The recent Energy and Climate Change Committee report published on 17 June1, concluding that a change is required in the way the UK energy system is operated, recommends transferring system operation from the National Grid to an independent system operator (ISO) at the national level.
At the regional level, the Committee observed that "local energy is here" and that more and more electricity generation occurs at the regional distribution, rather than national transmission level, "but Distribution Network Operators (DNOs) remain "somewhat blind to their energy flows and passive in managing them". It suggests there must be a transition to fully-functional Distribution System Operators (DSOs) which balance and control their local grids, and ever more complicated energy flows.
Overall the Committee expressed concern that the energy system is not currently flexible enough to meet the three principal challenges presented by, new energy sources (connection and grid reinforcement), employing new tools e.g. smart metering to balance supply, and demand and the impediment of "outdated and inflexible regulation and governance". In particular it calls on the Government to establish a cross-departmental working group to investigate and report on improving the integration of the connection and planning-consent processes in England.
Noting that the Government has accepted the National Infrastructure Commission's (NIC) recommendation that DECC and Ofgem should review the regulatory and legal status of storage, in particular to remove outdated barriers, the Committee recommends that the Government commissions a study on the future of large-scale storage in the UK which includes consideration of potential sites and what support such projects would need to be viable.
The Committee's overarching message to the Government is to take seriously the criticisms about its speed of delivery, as expressed in this report and elsewhere, and to learn lessons from its approach to energy networks that can be used to improve its change readiness in future.
Notably the report includes some interesting findings on the current multiples roles of National Grid and raises the question as to whether having an independent system operator (based on the US example) would serve the interests of the market as a whole better. Using electricity as an example, NGET acts as system operator for the entire transmission system, owns the large majority of the transmission system in England and Wales, and as the report highlights, has interests in interconnection assets as well. This could lead to potential conflicts of interest. In terms of balancing the network, NGET can call on generating plant to increase or decrease output, or can call on interconnectors, in which it may have a financial interest, to be paid to perform the same function. Another example would be that because of the price control structure, NGET's revenue (as owner of parts of the network) is based on its cost base of those transmission assets. So, while NGET as system operator can recommend that certain new assets are required, the revenue from those assets will flow to NGET in its role as network owner. While the report does not imply that NGET has acted inappropriately in any way, it does highlight that the current structure may not be the most appropriate allocation of responsibilities.
This connects to the question about NGET's role in the development of long-term assets and the length of time required for the construction of new assets. NGET has long argued that it is prevented from taking speculative action that would enable swifter development of the network due to the regulatory constraints placed upon it and the risk of being left with stranded assets. The development of offshore networks brought this issue to the fore, with the question as to whether having a series of point to point connections between each project and the existing grid was the most economic and efficient way to develop the system. Would an integrated network connecting a number of projects within an offshore zone, or a number of zones in the North Sea, have been a better engineering solution? This aspect of the discussion has been going on for some time. If the overall role of National Grid is being reviewed, may this be an opportunity to revisit this question as well?
The Committee's conclusions and recommendations are summarised at the end of this note.
Going forward the Committee said it would continue to look into the Government’s adaptability to emerging technologies as part of its ongoing inquiry into Energy revolution.
- Call on the Government to establish a cross-departmental working group to investigate and report on improving the integration of the connection and planning-consent processes in England
- Anticipatory investment must be accompanied by up-to-date modelling to minimise this risk
- Ofgem should carry out further impact assessment on systems of cost recovery for anticipatory investment.
Network charges and connection costs
- DECC should investigate the disadvantage UK generators may face against other European generators as Great Britain becomes more interconnected, and the impact this may have on development of domestic renewable generation
- Ofgem should analyse the costs and benefits of levelling connection costs across Great Britain.
- The Committee expressed concern that the roll-out of smart meters is not progressing quickly enough to achieve the necessary mass to truly create a smart energy network.
Gas and heat networks
- Both the Government and Ofgem should set indicative targets for biomethane and hydrogen deployment, and consider what support might be needed to deliver consequential changes to network infrastructure
- Ofgem should be required by the Government to regulate district heating networks, and the Government should seek to make whatever legislative changes are necessary to enable this.
- Noting that the Government has accepted the National Infrastructure Commission's (NIC) recommendation that DECC and Ofgem should review the regulatory and legal status of storage, the Committee recommends that the Government commissions a study on the future of large-scale storage in the UK which includes consideration of potential sites and what support such projects would need to be viable
- The Committee urged the Government to publish its plans, as soon as possible, for exempting storage installations from balancing charges, and from all double-charging of network charges
- Storage technologies should be deployed at scale as soon as possible
- DECC and Ofgem should analyse the long-term risks of network ownership, operation and procurement in their work on storage.
Demand Side Response
- The Committee suggests that, in addition to the promised review of DSR by Ofgem the Government needs to set out a more detailed strategy for Demand Side Response.
- Development of interconnection should be accompanied by a strategy to develop sufficient low-carbon generation capacity for export.
- The Committee strongly supports Ofgem’s commitment to network innovation, but noted that there is room for improvement.
- The Government should develop and publish a road map for DSO introduction, identifying future legislative and regulatory changes needed. The road map should include a plan to require small-scale generators to provide real-time information to DSOs. The relationships across DSOs and between DSOs and the Transmission System Operator must also be clarified
- Given risks to consumers from accumulation of monopoly power, DECC and Ofgem should be prepared to review the governance of distribution networks as DSOs’ functions develop, and to separate distribution networks’ operation from their ownership if their conjunction proves to have a negative impact on consumers
- The Committee recommends creating an Independent System Operator (ISO). The Government should set out its intentions regarding an ISO as soon as possible, and consult on a detailed, staged plan for their implementation, so as to avoid injecting uncertainty into the energy sector
- Implementing a whole-systems approach could produce better solutions for the kinds of challenges discussed throughout this report.
Flexible policy for a flexible energy system
- Our overarching message to the Government is to take seriously the criticisms about its speed of delivery, as expressed in this report and elsewhere, and to learn lessons from its approach to energy networks that can be used to improve its change readiness in future.