consumers. "There is a risk that if you just focus on the network costs you ignore the opportunities for our customers," said one. "Sometimes having a more expensive network enables customers to have cheaper energy overall. We need to set up an arrange - ment which allows us to reflect that whole- system approach." Given the huge uncertainty over the future of the energy system, attendees also thought network companies should be compensated for providing optionality where valuable, for example, by oversizing assets when they eventually need to be replaced. One noted that digging "the hole" typically accounts for 80 per cent of the cost of replac - ing an underground cable. "Optionality value is absolutely critical to the case for flexibility and yet when you look at the regulatory arrangements they don't reward or encourage optionality," explained another. They asked what level of network conges - NETWORK / 30 / FEBRUARY 2019 Getting regulation right Flexibility and the DSO business model was the topic of discussion at a recent roundtable hosted by Network and Oracle. With work now well underway on the second set of RIIO price controls, speakers were keen to talk about the impact of regulation on the transformation of networks.

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