Utility Week

26 | JULY 2022 | UTILITY WEEK Electricity Analysis Degrees of separation: the different pathways to DSO In the first half of a deep dive exploration of the development of distribution system operator services, Tom Grimwood looks at the models being proposed by Ofgem and the different approaches being taken by DNOs. A s part of the transition to a net-zero energy system, distribution network operators (DNOs) are taking a more active role in the management of their net- works, developing a series of distribution system operator (DSO) functions similar to those of the Electricity System Operator (ESO) at the transmission level. However, in a call for input on the future of local energy institutions and govern- ance issued by Ofgem in April, the regulator raised concerns that the current arrange- ments may not be suited to these functions, namely energy system planning, flexibility market facilitation, and real-time operation of local energy networks. Ofgem said there are "institutional gaps and a lack of accountability" with regards to some functions, and even where there are clear roles and responsibilities, "it is not clear that these are assigned to the institu- tions best placed to perform them in future". Furthermore, there is "insufficient, or ineffective, co-ordination between actors across the energy system at a sub-national level," while "confusion and regional vari- ances" could delay the transition to net zero. Ofgem therefore proposed four possible models for the future. In the first, DNOs would continue to per- form all DSO functions, with potential con- flicts of interests being mitigated through internal separation. This could mean sepa- rating the DSO functions within the DNO, or creating a legally separate DSO under the same parent company. In the second model, fully independent DSOs (IDSOs) would be established to carry out at some or all of the DSO functions cur- rently performed by DNOs. Ofgem said these IDSOs could be publicly or privately owned but would have separate parent companies to the networks. In the third, DSO functions would instead be taken on by regional system planners and operators, which would develop regional energy system plans, perhaps with demo- cratic oversight from local government. As well as electricity, these plans would cover other energy system vectors such as gas and heat. The regional system planners and operators would be fully independ- ent from the DNOs and could be publicly or privately owned. In the fourth and final model, DSO functions would be dispersed between dif- ferent organisations, with the aim of max- imising synergies within functions and allowing institutions to focus on their core competencies. Ofgem said there are various possible sub-variants to this model but, for example, suggested that the Future System Operator (FSO) that will eventually replace the ESO could take on the role of market facilitator, while planning could be under- taken by a separate regional system planner. Both as part of the RIIO-ED2 business planning process and in direct response to the call for input, several DNOs have already indicated their opposition to all but the least radical of these options. Conflicts of interest In its RIIO-ED2 business plan, Northern Powergrid stated its intention to create a new DSO business unit led by an executive director. This unit would feature an assur- ance function for progress monitoring and external reporting, which would facilitate an independent audit of investment decision- making processes. However, the company said it does not believe that further structural changes, such as legal separation between DSO and DNO functions, are justified, arguing this would undermine synergies between the two sets of functions and weaken incentives in the regu- latory framework to optimise costs. The company defended this position during an Ofgem open hearing in March in which Justin McCracken, chair of Northern Powergrid's Customer Engagement Group, raised concerns over a potential "conflict of interest between the DSO's role as a pur- chaser of flexibility and its role as a neutral facilitator of flexibility markets". Chief executive Phil Jones said this risk was "perceived" rather than "real". "O–en people say, well, you'd rather build copper, wouldn't you? You'll always seek to do that," he said. "If that were true, I've yet to have it explained to me why there'd ever have been an underspend. "It's the same when we decided to use a short-term maintenance-oriented solu- tion instead of a capital one, and I've been around a long time now and spent most of my career working with people to figure out how to do exactly those kind of things." He continued: "I just see flexibility as another way of optimising the total cost spend, so I think just to suggest that that is a particularly unpleasant form of substitute doesn't make sense to me. It's actually one

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