Changing the way we regulate our utility networks and it’s impact on regional economies

Why changing the way we regulate our utility networks would have a profound effect on our regional economies

If you want to know how simple, low cost, easy to implement changes in regulation could have big benefits for regional, city and community economies you need to understand the place Distribution Network Operators(DNOs for short) have found themselves in within the energy supply chain.

As with your weekly grocery shopping, you have a choice of a convenience store, supporting local producers or search for the best supermarket deals.

If we need to connect our buildings to a utility, electrical power for example, when it comes to who lays the cable to our door we really only have one choice. The cable belongs to the distribution network operator and by default they are effectively a monopoly.

Monopolies aren’t great for ensuring the best deal, so they are highly regulated in terms of service levels and fixed rates are impose on the suppliers. DNOs are tightly regulated in terms of what and how they can invest in the development of the network. A regulator, Ofgem in the UK, creates and enforces these regulations.

This feels like a miserably tight corner in which to do business, but institutional investment loves a monopoly provider, the returns may be modest but as assets go – they are  safe and secure. We are always going to need electricity delivered to us when and where we want it. Right?

So the big power stations (owned by the big six generating companies in the UK) pour power into the national grid (another monopoly) who ‘transmit’ the power across the country to the DNOs who then ‘distribute’ it to the consumers. The suppliers contract with the generators to supply them with electricity and pay what is in effect a shipping cost for the use of the transmission and distribution networks and the power lost in the process.

A contracting system is in place where suppliers must forward book generating capacity – most of the central generating capacity in the UK is contracted in this way. The grid doesn’t like having too much or too little power flowing in it so the folks in the big control room at National Grid monitor the contracting process very closely and intervene by orchestrating the addition or disconnection of relatively small amounts of generating capacity in real time to keep everything stable, this whole process is called balancing. The suppliers have to pay for this service and as keeping generators available for short term balancing is not efficient, suppliers are also subject to penalties if they mess up their forecasts and order too little or too much electricity.

Think of all this as like running a restaurant, you want to buy your fresh food in advance to get the best price, but it needs to be as close to when you are going to use it so that its fresh and crucially you have a fair idea of how many mouths you are going to feed. Get it wrong and you’ll have a bunch of wasted food on your hands or you’ll be round to the expensive local store to buy more food.

So far so good and its worked more or less like this for a long time.

Now what happens if you move to a world where generation starts to move away from the big power stations. This is called distributed generation. Forms of distributed power generation include:

  • Wind farms
  • Solar farms
  • Domestic PV
  • Combined heat and power plants
  • Anaerobic digestion
  • Waste to energy

These typically supply into the local distribution networks and are the electrical equivalent of local farmers directly entering the supply chain with local grown produce.

Some forms of distributed generation run continuously, others like wind and solar do not and most are not controlled by National grid. In our restaurant analogy this is like depending on the fisherman landing his daily catch; it could be feast or famine. This can be a bit of a problem, for example like when the sun shines on a sunny summer day, this gives rise to places like Cornwall generating significantly more power than it requires.

What a great success story for those who pumped subsidy into the PV market to build volume and lower production cost?

Well yes, but this is difficult for the DNO who must do something with the excess power to ensure stability of the network; failing to do so means that consumers are plunged into the unpredictable service levels that are all too familiar to those in the developing world.

This is all the more difficult because, fueled by subsidies, the speed at which some forms of distributed generation have proliferated has been considerable. Commercial solar farms were virtually non-existent five years ago. In infrastructural time frames that is rapid change!

What is required is a smart grid that can not only cope with power flowing in different directions but can also act autonomously to regulate both central and local supply and demand. That technology is on its way.

But what does the highly regulated environment of a DNO actually allow them to do?

Well…in some instances they can disconnect the solar panels (called curtailment) but that seems counterintuitive; passing up on free energy because the network cannot access sufficient demand. This also adversely affects the business case for solar generators, who are already struggling following the withdrawal of government subsidies.

They can’t directly increase demand to soak up the power because active demand management is not part of their remit, however they can work with suppliers to try and increase demand at times when excess power is likely to occur. The sunshine tariff introduced by Tempus Energy, a supplier in Cornwall, is a good example of the DNO working with a supplier to attempt to influence behaviors by offering cheap electricity during summer daytime hours. Smart metering could also help here but that has been deferred to 2020.

And – perversely – they can’t store it (by making hydrogen to dump into the gas grid or to use to generate power later or by using batteries etc.) as they are not allowed to supply power into the network.

So the main solution is to reinforce their network and build a mechanism to allow them to throw the excess power over the garden wall (so to speak).

This is not ideal, overhead networks (which a lot of them are) have protracted planning processes covering replacement and reinforcement that could take decades, at the end of which the problem may also have arisen on the other side of the fence!

Western Power Distribution who are the DNO for Cornwall are in exactly this position. Their only major option to solve the immediate problem has been to close the grid to further commercial distributed generation for a period of five years and to embark on the path of network reinforcement. They are exploring other measures and would dearly like to do a lot more but that is where the regulations have put them.

This problem came to light at the Cornwall Energy Island workshop which was run in March 2015 by Buro Happold and its partner The Eden Project.

It became clear to the 120 stakeholders who attended the two day event that a review of DNO regulations could have a profoundly positive impact on the Cornish economy by allowing the DNO to find ways to keep low cost excess power from distributed generation within the county regional energy costs could be reduced.

In the same way that subsidy has driven volume in renewable generation, similar interventions are required to promote the roll out of storage – this could be in the hands of:

  • the DNO to balance the local network (perhaps by being allowed to divert investment from reinforcement)
  • with the generators to improve their business case to allow them to sell more power and,
  • for customers – the equivalent of putting seasonal produce in the freezer to use later and save money.

Better still the creation of a regional ‘farmers market’ for electricity between local generators, suppliers and customers could be a real step forward, WREN, the Wadebridge Renewable Energy Network is a local not for profit energy cooperative pushing forward in this area through its Wadebridge Energy Company initiative.

You can read more about this and a range of other concepts and measures in Buro Happold’s recently published Energy Island White Paper, which identifies a series of areas where UK national energy policy could take further steps to help the Cornish economy and other regions through a fresh and supportive approach to regional energy.

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