Where does change start if the future is already decided?

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 24 Jan 2019

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Distribution system operators must keep pace with new ways to generate, distribute and consume energy while becoming catalysts of change.

The world is delivering on renewables; robust engineering is fortifying infrastructure and the distribution grid functions well, despite economic and industrial growth and increased populations. “Connect and reinforce,” the conventional way of bolting on additional network capacity, is managing. As far as progress in the energy sector goes, so far so good.

But five years from now, it’s all going to change.

We are on a rapid trajectory towards decarbonization, which will increase the burden on electricity demand. In the meantime, technology is advancing at full tilt, redefining what is possible with intelligent innovations that make energy cleaner, smarter and tradable. The energy model is becoming increasingly decentralized as consumers generate and store their own. Adoption of distributed energy resources (DER) is going up as prices come down. Affordable electric vehicles (EVs) are becoming mainstream, with potential to act as storage and capacity providers.

The extent of the transition is huge.

The energy industry concurs. Our survey among 117 electricity sector professionals identified significant challenges ahead for distribution system operators (DSOs).

The time to prepare for an entirely different energy future is now.

Energy future will be decarbonized, decentralized and electric

The charge towards a decarbonized energy future is underway. Europe’s power sector says decarbonization is achievable by 2045. This ambitious target demands substantial investment, innovation and new business models to bring distribution system operators up to scratch.

Ultimately, renewable generation will contribute more than 80% of Europe’s future energy needs. Onshore wind capacity is expected to triple to 640GW by 2045, with offshore wind expanding to 470GW. Solar photovoltaic (PV) capacity is set to increase seven-fold to 950GW. By 2045, as much as 63% of the EU economy could be decarbonized, with new load coming from the electrification of transport, heating and industry.

Source: “Decarbonisation Pathways,” Eurelectric, accessed 8 December 2018.

On the demand side, consumers – residential, commercial and industrial – will respond to market signals on energy availability and price. They will make an additional 120GW-150GW of flexible load available to the grid by 2045.

At the same time, the penetration of EVs is rising quickly, with adoption expected to accelerate given the increasing economic viability of battery technology and rollout of EV charging points.

Most of this generation capacity and new load will connect to the existing distribution grid.

Decarbonizing the EU

63%

By 2045, as much as 63% of the EU economy could be decarbonized, with new load coming from the electrification of transport, heating and industry.

DSOs at the heart of the energy transition

The scene is set for an energy transition delivered by DSOs as the interface between the transmission system operator (TSO) and consumer.

DSOs are responsible, primarily, for timely connections of new capacity to the grid and for improving system resiliency through reinforcement. They will also accelerate investment in innovation and digitization.

Guiding principles for tomorrow’s DSO v5

Source: EY.

So far, investment has made Europe’s networks among the most reliable in the world, according to Clean Energy Wire. Five years from now however, DER technologies will be more affordable and widely adopted. There will be more distributed generation coming on line from wind, solar and storage. EVs are set to reach cost parity in Europe no later than the mid-2020s. Under these demands, DSOs must transform to keep networks running smoothly, to regulate power flows and voltage while maintaing and upgrading grid infrastructure.

To meet long-term decarbonization goals, balance needs to be struck between conventional grid reinforcement and harnessing flexibility in the power system. It will warrant radical changes to business processes, pricing and tariff-setting. And that can only happen if the right regulatory framework is in place.

Getting ready: DSO 2.0

The confluence of all these changes leave DSOs in charge of:

  • Aging networks in need of investment to improve grid capacity
  • Influx in variable renewable generation, rising demand from EVs and the need for greater visibility and control over electricity flowing across their grids
  • Markets in which network customers, flexibility providers and prosumers interact, making digitization of the grid a priority

Compare the DSO to the town planner, who expands the road network to cope with increased traffic but, at some point, has to implement calming measures to control flow.

Though DSOs can keep the network running in a reliable, affordable and sustainable way, before long, smart controls and intelligence to manage expanding and multi-directional energy flows will be needed.

The upshot, if DSOs are to enable the energy transition, is change to the existing operating model, internal processes and competencies. Investment in tools, people and infrastructure are needed within the next few years, accompanied by a cultural mindset shift and partnerships with other players.

What distinguishes today’s energy system from tomorrow’s?

Current energy system Future energy system
Centralized generation Energy flows in multiple directions
Few connections Rising demand from new sectors (such as EVs, heat pumps and data centers) and huge increases in distributed assets connected at the distribution level
Reactive management

Advanced network automation and control

Limited visibility of connections at the distribution level Coordination and information exchange between the DSO and TSO
Limited customer engagement Need to build relationships and to facilitate competition and innovation
Network sized to meet peak demand Optimized network-investment decisions, using alternative flexible solutions 

Though DSOs can keep the network running in a reliable, affordable and sustainable way, before long, smart controls and intelligence to manage expanding and multi-directional energy flows will be needed.

Of course, as respondents to EY’s survey point out, there is no one-size-fits-all future model. Outcomes will be shaped by local circumstance, maturity and dynamics. Some will be characterized by high EV adoption, others by low technology implementation and lower levels of DER. Some will serve buzzing urban communities, others will support rural users. Some markets will be home to multiple DSOs, others to few. Each circumstance however, puts the DSO in charge of delivering the energy transition.

Alongside TSOs, DSOs will design markets in which all network customers can connect and exchange energy services and recover value. They will optimize local peer-to-peer interactions and enable access to regional, national and cross-border trade. Progress to the future energy system will be phased.

  • Phase 1: Invest to make the grid robust, resilient and intelligent enough to accommodate DER, EV-charging infrastructure, data centers, electrification of heat and other modifications. Adjust demand profiles to supply peaks in renewable generation, boosting overall capacity. Provide visability across multiple connection points.
  • Phase 2: Invest in digital solutions and technology to automate and control the network, which includes valuing flexibility from different generation and demand sources. DSOs and TSOs develop cost-reflective tariffs as well as frameworks for ancillary services to encourage participation from DER owners and aggregators.
  • Phase 3: Investment pays off in optimized systems and networks to enable the energy transition. Embed active network management capabilities into all EU power systems to ensure grid stability. Provide advanced distributed grid intelligence, control systems, platforms for energy trading and micro-grid services go live.

Making regulation work

Though the will to enable the energy transition is there, a relevant and adaptive regulatory and policy framework is lacking. The entire industry can influence regulatory direction. When we asked industry figures what they most wanted from regulation, they said it should:

  • Recognize the role of DSOs
  • Encourage and reward investment in a high renewables-based system
  • Ensure investors get fair returns
  • Incentivize DSOs to embrace new technologies
  • Deliver mechanisms that enable DSOs as neutral market facilitators

On the investment front, policy makers must be cognizant of the time it takes for payback from new technologies and overall “smartening” of networks to filter through. Meanwhile, incentives are sought that apply neutrally to both CAPEX and OPEX, given the shift from one to the other as innovative technologies mature.

Ensuring flexibility will be critical as generation, particularly from variable DER, increases. Regulation must recognize therefore, the roles of distributed generators, flexibility providers, self-consumers and communities, and enable a level playing field in which no one business model is prioritized.

Don’t delay

Red flags are waving; the charge towards decarbonization is on. Failure to anticipate oncoming changes to generation and technology, risks undermining the affordability of the energy transition and jeopardizing energy security and supply going forward.

We are on the brink of a very different energy world. Change is imminent; delay is not an option.

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 way we generate, consume and store energy is transforming. The next five years will be critical as technology accelerates, distributed energy resources become mainstream and electric vehicles and other innovations move us swiftly toward a decarbonized future. But is the network fit to deliver increased load? Are all grid and system costs allocated fairly across customer groups? How will distribution system operators go about integrating intermittent and decentralized energy resources? What needs to change and how long have we got? Without radical intervention, and a new regulatory model, the honest answer is probably not long enough.

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.