Utility Week

12 | 3RD - 9TH NOVEMBER 2017 | UTILITY WEEK Policy & Regulation Analysis L ast week saw the publication of a government-commissioned review into the cost of energy by prominent Oxford economist Dieter Helm. Helm called for a drastic overhaul of UK energy policy, regu- lation and market structures, which he described as "not fit for purpose". Unsurpris- ingly, the review garnered plenty of attention both inside and outside the energy industry. What was surprising, though, was that relatively little attention was paid to his pro- posals to revamp electricity networks, par- ticularly by the national media. Although these were arguably the most radical of his many recommendations, several outlets referenced them only in passing, or indeed failed to mention them at all. Helm argued that the RIIO regulatory framework is no longer up to scratch, claim- ing the price controls have been too gen- erous to distribution networks operators (DNOs). He said DNOs had secured returns that would be the envy of their much-criti- cised counterparts in the retail sector, and that the eight-year gap between settlements is too long given the breakneck speed of technological developments. According to Helm, not only should the national system operator (NSO) be com- pletely separated from National Grid and taken into public ownership, but the govern- ment should also create a series of publicly- owned regional system operators (RSOs), which would be handed many of the current responsibilities of the DNOs and Ofgem. These RSOs would be given the task of securing local energy supplies and would do so by holding tenders for specific system requirements. The DNOs would effectively be relegated to the role contractor – "one of a number of competitive suppliers". There would be no more benchmark- ing, no more allowances and no more peri- odic settlements: "At a stroke, much of what Ofgem currently does in respect of network regulation is no longer needed." Catherine Mitchell, professor of energy policy at the University of Exeter, shares Helm's concerns over network returns and the length of the RIIO periods. That said, she has several reservations about the solutions he has put forward. Mitchell tells Utility Week that the "grid edge" companies, which are seeking to dis- rupt the energy industry from the outside, will "absolutely" want distribution system operators (DSOs) – as the DNOs are set to become – to be "separated out from the wires". They fear that DSOs will otherwise favour network reinforcements over innova- tive alternatives. However, Mitchell argues that this need not be the case, provided that the right incentives can be provided through perfor- mance-based regulation. DSOs, which are "intimately involved" with network infra- structure, could in fact be better placed to introduce non-wire alternatives. Furthermore, she says that separating system operation from network infrastruc- ture at the distribution level could work out to be "very expensive" when compared with doing the same thing at the national level. "I think it needs to be thought about much more deeply than saying just because we've done it at the transmission level, we should also do it for distribution." She opposes the suggestion that RSOs could effectively act as both regulator and operator, saying there "needs to be more oversight". If Helm's proposals were to be enacted, Mitchell says it would better to hold back for the time being. She envisions an energy system optimised from the bottom-up rather than the top-down. Before this can happen, she says, DNOs need to be given the chance to build up a more granular picture of the distributed energy resources connected to their networks. Her support for such a change would also depend on what exactly is meant by regional, because this bottom-up optimisa- tion needs to begin at a truly local level. Without further clarity about what exactly Helm intends, and more evidence to support his recommendations, her position is that of an "agnostic". Dan Roberts, director of the energy prac- tice at consultancy firm Frontier Economics, Helm's new world order Nowhere is Dieter Helm's wide-ranging review of the cost of energy in the UK more radical than in its calls for the transformation of the distribution and transmission system. Tom Grimwood reports. "Given the high-level nature of his review it would be dangerous to simply do as Dieter says but foolish to ignore some of the fundamental issues he raises." Maxine Frerk, director, Grid Edge Policy (formerly senior partner for networks, Ofgem) "It needs to be thought about much more deeply than saying just because we've done it at the transmission level, we should also do it for distribution." Catherine Mitchell, professor of energy policy, University of Exeter "The separation of network ownership from its operation is clearly a direction of travel being seen in networks across the world." Mike Kay, member, Future Power Systems Architecture project

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