Source · Select Committees · Business and Trade Committee
Recommendation 56
56
Accepted
Paragraph: 223
Mandate Ofgem to intervene on DNO visibility standards and monitor 'Flexibility First' adherence.
Recommendation
In future, data and visibility will be key to ascertaining whether network reinforcement or an alternative, such as procuring flexibility services, would be most cost effective for consumers. But there has been insufficient investment in monitoring capability at low voltages to date, resulting in poor visibility of connected assets and the state of the distribution networks. It is also unclear whether all distribution operators are maximising the opportunities of a smarter, more flexible grid. We recommend firmer intervention from Ofgem on minimum visibility standards for Distribution Network Operators. We also recommend that Ofgem reviews whether it has robust processes in place to monitor whether Distribution Network Operators are taking a ‘Flexibility First’ approach and making sufficient use of smart solutions.
Government Response Summary
Ofgem agrees with the recommendation, stating it has approved £167.54m for Distribution Network Operators (DNOs) to roll out Low Voltage (LV) network monitoring. Ofgem also clarifies that its DSO incentive framework within RIIO-ED2 includes evaluation criteria and a new smart optimisation output to monitor DNO performance in developing flexibility and using smart solutions.
Paragraph Reference:
223
Government Response
Accepted
HM Government
Accepted
136. [Response provided by Ofgem] Ofgem agrees with the committee’s recommendation to improve the visibility of the electricity network, particularly at low voltages. Ofgem’s view is that without effective visibility of the LV electricity network, DNOs will be making false assumptions in their planning, connections, and modelling processes. Some DNOs had started their monitoring rollout during the RIIO-ED1 price control, however, penetration of the overall LV network was poor. 137. At RIIO-ED2 business plan submission, Ofgem encouraged DNOs to submit robust business cases for rolling out network monitoring equipment to address the poor visibility of the LV network. All DNOs submitted acceptable plans for this rollout, and we approved £167.54m of spend on LV monitoring. 138. This LV monitoring capacity will involve a combination of direct monitoring (monitors installed in substations) and the use of aggregated smart data. From combining targeted direct monitoring, advanced data analytics, and smart meter data, DNOs can build a set of substation archetypes that can then be used to model the entire LV network with 100% coverage by 2028. This reduces costs for consumers, as DNOs do not need to roll out expensive monitoring equipment (£1,500–3,000 per unit) to all LV substations. Proposed penetration of direct monitoring varies from 22 to 52% across the DNOs. 139. The design of the new RIIO-ED2 price control, which commenced on 1 April 2023, provides a strong platform to do things differently in terms of how Ofgem organises and operates the networks to help unlock the network capacity that customers will need. This includes harnessing the full potential of flexibility and other smart technologies. 140. Alongside direct funding for the procurement of flexibility services on secondary networks in baseline allowances, in period funding mechanisms include unit rates that will put flexibility services on a level playing field with the alternative of network reinforcement. To enhance DSO capability and get DNOs to develop and use their network more efficiently, including taking a Flexibility First approach, Ofgem introduced a new DSO financial incentive in RIIO-ED2. The incentive offers both reward and penalty, which Ofgem considers as ensuring there is a robust incentive (+ 0.4 % / - 0.2% of RoRE per year) in place, and that the incentive framework hinges on robust LV network monitoring. 141. The DSO incentive uses three evaluation criteria to measure DNO performance: a stakeholder survey, a performance panel assessment, and quantitative metrics. As part of the performance panel, DNOs are assessed on their work in developing flexibility, and as part of that will be explicitly evaluated on how they assess network options. In the survey, stakeholders will be asked to score DNO performance on flexibility market development. Therefore, Ofgem believes that DNOs will be robustly assessed on their performance. 142. Ofgem also included in the ED2 control a new smart optimisation output that will be central to the DSO incentive. Ofgem considers that by introducing this output, building out the digital and data capabilities of the networks, better regulating the DSO functions through clearer outputs and strengthened incentives, DNOs will be able to move from just in time network planning to something that can be more strategically organised at the local level.