SMART TALK – COST OF ENERGY REVIEW.

 

It’s only the day after the publication of Dieter Helm’s work on the cost of energy in the UK.   I look forward to digesting its content over the next few days and trying to fathom the potential implications of the directional signals coming from the document.   At this stage I have only managed the Key Findings and Recommendations summary, and for the first time in a long time I have been inspired to read through the detail of what promises to be a watershed document in shaping the energy industry structure in the UK over the short to mid – term.

Given the relatively short timeline to research and finalise this document, the clarity of the recommendations is refreshing.   It is significant that they have been able to be presented without the many influences that could dilute the criticality of the strategic intent behind the document.   The desire for the UK to have the lowest energy costs in Europe, and for them to be provided in a low carbon environment, is both admirable and critical if the UK is to achieve its productivity gains and leadership status in energy on the world stage.

Through time, and after digestion of the document, I will prepare some further comment.   At this point I would like to share some thought provokers around the Key Findings and Recommendations as they relate to networks businesses.   These are high level comments without the context of reading the full document and as such may not be accurate or detailed enough in their development.  However, they do represent an initial reaction to points 10 through 13 with the aim of enabling the realisation of the intent.

  • Point 10 – commenting on the RIIO framework and its appropriateness for the technology led pace of change is interesting. As an advocate of technology being available today ahead of the appropriate market structures to support its implementation, there is a huge part of me that agrees with this suggestion.   However, I am actually more concerned about the integrity of national infrastructure and would argue the need for the existing eight-year framework to be maintained for existing infrastructure.   Such an approach would bring certainty for security, investors and enable the sound economic environment for a platform of stability through the period of technology/market change.   The framework could be tilted/incentivised around technology & market implementation.   Separately, a range of more short term incentive arrangements could be enabled for networks to take on board technology and market change.   These could be available for both new and existing entrants.   Established industry custodians could be incentivised to enable the new market players.

This is a complex web – but the criticality of maintaining national critical infrastructure either at a Transmission or Distribution level is fundamental to enabling the transition.

  • Point 11 – the creation of both NSO and RSO functions is a welcomed proposal and aligns very much with existing industry DNOs to move to being DSOs. The DNO transition is a safe approach to enabling the new paradigms, however, the pace of progression and implementation should be driven with appropriate incentives, perhaps separately to normal regulated rate of return business models.  Be sure that for the vast majority of customers, in the first instance this DNO to DSO transition should provide the lowest risk with the greatest capability behind it.

The concept of both NSO and RSO functions in the public sector, may seem a backward step, but actually may enable a greater degree of enablement with variability in pace of change with new entrants.   The co – existence of this approach with the baseline DNO to DSO transition is intriguing and perhaps is not envisioned in this model.  My provocation would be that RSOs could be DSOs established from DNOs, or they could also be geographic zones, cities, villages etc.  Enabling DSOs from DNOs with the power to create and populate RSOs could be a low risk transitional approach.

The ownership structure for RSOs presents opportunity, public sector led proposals will support community self – sufficiency and the like, but this needs to be in the context of preserving national infrastructure with security of supply at its core.   There will clearly be arguments suggesting that privately inspired RSOs will develop with greater pace.   The DNOs, of today could be actively motivated to create independent RSOs through time and with incentives.

  • Point 12 – on licencing the suggestion of a simpler licence at a local level for distributed vertically integrated solutions makes a lot of sense and would be a key enabler for the establishment of RSOs under any model. Thought to the creation and structure of these will evolve with experience, but this is a seen as a significant enabler of supporting the strategic intent.

 

  • Point 13 – Simplifying the regulatory intervention will be welcomed by all parties. Should the existing framework review period continue to provide the platform for existing assets, this can be achieved in a richer sense than is suggested by the headline recommendations.   It needs, however, to be recognised that the establishment of DSO/RSO models will require innovative market capabilities to be established.   Whilst this may not be a regulatory function it will be a key component of the emerging DSO/RSO environment.

There is much to think about in these four bullet points.   They should be causing the existing industry players some angst, but also shaping up opportunities for the future.   For the first time new market models to stimulate the play through of technology are beginning to be presented.   There has never been a greater time for the UK to lead the world with this low cost, low carbon environment.   Now is the time for regulators, policy makers and industry leaders to rise to the emerging opportunity.

 

…….more will be shared on digestion of the full document

 

David Rutherford


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