Where do the DSOs in Europe see their future? Survey results discussed
Last year the Vlerick Business School published a survey (Outlook on the European DSO Landscape 2020) among 108 executives from DSOs that represent the majority (up to 70% according to Tackx & Meus (2016)) of all customers in Europe. Most of the involved DSOs serve more than 1 million network users each, and only 10% of the survey participants are smaller DSOs with less than 100,000 network users.
The survey tried to catch the executives’ view on the DSO landscape in Europe in 2020. The results of this survey provide some very interesting insights which we want to discuss in the following.
Innovation – Key driver for privately owned DSOs
In the last decade, network operators primary focused on regulation and on how to optimize its asset in agreement with the regulation scheme. This is changing now, as innovation is gaining great importance for the DSOs. The survey by Tackx & Meus (2016) indicates that larger and privately owned DSOs have a stronger focus on innovation than their publicly owned or smaller counterparts. It seems that especially these larger DSOs are planning to transform their business focus from an asset-based to service-based approaches. In the survey, 72% of the DSOs mentioned that they are planning to transform their business to a service-based company. But what does that mean? In the survey, the executives of the DSOs indicated three areas in which they want to become active as service-providers in the future: Data Hubs (89%), active control of decentralized generation (82%) and demand-response and balancing-responsible operator (82%) are the services that were mentioned in the survey. Let us take a closer look at these services.
The DSO as a Data Hub provider
90% of the participants think that DSOs will become data hubs to organize market access. It is important to note here that most data hubs that are currently developed aim at the reduction of market entry barriers in the competitive parts of the energy supply chain: generation and retail. The basic function of data hubs therefore is to provide a level playing field via non-discriminatory data access. Here, data from smart metering are in the focus of the debate, as a majority of EU-member states currently plans or has started the smart meter roll-out as it is required by the EU commission. Therefore, in many cases (e.g. Netherlands, Belgium, Spain etc.) the DSOs are responsible for developing data hubs that collect the data from the smart meters and for securing a safe and secure data transfer to all eligible market parties. What we can see from the data hubs in Europe is that most of them provide a basic functionality that is supposed to secure market processes like supplier switching, billing etc. The interesting question then is how these services – that for now focus on market process mainly related to retail – will evolve in the future. It seems likely that data hubs will be used to provide services for the network operators (e.g. data exchange between the DSO and the TSO) as well as for new market entrants with new business models (e.g. related to behind-the-meter services). If you want to know more about data hubs, we recommend this post here. The open question that needs to be addressed in the future is whether data hubs run by the DSOs, which constitute a new monopoly for the network operators, are the right (i.e. efficient) approach to support the development of new digital business models.
Active control of distributed generation and demand-response
About 80% of the respondents to the survey stated that they expect the DSO to actively control distributed resources or actively coordinate with the consumers via demand-response mechanisms. With increasing shares of renewables, the active management of distribution grids gains relevance. For Germany, a study for the Federal Ministry of Economics and Innovation (BMWi) by E-Bridge, OFFIS and RWTH revealed that the active management of distribution grids alone (here active management of 3% of annual RES production, 97% are not touched by the DSO) can reduce the costs for the grid expansion for RES integration by up to 40%. These numbers show the huge cost saving potential associated with active control of the distribution grid. However, the question remains whether the active control should remain a command and control mechanism executed by the network operator, or whether market mechanisms could help to further reduce the costs of the active network management and as a result further reduce the costs of RES integration of the networks. Here is where the discussion about regional flexibility markets come into play (see these posts here and here on the current discussions in the EU and Germany related to flexibility markets).
Demand-response is a rather new application in Europe. UK Power Networks (UKPN) is the first European utility that is currently preparing an open tender for flexibility services that could be addressed via aggregated demand-response services. UKPN searches for 34 MW of flexibility in its first tender in 2017. Each participant within the tender has to provide at least 500kW to the network operator (this threshold is currently under discussion and might change). For more information on the tender by UKNP see this article. This procedure is quite common in the US, e.g. in California, where the three largest Investor Owned Utilities (IOUs) have already contracted 320 MW (in three auctions) of demand-response capacity (e.g. from Tesla (with only a small share of the total capacity) and other companies like OhmConnect (more than 60 MW contracted with the IOUs)). More info about the DR initiatives in the US can be found here Greentechmedia (2017).
Here again, the question needs to be addressed whether these bilateral contracts can be substituted via sort-term markets that provide regional price signals to the flexibility providers based on demand-response services and what benefits can be derived from such regional flexibility market approaches. For the network operators, long-term bilateral contracts are the appropriate choice for now as these contracts reduce risks. However, this might change if we move to a system with short-term contracting periods. We will pick up the issue of risk management for DSOs related to flexibility procurement in a later post. For now, let us move on to the third area where the participants of the survey by Vlerick Business school indicated as a future business area for DSOs: Balancing Responsibility on the distribution grid level
Balancing Responsibility
More than 80% of the respondents indicated that they expect the DSO to gain balancing responsibility within the next five years. This response points at one of the key challenges for the stabilization of electricity networks: As a direct consequence of the decentralization generation capacities are moving from the transmission level towards the distribution grids. Thereby, the resources that can provide ancillary service (voltage, frequency control etc.) to the network operators are moving to the distribution grids as well. Now, there are two options how to adapt to these developments: Either the TSO (or ISO for the US), who is responsible for system stability in European countries, could get access to the services from the distributed generators on the distribution grid, or the DSO could become responsible for system stability on the distribution grid level. Both concepts can be applied and have their strengths and weaknesses. In general, sticking to the TSO model builds on established processes, but requires an extension of the TSO’s competences on the distribution grid level, while the DSO concept makes use of the local expertise of the DSOs, but requires a more complex coordination mechanism between the TSO and the DSO to balance both grids, the transmission and distribution grid, at the same time. Especially in countries with many DSOs, like Germany or Denmark, the coordination between the TSO and the DSO could become very complex. Here, different platform market approaches could provide solutions to the coordination issue. These models are currently under investigation and need further specification. You can learn more about this debate on regional flexibility markets here and here on our blog.
Larger DSOs strive for more innovation and responsibility
To sum up, the survey by Tackx & Meus (2016) points out that the larger DSOs are keen to increase the level of innovation in their companies and want to gain more responsibility in a future distributed energy system. However, the survey reveals one important challenge for these ambitions: What about the smaller DSOs that would prefer to stick to a business-as-usual mode? Can we develop a market design and corresponding regulation to allow some DSOs (the larger ones) to invest into innovation and gain more responsibility, while at the same time allowing smaller DSOs to stick to their current role? Is there an efficient way to organize this? And even if we can address this issue from a regulatory perspective, how do we secure the efficient coordination between the network operators? All these are important questions that need to be addressed by the DSOs who claim that they want to gain more responsibility.
Are distribution network operators in Europe threatened by a potential application of blockchain technology in the energy sector? This seems to be the pressing question that was at least partially the motivation for a recent report on blockchain in the energy sector by eurelectric, which is the European association of the distribution grid operators. From our perspective, this report reads like an attempt by the industry to reassure itself that its core business model – asset ownership and operation of the electricity networks – is not threatened by blockchain. While this might be true for asset ownership, this is different in the case of network operation.