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August 2016
Between a rock and a hard place

Between a rock and a hard place

01 August 2016

Damon Mount - Power sales manager

Distribution network operators (DNOs) are facing a tough challenge. They need to offer speedy and reliable connections for a diverse range of renewable energy sources, but at the same time they must protect the reliability of their networks. In the UK, the RIIO-ED1 regulation and price control package from Ofgem, the government regulator for the gas and electricity markets, means that if they get it wrong they will potentially suffer severe financial penalties.

The very nature of power generation and distribution is changing, and this is creating a real headache for DNOs. They have a distribution network that was designed to accommodate a comparatively small number of large power stations, and are now having to adapt this to the world of embedded generation, where a large number of small power sources is the norm. The changes required are by no means trivial, especially as they must be accomplished while the network remains fully operational, reliably delivering energy to the DNOs’ customers.

It is clear that substantial investment may be required, but DNOs operating in the UK are comparatively well placed when it comes to securing this investment. The energy market in the UK is stable, and energy supply is a privatised industry with established regulatory processes. These factors make investments in energy infrastructure an attractive proposition.

Nevertheless, DNOs will still have to demonstrate that they can produce an attractive return on this investment which, to put it bluntly, means that they have to operate profitably. And their profitability is now almost completely dependent on RIIO-ED1, Ofgem’s regulation and price control instrument.

RIIO is an acronym for Revenue = Incentives + Innovation + Outputs, a formula that neatly encapsulates its intentions. In Ofgem’s own words, these are “to drive real benefits for consumers, by providing companies with strong incentives to step up and meet the challenges of delivering a low carbon, sustainable energy sector at value for money for existing and future consumers.” RIIO-ED1, which applies to the energy distribution sector, came into force in April 2015, and will remain in force for eight years.

Energy pricing is regulated by Ofgem and rises are capped, so DNO revenue depends almost entirely on RIIO. Innovation and outputs are measured, and RIIO-ED1 has attractive incentives for exceeding the targets. These are set for many aspects of performance including customer satisfaction, safety, network reliability and availability, environmental impact, social obligations and connection terms.

Incentives are provided for speed of connection and for customer engagement, factors that have a particular relevance in relation to new energy sources. Generating over-capacity in the UK network in 2014 was around 6%, but a programme of closing old environmentally damaging coal-fired power stations and end-of-life nuclear facilities means that the figure for 2015 was just 2.1%. The intention is that the new small-scale generators will fill this gap.

The RIIO-ED1 mechanism does not, however, depend on incentives alone; there are also penalties for DNOs who miss their targets. Performance is reviewed retrospectively using agreed key performance indicators (KPIs). Assessment criteria include speed of connection, results of customer surveys and views from stakeholders. Based on the reviews, the Ofgem panel has the power to impose penalties of up to 0.9% of a poorly performing DNO’s revenue, and also to order it to make GSOP (guaranteed standards of performance) payments to customers for late delivery of services.

A key factor in determining the profitability of a DNO is clearly its ability to handle new connections quickly and efficiently without compromising network performance. To help with this, the UK Engineering Networks Association has produced a series of Engineering Recommendations (ERs).
ER G81 provides a framework and guidance for the installation and connection of commercial and industrial loads. The applicant (that is, the consumer) is responsible for the design, installation and testing, along with the supply of all records and documentation, while the DNO is responsible for approving the design, defining the tests that are needed, and providing the connection to the network. ER G59/3 provides similar guidance for the connection of distributed generation to the network.

These ERs include examples of tests that the DNO may require the consumer to perform before providing a network connection, but these are very general. ER G81, for example, states that tests must be carried out “to verify the complete installation has been installed correctly and is safe to energise.” Wise applicants will, therefore, look to CIGRE and even IEEE standards for further guidance, as well as considering new test methods, such as partial discharge analysis for cables, that provide dependable results while saving time and money.

Being able to provide the DNO with comprehensive and reliable test data will be increasingly important since connecting an installation that does not operate as expected may impact network performance, leading to the imposition of financial penalties on the DNO. With this in mind, the DNOs can understandably be expected to take the line that, “If you can’t prove that you’ve carried out all of the necessary testing correctly, we won’t connect you.”

This article has focussed for the most part on new connections to the distribution network, but it is important to remember that these are not the only criteria against which the DNOs are measured, nor are they the only factors that impact network reliability. To ensure profitable operation, the DNOs also need to monitor and care for key assets that include transformers, circuit breakers and cables.

For all of these, regular testing is the key to maximising availability and service life while reducing as far as possible the risk of unexpected failure. This is particularly beneficial for power cables as poor joints and ageing insulation are among the most common causes of failure and downtime in power networks. However, modern test methods can readily identify incipient problems, allowing them to be remedied before they lead to cable failure.

To cope with the move toward sustainable energy from renewable resources, which means that huge numbers of small generators are requiring new grid connections, energy networks are currently evolving faster than they have ever done at any point in their history.

This presents DNOs with many challenges, but RIIOED1 means that those who successfully address these challenges have excellent opportunities for financial reward. While it may not at first be apparent that testing is a key element to achieving this success, consideration of the points raised in this article will hopefully demonstrate that testing really does have a crucial role to play.

Tags: distribution, DNO, energy, generation, networks, power, renewable