6 minute read 18 Mar 2019
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Six ways for regulators to support the energy transition

Authors

Serge Colle

EY Global Power & Utilities Advisory Leader

Global energy advisor. Connecting clients with EY services, assets and experience.

Paul Micallef

EY Global Digital Grid Leader

Passionate about the future of energy. Outdoors lover. Avid traveller.

6 minute read 18 Mar 2019

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How much faster would our energy ecosystem transform if underpinned by supportive regulation?

This article is part of the New DSO business models series.

The pace of the energy transition is accelerating, thanks to technology advances, falling costs and mounting appetite for renewable generation.

The next five years will likely move faster still. Distribution system operators (DSOs) are on their own transformation journey to invest and acquire the skills needed to deliver the energy transition. But it’s not easy.

Electricity demand will rocket as we pursue decarbonization. Electrification of transport, buildings and industry will add around 2.1% new load every year. As a proportion of the EU generation mix, offshore and onshore wind and solar photovoltaics will rise significantly. Advances in technology, better storage capabilities and more extensive rollouts of charging infrastructure will see electric vehicles on Europe’s roads rise from 500,000 in 2015, to 10 million by 2023, and 30 million by 2030. Most of this generation capacity and new load will be connected at the distribution level, requiring substantial investment to reinforce and smarten the grid. The conventional “connect and reinforce” model that has so far worked well cannot be sustained indefinitely.

In addition, the regulation required to support and sustain the energy transition needs to catch up. Regulators must:

  • Recognize the acceleration and coincidence of multiple agents of change 
  • Acknowledge the role that DSOs will play in enabling the energy transition and keeping electricity flowing across networks at the best cost to users
  • Incentivize investments, innovation, and research and development
  • Define tariffs that enable fair recovery of grid maintenance and investment costs, based on usage by different consumer groups

If regulation and policy are not adaptive, the big shift toward a decentralized and decarbonized energy system risks being destabilized.

What needs to change?

Encouraging capital investment is a challenge in this uncertain and dynamic energy world. It warrants a supportive regulatory framework that enables fair and stable returns to investors, in so far as national conditions allow.

DSOs are working hard at optimizing networks to keep delivering quality energy reliably and at the lowest cost to users. Regulation should enable that with financial rewards to encourage innovation – investments in infrastructure or new technology for example. Ultimately, the framework should be designed to keep the energy transition on track.

Source: EY

Seventy-five percent of network leaders say regulation is not moving fast enough.1

The regulatory framework should also recognize the changing use of the network and enable greater participation by the growing energy community. Whether prosumers, peer-to-peer traders, aggregators or providers of flexibility services, there should be scope to make money from generating, trading or facilitating the exchange of energy, as well as incentive mechanisms.

Urgent need for flexible regulatory framework

Despite not being the decision-makers, the entire industry can influence the direction and progress of regulation. The challenge is that this transition is bigger than anything experienced in the energy industry before.

The EU’s clean energy package includes ambitious promises on renewable energy, efficiency and performance. Other reforms – not ratified, but being actively pursued by industry body Eurelectric – recognize the role of the DSO in prioritizing renewables, empowering customers, enabling better management of energy flows and collaborating with transmission system operators (TSOs) to secure supply.

The industry believes that more can be done though, with DSO respondents to the EY 2018 survey pointing to areas where clear regulatory direction is needed to:

  • Define the DSO’s current and evolving role, aligned with the TSO, and scope to harness flexibility
  • Ensure customers are not disadvantaged financially
  • Enable fair returns to investors by being less short term and more forward focused
  • Give DSOs flexibility, with targets rather than specific policy and expenditure restrictions
  • Recognize long-term paybacks from innovation and digitization expenditure, and the overall “smartening” of power networks
  • Determine the optimum risk allocation, especially for emerging technology investments with short life-spans 
  • Create a level playing field for all market players, not prioritizing one particular business model, but ensuring that tariffs are designed so all users contribute fairly to network and policy costs
  • Enable intermediaries to act on behalf of customers who may struggle or be reluctant to adjust to a smart, market-based energy ecosystem

Priorities are clear, but will regulators move fast enough?

If regulation and policy don’t adapt and enable the energy transition, it will still happen, just not fast enough.

Industry participants were asked what they wanted from policymakers. Six priorities emerged:

1. Recognition of the DSO’s role and regulatory framework support. Including incentives to implement initiatives that support the DSO’s transformation and enable the energy transition.

2. Reward innovation with greater incentives. Providing bigger incentives to offset innovation risk and incentives that apply to both CAPEX and OPEX, acknowledging the shift from one to the other. And where returns take decades to materialize, regulatory stability and a predictable investment framework to help phase in innovations.

3. Rethink tariff design. Ensuring consumers who generate their own electricity, but use the grid, contribute to the cost of grid modernization and digitization charges.

4. Timely implementation of the clean energy package. Facilitating distributed generation and flexibility services at a local level and, in turn, allowing for competitive procurement and congestion management – leading to greater efficiencies in the distribution system.

5. Remove barriers to battery development. Allowing for greater public ownership and enabling DSOs to operate grid-scale storage facilities within clearly defined regulatory parameters.

6. Regulatory intervention on energy standards and data management. Giving customers and other market participants access to information to fully engage in the market.

Source: EY

The industry also wants alignment on flexible pricing methods and market platforms for procuring flexibility services. Industry players are seeking a comprehensive financial model to integrate permitted regulatory remuneration from flexibility services, with the creation of optimal value for network customers and the DSOs themselves. And that can only be delivered with the right sort of regulatory framework and enhanced tariff and price-setting mechanisms.

If regulation and policy don’t adapt and enable the energy transition, it will still happen, just not fast enough. 

Slow regulatory response risks destabilizing energy transition

Advances in technology are accelerating new ways of generating, valuing and trading energy. But greater dialogue is needed by the commission, regulators, DSOs and TSOs to drive through changes that will reshape the regulatory landscape.

A clear but evolving regulatory policy will define the new, wider DSO role in relation to the TSO and other communities involved in generating, distributing and selling electricity. And it will provide assurance over the incentives and returns that come from enabling the future of energy networks.

Until then, the energy transition continues, waiting for regulation to catch up.

DSOs as the catalysts of change

EY research is based on interviews with leading C-suite energy executives, the experiences of heads of operations, innovation, regulation and network strategy, and the surveyed opinions of 117 energy professionals.

Read the full report here

Summary

The pace of the energy transition is gathering momentum as we move to a decentralized, distributed and increasingly decarbonized ecosystem. The next five years, propelled by advances in technology, empowered consumers and competitive forces, will see critical developments that will define what our energy future looks like. But, is regulation standing in the way of the energy transition? Would progress be faster if a robust regulatory framework provided a clear direction of travel?

About this article

Authors

Serge Colle

EY Global Power & Utilities Advisory Leader

Global energy advisor. Connecting clients with EY services, assets and experience.

Paul Micallef

EY Global Digital Grid Leader

Passionate about the future of energy. Outdoors lover. Avid traveller.