Role of Distribution Network Operators (DNOs) in relation to energy demand reduction

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Distribution Network

Background

1.1. DNOs currently undertake a number of activities to manage increases in load on the distribution system. DNOs are now looking at using innovative means such as demand side management (DSM) to do so. This involves the DNO contracting with a network customer to constrain their demand at certain times. DNOs can enter into these types of arrangements to avoid the cost of network reinforcement. Work Stream 6 (WS6) of the Smart Grids Forum (SGF) has discussed whether DNOs could use energy demand reduction measures in their customers’ premises to reduce load on the distribution system either in a similar way to DSR or by doing work themselves.

‘The rebound effect’

1.2. The rebound effect refers to behavioural or other systemic responses to the introduction of new technologies that increase the efficiency of resource use. This falls into two general categories when discussing installing energy demand reduction measures in customers’ premises:

  1. Increased fuel efficiency lowers the cost of consumption and hence increases the consumption of that good; and
  2. Decreased cost of the good enables increased household consumption of other goods and services.

This means that simply installing energy demand reduction measures in customer’s premises may not have the effect of reducing load and creating capacity on the network in isolation. Any contractual arrangements entered into by network companies would need to ensure that electricity demand actually reduced otherwise they may not deliver the required network capacity.
Incentives and innovation

1.3. DNOs are incentivised to deliver a set of predefined outputs as efficiently as possible. One way they are incentivised to do this is through an efficiency incentive. This encourages DNOs to be as efficient as possible with their allowance which was set at the price control (known as the ex-ante allowance).
1.4. The effect of the efficiency incentive means that where a licensee makes a saving against their ex-ante allowance 1, it gets to keep a proportion (currently around 50 per cent of the saving, with the remainder being returned to consumers. Equally, if DNOs overspend against their ex-ante allowance then they must fund a proportion (currently around 50per cent themselves) with the remainder being funded by customers.

1.5. Consequently, if energy demand reduction measures represent the most efficient means of resolving constraints on the network, then DNOs will be incentivised to use them and make gains against their allowances under the efficiency incentive.

1.6. It has been suggested that DNOs would benefit from trialling the impact energy demand reduction measures can have on their network. This will help them understand the extent of the ‘rebound effect’ and whether energy demand reduction is a useful constraint management tool. We have asked licensees to give us examples of the types of energy demand reduction measures they would like to trial. The majority of the examples provided would not be eligible because they would fail to meet the criterion which states that the method being trialled must have a ‘direct impact’ on the network. This is defined as something which would have an observable and controllable impact on the distribution system. In addition energy demand reduction measures would not be installed ‘on the distribution system’ and they may not be considered controllable. We have consulted on allowing DNOs and other network licensees to trial energy demand reduction measures under the Network Innovation Competition (NIC) and the Network Innovation Allowance (NIA) and these governance documents are available on our website. The latest draft of the LCN Fund governance document is currently open for statutory consultation and would allow energy demand reduction measures to be trialled.

Working on the customer side of the meter

1.7. There have been comments that DNOs are not incentivised to work off the distribution network to deliver energy demand reduction solutions. The regulatory approach is increasingly about delivering outputs. Through equalising the incentives and moving to a totex approach, DNOs are revenue neutral to how they deliver their outputs. If they can deliver them more efficiently through working with customers and installing infrastructure on the customer side of the meter, then there is nothing to prevent them from doing so. Since DNOs are not currently customer facing businesses, there seems particular merit in them contracting with third party providers of energy demand reduction measures to realise the benefits of these activities for the networks.

Other sources of funding for energy demand reduction

1.8. As well as contracting with third parties, DNOs could work to raise the profile of other energy demand reduction schemes amongst customers on its network  and facilitate  participation in energy demand reduction schemes such as:

  • the Carbon Emissions Reduction Target (CERT) – which requires all domestic energy suppliers with a customer base in excess of 250,000 customers to make savings in the amount of CO2 emitted by their customers.
  • Community Energy Saving Programme (CESP) – which targets households across Great Britain, in areas of low income, to improve energy efficiency standards, and reduce fuel bills.
  • Energy Company Obligation (ECO) – which is the Government’s new domestic energy demand reduction programme designed to replace the existing CERT and CESP programmes, both of which come to a close at the end of 2012. ECO will introduce three targets to use energy heat more efficiently.
  • The Green Deal – is a financial mechanism which eliminates the need to pay upfront for energy demand reduction measures and instead provides reassurances that the cost of the measures should be covered by savings on the electricity bill.


1 This is the up-front allowance set in the price control which network companies can recover from customers to deliver their outputs.