Utility Week

28 | JULY 2022 | UTILITY WEEK Electricity The report instead recommended "ring- fencing", which it argued would "avoid the perception of con icts of interest" while allowing DNOs to develop their DSO capabil- ities "without the loss of management time". "It also leaves open the option for Ofgem and government to pursue other separation options in the future, if evidence emerges that con icts of interest exist, and the ben- e• ts of separation are material," the report concluded. Following the call for input, SSEN asked NERA to update its analysis and develop alternative proposals, which it presented to Ofgem in its formal response. SSEN said this new model, which it described as a variant of model one, would leverage key features of the others, while retaining synergies between DNO and DSO functions. It would do this by creating the new role of a local net-zero coordinator. NERA's follow-up report said these entities would address "a gap in the current arrangements… wherein is no public body that is responsible for providing a strategic, long-term view on the path to net zero of local energy systems as a whole". SSEN said these "publicly funded not-for- pro• t bodies" could be responsible for pro- ducing "local street-by-street transport and energy plans and scenarios" to be used by DNOs and gas distribution networks (GDNs), with democratic oversight from elected local net zero commissioners. NERA said this model would help to address potential con icts of interest that DNOs and GDNs may have but would avoid "separating the operational and investment planning activities that is likely to create ine‰ ciency, or splitting the responsibilities for security of supply which could create a 'moral hazard' problem". Functional separation Some DNOs appear to be more amenable to the kind of separation proposed by Ofgem in its call for evidence. Ben Godfrey, DSO manager at Western Power Distribution (WPD), says the com- pany is already working within Ofgem's • rst model, having established a "functionally separate" DSO department over the past year. He says the DSO functions will be exter- nally audited and overseen by an independ- ent scrutiny panel that he compares to the Customer Engagement Groups created as part of the RIIO2 process. "We see the DSO scrutiny panel that we put forward having a number of key individ- uals representing organizations and sectors that are involved in the DSO and exibility space," he says. "And they will be able to provide expert opinion on where we should be heading and shaping our ambition to make sure that we're delivering the best that we can do for customers." Godfrey says WPD did consider full legal separation as part of its ED2 planning but "steered away" from this option, as "ulti- mately there's no additional bene• t in the short term for that kind of legal separation". "We're still underneath the same licence conditions and the codes," he adds. "The only owner of the DSO would be the DNO, so while it provides particular clarity on what was included within the DSO and what's outside of the DSO in terms of the con icts of interests, we don't think that legal separa- tion by itself actually delivers any additional bene• t." Godfrey cautions against making signi• - cant changes too quickly – that is, during the ED2 period – noting that DNOs are supposed to be "low-risk businesses". He recognises SSEN's argument that fur- ther separation may create "arti• cial barri- ers" that could "stymie" progress and that the RIIO framework already provides strong incentives for the development of DSO func- tions. He says the planned establishment of the FSO during ED2 could o– er valuable lessons on the e– ects of such institutional changes. However, Godfrey also recognises con- cerns over potential con icts of interest and says legal separation may be bene• cial over the longer term, describing WPD's current plans as a "transitionary step". He says these bene• ts may emerge once the industry has headed "down the road of codifying and formalising the DNO and DSO relationship". Godfrey says there may also be bene• ts in the more radical of Ofgem's proposed mod- els, stating: "I don't think we should take anything o– the table." He says it "very early" to say much about these models but "the call for input has done quite a good job of setting out what the potential landscape is". "I think the one thing for me that is miss- ing in there is really the regulatory impact of some of these particular worlds," he adds. "We've got a very clear mechanism for delivering a combined ownership model one role, and we've got incentive-based regula- tion, that really does quite a lot of the heavy Analysis continued from previous page

• Cover