Ofgem asks for feedback on DNO-DSO transition and flexibility

The UK regulator is inviting comment by October on various issues related to the transition from DNO to DSO.
Published: Tue 06 Aug 2019

UK regulator Ofgem is seeking comment on how it will facilitate flexibility markets during the DNOs transition to a DSO model in a position paper published today.

An increase in distributed generation means that DNOs will have to take on system operator functions, such as active network management, using new digital technologies and real-time data to manage the network. Ofgem has to walk a tightrope as it tries to keep regulations clear and up to date in step with rapidly changing roles and responsibilities, without setting rules too restrictive that might cause problems in the future as markets develop.

Ofgem has encouraged DNOs to tender for flexibility services and several aggregators and platforms have emerged to meet that need. But DNOs can also provide these services themselves, which may create a real or perceived unlevel playing field as their position as network operator gives a competitive advantage unavailable to other market participants. DNOs have access to information about electricity networks, use of network assets funded by consumers, and access to cheaper capital due to the regulated nature of its activities that other flexibility providers do not have.

The regulator will publish further analysis soon in a paper on markets for trading energy flexibility, and will host a workshop this autumn to discuss developments in DNO flexibility tenders. 

Its key aim is to reduce barriers to entry and ensure fair competition so costs are minimised for consumers. It says in the paper that it expects DNOs to explain clearly how flexibility tenders and other alternatives to network management interact, including active network management schemes, and how they will choose between them. Ofgem also says that if all six DNOs and the ESO National Grid all have different flexibility and balancing or ancillary market competition formats, this raises complexity and creates artificial barriers to entry.  It is asking for comment by the 15th October 2019.


The paper was generally welcomed by industry observers, although Ofgem’s reluctance to delay decisions on any institutional changes might limit buy-in from the DNOs, warned John Scott, director of consultants Chiltern Power. “Where is the jam in this sandwich? What return do DNOs expect and will DSO activities change their risk profile?” he asked. He pointed out that the paper discusses risks to consumers and risks to contested markets but is almost silent on risks to parties at the grid edge and to DNOs themselves. It also says very little about community energy and peer-to-peer trading programmes. He urged Ofgem to be decisive in its action: “It’s a promising step but please don’t wait for perfection. Be bold, implement the changes and then set a review point to learn the lessons.”

Kyle Martin, head of market insight at LCP said: "Although some elements of Distribution System Operation will take time to develop, Ofgem rightly highlights several areas where action will need to be taken sooner. Facilitating competitive markets, ensuring open access to data and incentivising innovation all need to be priorities if we are going to deliver a smart, flexible distribution system that enables both decarbonisation and more efficient use of the distribution network."

Some progress has been made to coordinate markets at the Energy Network Association’s Open Networks Project, via which Ofgem has engaged with industry stakeholders. It wants to ensure action is coordinated so that flexibility providers can stack their products across different markets to gain maximum value.

DNOs should take into account the downward trajectory in flexible technology costs in their cost-benefit analyses when considering whether investment in new grid infrastructure is required, Ofgem says in the paper.  It is also calling for comment on its reform of electricity network access and forward-looking charging, which should create more cost-reflective and locationally granular signals for network use to minimise the need for network reinforcement. Flexibility markets could help the UK save up to £8bn a year by 2030, according to the National Infrastructure Commission.

Current regulations were designed for a grid powered by large central power stations rather than a high reliance on distributed energy sources, and these may hinder the development of flexible services that could be delivered in future, says Dominic Fava, head of marketing and propositions at Origami Energy, which operates a virtual power plant platform. His company is working in a consortium with DNO Scottish and Southern Electricity Networks in Network Innovation project, Transition and Project Leo, one of the Innovate UK smart energy systems demonstrator projects announced in April. “The power system is going to get increasingly congested and use of the network will be challenged. We’re only just starting in this process with renewables, and as heat and transport is electrified the pressure on the network will only increase. That will require a new way of approaching this new electricity world and will open many new opportunities for many new participants alongside some bold changes to regulation to support new business models. We have to do things in a more intelligent way rather than just rolling out new infrastructure.”

Ofgem is also working on its package of price controls known as RIIO-2 that starts in 2021 for most monopoly companies and 2023 for electricity distribution companies. These seek to sharpen incentives on network companies, through greater efficiency and whole system incentives, increased competition and continued support for innovation.

The ENA is also running a consultation on flexibility services. The consultation follows its Six Steps for Delivering Flexibility Services commitment issued in June which sets out exactly how grid operators will run new flexibility markets across the country. The principles include: neutral market facilitation; market boundaries; transparency, visibility and privacy; rights and obligations; interoperability of solutions and coordination and information exchange.