Utility Week

UTILITY WEEK | 3RD - 9TH NOVEMBER 2017 | 13 Policy & Regulation The ENA's repsonse: "We look forward to reviewing the report in detail and feeding back our thoughts to BEIS. "Many of the changes to networks referred to by professor Helm are already tak- ing place, as part of the government's wider smart systems policy. Through the Open Networks Project, the functions of both local and national electricity networks are already being redefined in close collaboration with industry, and these changes will transform the way our electricity networks operate. The report is a valuable contribution towards the current discussion on RIIO2, however we believe that it is important that the integrity of the current RIIO1 framework is maintained in order to ensure that it continues to deliver the type of world-class network system that customers expect." is similarly unsure about the benefits of sep- arating system operation from network infra- structure at the distribution level. The Helm review cites the Offshore trans- mission owners (Oo) regime as an example of where competitive tendering has already been introduced for network infrastructure. But Roberts says the benefits of introducing a similar system for distribution networks is far from obvious. Ofgem is currently working to introduce competitive tendering for onshore transmis- sion infrastructure through the competitively appointed transmission owner (Cato) regime. Robert says Frontier Economics' analysis of the Cato regime found that while there are definitely advantages to competition, there are downsides too. "It's actually quite complicated to set up tenders for a piece of infrastructure… There's a lot of fixed costs," he argues. He says the overall benefits are greatest when dealing with larger projects: "If you're doing it for small investments, then the cost- benefit assessment is going to look different and you might find the benefits of competi- tion are outweighed by the fixed costs of the tendering process and managing tendered contracts aerwards." Whether competitive bidding at the dis- tribution level would be a "net win" for con- sumers is unclear. "I think you've got to do more digging," he adds. Along the same lines, Roberts says the Helm review fails to provide evidence that publicly-owned system operators would make better decisions. "The whole purpose of privatisation and liberalisation was to remove political and associated interference in the energy sector and inject some degree of commercial incentive," remarks Roberts. "It may be that public ownership is better. It may be that it's worse." He says that with no profit incentive and facing increased media scrutiny, they could be "unduly risk averse" – prone to "gold- plating" the power system and therefore adding to energy bills. Roberts says there needs to be "a lot more careful thinking", not just about whether the proposed model would be better than the status quo, but also "whether the pros outweigh the cons by enough to justify what would be a massive restructuring of the sec- tor, when the sector's got so much else on its plate". Mike Kay is a member of the Institution of Engineering and Technology and Energy Sys- tem Catapult steering group for the Future Power Systems Architecture (FPSA) project. Speaking on behalf of FPSA, Kay says sepa- rating network ownership and operation is "probably appropriate" given the need to develop alternatives to reinforcement. "The separation of network ownership from its operation is clearly a direction of travel being seen in networks across the world," he says. At the same time, he says the FPSA is "wary of supporting this as an overriding principle". "The counter view is that if at the local level the flexibility and services never grow enough to provide sufficient liquidity of services to allow a true substitution of ser- vices for network assets, there is little point in the separation," he adds. Kay says Helm's model represents a "radi- cal proposal" that would be hard work to implement – probably "at least as complex" as privatisation in the late 1980s. "Helm doesn't suggest a big bang to be under- taken in a very short time period, but nev- ertheless the scale of market redesign he is proposing by the early 2020s still seems very challenging to the current resources of Whitehall and the existing licence holders." Although "probably by design", the review "does not delve into the practicalities of implementation". Energy and Climate Intelligence Unit director Richard Black writes in a blog that while the Helm review presents a "plethora of ideas", his review suffers from a lack of supporting evidence. Channelling a school maths teacher, he implored Helm to "show your workings". This criticism seems to be as The main findings and recommendations: • Ofgem should carry out an assessment of the three options to tackle the scale of outper- formance in the current periods – do nothing; arm-twisting; and a one-off resetting. • The existing regulatory periods should be the last, and the conventional RIIO framework should be replaced when the periods come to an end, or aer a shorter roll-over period, by a streamlined and much simpler model, bringing greater scope for competition and for markets to bear down on costs. • The NSO should take on some of the duties in respect of the functions in the licences for transmission and including the duty to ensure the security of supply. A similar set of duties should be placed on the RSOs. • The licence distinctions between distribu- tion, generation and supply should be aban- doned at the regional level, to be replaced by a single, simpler licence. • The RSOs should determine the system requirements to ensure security of supply consistent with the carbon budgets and targets, and auction contracts for the delivery of required investments and services. These might be bundled together as in the existing DNOs, or disaggregated. • The DNOs and suppliers can share smart meters, thereby significantly reducing their costs of capital. A regional advisory board would remain, guaranteed by the RSO, and this could be securitised at a low cost of capital. • DNOs would be free to engage in generation and supply, and hence incentivise choices between investment in new-generation capac- ity, including renewables, and networks. • The role of Ofgem would be substantially diminished: there would be no further periodic reviews, and the NSO and RSOs would take on a number of regulatory functions currently performed by Ofgem. • The NSO and the RSOs should jointly form an overarching council so that their respective activities can be coordinated. • There would be residual regulatory roles to fulfil, and these could be absorbed into a sin- gle network regulator alongside those of water, transport and communications. true for Helm's proposals regarding networks as for any other part of the paper. As Roberts notes, Helm presents his view of the best way to reform the energy system as "incontrovertible truth". Yet, without evi- dence to back up his reforms, the review can, at best, "only ever be a catalyst to further thinking". Helm may be sure that he's got all the right answers but, as things stand, he's got a long way to go to convince others.

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