Coauthored by Priya Sreedharan (GridLab), Alex Walmsley (RMI), James Van Nostrand (former Chair, Massachusetts Department of Public Utilities)
Recently, the CHARGED initiative took a new group of regulators and staffers for a second trip to Great Britain (GB) to learn about their approach to distribution system planning and operations. The approach in GB encompasses tools like performance-based regulation to encourage demand side flexibility, flexible grid interconnection, and innovations in technology, and defer costly distribution capital investment. This trip, which included visits with many of the same actors as the previous trip — the regulator, Ofgem; distribution network operators (DNOs) National Grid Electricity Distribution (NGED) and UK Power Networks (UKPN); and the retail provider and flexibility market participant Octopus Energy — proved to be just as valuable and stimulating as the first CHARGED trip, which we blogged about here.
To recap, the GB flexibility markets were designed for, and have been successful in, deferring or avoiding new distribution system capacity build. The Distribution System Operators (DSOs), which may be a separate legal organization or entity/department within the utility, manage and procure flexibility services which include both demand response and flexible grid connections. What was clear from the utilities we visited is that they have developed new capabilities and are delivering on Ofgem’s regulatory ambition.
There are three core components that stood out to this group — financial regulatory incentives for distribution utilities to leverage flexibility over new capacity, a market design that has built-in cost-containment incentives (retail suppliers can lower their costs and improve profit by leveraging flexibility to offset their wholesale market procurement costs), and impressive technology platforms (we saw at least two types on this front — a digital platform for procuring flexibility services from flexibility providers, and a fully integrated customer information system that enabled communications and the implementation of simple or complex rate offerings to optimize customer distributed energy resources).
The rest of this blog delves into how benchmarking and grid utilization incentives are used in GB.
Ofgem’s Electricity Distribution Multiyear Rate Plan (MRP) 2023-2028 (referred to as RIIO-ED2) contains a strong incentive for utilities to deliver smart, flexible distribution grids with fast connections and excellent customer service. The DSO incentive is composed of qualitative and quantitative stakeholder surveys and an expert performance panel assessment, with all 6 utilities ranked relative to one another (as often the utilities are, promoting competition and a reputational incentive). The DSO Incentive is an upside (incentive), and downside (penalty) performance incentive mechanism (PIM), designed to encourage smart Distribution System Operation.
The DSO incentive is coupled with a financial mechanism designed to support grid flexibility by leveraging grid utilization data — the Load Related Expenditure Secondary Reinforcement Volume Driver (SRVD). To simplify this complex term, it is designed to make sure grid upgrades are effective and targeted, while acknowledging that even with forecasting and grid planning there is significant uncertainty at the start of an MRP on when and where upgrades might be needed. The SRVD can be explained as follows: On the secondary network, that is the low voltage (LV) network running at 230-400V, reinforcements, including secondary transformers taking voltage from 11kV to 230-400V, are funded based on their volume and unit cost (a volume driver). The Transformer Utilization Metric is used as one of a number of metrics to determine whether the volume driver cost is justified or not, with the potential for disallowances. The SRVD also sets a unit cost for flexibility procured on the secondary network instead of grid upgrades, meaning that the utility is incentivized to use flexibility as a like-for-like alternative to grid upgrades. This incentive is in addition to the overall TOTEX shared-savings incentive mechanism and the DSO incentive, making a strong case for utilities to seek and use flexibility. (A noteworthy difference in the form of rate regulation in GB is the use of TOTEX ratemaking, in which capital expenditures (CAPEX) and operating expenditures (OPEX) are pooled to form total expenditures (TOTEX).) This is an effective means of dealing with the CAPEX bias present in U.S. regulatory models, which encourage utilities to pursue capital-intensive projects, such as grid infrastructure, over alternatives, such as flexibility.
Over the course of our visit, our group became very interested in utilization metrics dimensions. Various questions were common in our formal and informal discussions. For example, on the topic of grid utilization, if utilities in GB can calculate grid asset utilization, why can’t we calculate grid utilization in the US? Surely, our utilities have the technical capabilities to do this. Could we learn something by comparing capacity utilization metrics across utilities? Could this be a tool to encourage load flexibility across US utilities? How difficult is it for utilities to calculate this? Can they readily calculate these with the existing data systems?
The CHARGED initiative was created for exactly these kinds of reasons—to surface, debate and develop common sense solutions that most, if not all, utilities can implement readily to save all ratepayers money. We think we’re onto something that could be useful to that end with utilization metrics and are eager to explore it further.