Utility Week

UTILITY WEEK | JULY 2022 | 29 Electricity li ing to make sure that there is su cient competition between all 14 di erent licence areas across the UK. "We can see that if some of those bounda- ries were then a little bit more blurred and separate, separated across di erent com- panies, there would need to be a layer of arbitration and monitoring and • nancial mechanisms to be able to pass funding across those particular entities." Legal separation UK Power Networks (UKPN) has taken a • rmer position on separation, stating in its RIIO-ED2 business plan that it intends to establish "an independent distribution sys- tem operator, as a legally separate entity, by no later than 2023". The company said this business unit would have an independent supervisory board and would produce "an annual conŒ icts report which will be publicly available and highlight any conŒ icting deci- sions between the DNO and DSO". Suleman Alli, director of customer service, strategy, regulation and information systems at UKPN, disputes NERA's conclu- sions that legal separation will have negli- gible bene• ts when compared to the costs. "Our view on it is that when we look at the actual numbers ourselves, the marginal cost of separation in the way that we've described in our business plan is negligible compared to the value," he says. "It's single-digit mil- lions compared with hundreds of millions of pounds of potential value." Alli says there are "progressive and mod- ern ways" to achieve separation without duplicating systems: "We've taken a very pragmatic approach to trying to maximise the value for the lowest amount of marginal cost. It is possible to do." He says stakeholders have legitimate concerns over conŒ icts of interest, noting the varied responses of DNOs to changes in demand in terms of load-related invest- ment: "GB peak demand has fallen by about 12% over the past six years, and if you look at the responses of other DNOs in terms of how they've responded to that exogenous change, in terms of the load-related expendi- ture, there's a range of responses, from those that have pared back expenditure and those that have not done so to the same extent. "Now demand is only one indicator but it's a litmus test and therefore I think stake- holders are wondering, are DNOs responding appropriately to changes in exogenous fac- tors based on past performance? And if the answer to that is no, then what's going to be di erent in the future, where exogenous fac- tors like the uptake of low-carbon technolo- gies, like consumer behaviour, change and have even more of an inŒ uence on potential investment needs?" He continues: "That's what stakeholders are saying to us and the only way we could address that and maintain the trust and transparency was to use a model which had signi• cant separation to build that con• - dence, including a separate board and trans- parency reporting and all the other things that we put in our business plan." When asked about the other, more radi- cal models put forward by Ofgem, Alli strikes a more cautious tone, saying: "As you move to the other models, what we need to think about as an industry and regulator is would how our requirements be met? How would we ensure clear accountability with suf- • cient control to be able to maintain reli- ability, maintain system security as well as deliver net zero at lowest cost?" But he concludes: "It's an exciting time because Ofgem is again showing progressive thinking and trying to lead the way globally in terms of how DNOs need to evolve and adapt to the changing environment. "We think it continues to represent thought leadership by Ofgem in provoking thinking to say what is the right approach for the UK. And I think in the same way that the UK regulatory model has really set a stand- ard for the rest of the world, the way in which we are evolving our thinking of local energy institutions and governance will hopefully do the same and maybe be a model for peo- ple to copy in other countries." Tom Grimwood, news editor The second part of this analysis will be available on www.utilityweek.co.uk later this month.

• Cover