The energy transition is underway, accelerated by the decarbonisation agenda, consumer appetite for renewables and the relentless march of technology and innovation. But progress could be compromised if distribution system operators delay their response, insists Serge Colle, EY Global Power and Utilities Advisory Leader

The world is committed to ambitious decarbonisation and climate change targets. Though distribution system operators (DSOs) have the destination in sight, they are trying to figure out how on earth they will get there. If the speed of innovation outpaces the DSOs’ response, the energy transition may be compromised and those ambitious objectives might be missed. Over the past 15 years, Europe’s utilities have ramped up renewable generation on the back of attractive incentives. Growing appetite for renewables has, in turn, contributed to a collapse in wholesale energy prices. With demand further weakened by the financial crisis, revenues from conventional generation were dealt a blow, prompting asset impairments to the tune of €143 billion between 2010 and 2016. Even though market capitalisations have halved at some of Europe’s biggest utilities, the lights have stayed on. And that, in no insignificant way, is down to the network companies that have delivered on investment projects to fortify infrastructure. They have connected renewable generation to the grid, enabled decentralised energy resources (DER) and coped with rising demand from economic, industrial and population growth. Europe’s networks are regarded as some of the most reliable in the world. For now, “connect and reinforce”, the conventional way of bolting on extra network capacity, is managing. But it cannot continue.

Bulging at the seams

Five years from now, the trajectory towards decarbonisation will gain significant momentum, increasing the burden on electricity demand. It will become even harder to keep pace and more complex to manage. The statistics raise reasons for concern. According to Eurelectric, the electrification of transport, buildings and industry add approximately 2.1% of new loads every year. The share of offshore wind, onshore wind and solar photovoltaic (PV) capacity in the EU generation mix will rise from 23% in 2015, to 55% by 2030 and to 73% by 2045. Solar, wind, biomass and other technologies will become cheaper. In some cases, they have already reached parity with conventional generation. In 2017, electricity generated from renewable sources topped 30%, but will rise to 80% by 2050. Technology will advance at a faster rate, putting electric vehicles (EVs) on a price and performance footing with combustion engines in Europe by the mid-2020s. Enhanced battery storage capabilities and increased availability of EV charging infrastructure will see take-up soar from 500,000 EVs in 2015, to ten million by 2023 and 30 million by 2030. Governments are phasing out petrol and diesel vehicles and introducing clean air mandates, and car makers are rolling out more affordable EVs. Electricity consumption will rocket and the unpredictability of peak demand patterns will put pressure on supply. But statistics only tell part of the story. The reality is that we cannot continue to add load, or supply, without compromising the network. The “connect and reinforce” model, that has served us well, is unsustainable.

How to get to where we want to be

We need to make some significant decisions for the future and they start with redefining the roles, responsibilities and capabilities of the DSO, which will be fundamental to the emerging energy ecosystem. Functioning as the interface between consumers and the transmission system operator (TSO), future DSOs will retain responsibility for core services, such as timely connections of new capacity to the grid and reinforcement. Additionally, they will champion innovation and digitalisation to create visibility over power flows, identified by 71% of 117 respondents to an EY survey of DSOs as a hurdle to delivering a safe and reliable grid. New undertakings include enhancing local system resiliency. DSOs will need to embed sensors in the network to make it more intuitive and responsive to signals. They will have to coordinate investment in digital technologies to regulate voltage, and integrate all types of generation and harness the flexibility of DER across the network. For 67% of EY’s survey respondents, the challenge is in balancing asset modernisation and keeping down costs. DSOs will also take on the role of working as a neutral facilitator in a market crowded with network customers, prosumers, flexibility providers and aggregators. They will develop platforms to procure flexibility services and the commercial frameworks that go with it. Their focus, meanwhile, will remain on securing the most cost-effective solutions for energy customers, and more efficient outcomes for the network as a whole. Revisions to business capabilities will accompany changes to the DSO operating model. Some will be entirely new, others will be enhancements, as illustrated below. Of course, not every country, region or DSO is at the same level of maturity nor experiences the same local circumstances or levels of technology or DER implementation. There is no one-size-fits-all DSO model, rather a broad set of criteria to help steer the energy transition.

Stand or fall on regulation

Hindering the energy transition’s progress, however, is the absence of an adaptive and agile regulatory framework that will enable DSOs to move to the next maturity level:

• The EU estimates that we need to reinforce and smarten the distribution grid at a cost of €11 billion a year. Yet, rewards for innovation or research and development are lacking.
• We need to recognise the roles and responsibilities of new players entering this multi-faceted energy landscape. Without appropriate regulatory recognition, they cannot bring forward solutions to enable more efficient and cost-effective energy outcomes.
• We need regulation to enable an ancillary or flexible commercial market in which all DER owners and aggregators, irrespective of technology, can trade.
• We need tariffs that fairly reflect how users, be they prosumers, microgrid users, network customers or others, use and contribute to the network.
  This energy transition might stand or fall on the ability of governments and regulators to anticipate and get behind the biggest shift that the energy industry has ever seen. Red flags are waving. Delay is not an option. Serge Colle recently collaborated with industry body Eurelectric on the report Where does change start if the future is already decided?

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