Erik Rakhou, Alternate Member, EU Agency ACER Board of Appeal and Senior Manager, Baringa Partners 
Harry Taylor, Director, Baringa Partners 
Chris Collins, Senior Manager, Baringa Partners
The global energy landscape is changing. This is particularly true in EU countries, which are preparing to implement the Clean Energy Package[1]. Distribution System operators (DSOs)[2] have historically had an important role in connecting low carbon generation, but with the pace of decarbonisation and electrification of the energy system they are having to adapt quickly in order to manage:
– Vastly more connection requests that need to be assessed, approved and implemented
– More diversity of technologies requiring access to the network
– Customers using the network in new and less predictable ways
– More need for real-time network visibility, and analytics
– Demands to make that network data consistent, transparent and accessible to third parties.
In order to meet these challenges, DSOs are having to make significant improvements to their digital and data capabilities. It is tempting to talk about the digital future of DSOs as a vision for the distant future, that of 2030 and beyond. But these changes will not take the form of a single ‘big bang’ transformation but, rather, a journey of increasing maturity that delivers value at each step along the way. So whilst the final destination is uncertain, the journey needs to start now in 2020.
Source: Baringa
The reaction from regulators and policy makers has been to push ‘digitalisation’ as a missing piece of the puzzle for decarbonisation and for customer affordability. At times, it is even proffered as a criticism aimed at businesses that have failed to adapt to the modern world. Technology change takes time; those prior investments of the last two or five years can still be delivering value to the business and should not be undermined. Similarly, culture change is not an overnight process, typically needing a number of years to truly embed and sustain cultural shifts. A phased plan, pointing towards a clear “end state” vision is required. Too often everything ends up on the left hand side of this plan, with little on the right.
Whilst many regulators can demonstrate a commendable level of digital understanding, their position as policy experts and economists often does not afford them the context and practical understanding of the DSO business. Information asymmetry so far is working in reverse, making regulators consider digitalisation is a once and done, easy answer – it is not – it is definitely a necessity, catalysing the societal wave of energy transition.
Why is the DSO world changing?
There are three interdependent factors that are driving the need for DSO evolution to an ‘end-state’:
Decarbonisation and electrification: Carbon reduction targets, such as those within the EU’s Clean Energy Package, and forthcoming Green Deal, necessitate not only the electrification and decarbonisation of the electricity system, meaning more renewable generation, but also a significant increase in electrical transport and heating loads. In some regions, data centres are also placing additional demands on, in particular, the low voltage networks (for example, in the Netherlands alone, 200 data centres with 4 TWh of annual demand have been connected in recent years contributing to low voltage grid congestion[3]). This is placing increased pressure on the electricity networks, and creating particular challenges at the lower voltage levels.
Focus on network capex efficiency: DSOs are under pressure to reduce their capital expenditure where opex solutions (such as the use of flexibility arrangements) are more economic (in many instances this is reflected in ‘totex’ regulatory accounting). As the rate of new connections increases, this becomes not only an economic issue, but a practical one: there is simply neither the time nor the resource to build out the network to accommodate the additional load.
Evolving customer expectations: Network customers (both generators and consumers) and their agents (for example suppliers and aggregators) are increasingly looking for faster and cheaper connections, more flexible network access arrangements, and the ability to participate in local and national flexibility markets.
What changes might DSOs have to make?
Flex first: Much of this is focused on managing the network more dynamically, and this includes interaction between the DSO-TSO (that is not always simply opting for a capex solution). One part of that is managing the network assets themselves in novel ways (for example dynamic switching, intelligent use of data and real-time load flow modelling/measurement and network management). This is as much a cultural transformation as it is a development of engineering strategy.
Novel connections: This creates a need for novel forms of connection agreements, and the increasing use of Active Network Management (ANM) and dynamic access rights that provide grid flexibility and services to enable optimisation of capex and opex within and across the energy system (giving rise to whole system thinking). Managing the future energy ecosystem means engaging with other stakeholders in a way that avoids creating network issues but that also offers win-win transactions for both parties.
Live view: This also means DSOs having a more detailed and more “live” view of their networks (particularly at Low Voltage) than ever before. This optimisation and real time understanding will be enabled through open data, automation, analytics and greater organisation agility. These shifts in the business are all characteristics of digitally mature organisations.
Customer service: The nature of customer service within the DSO is changing – those connecting customers of DER cannot be treated on a ‘connect and forget’ basis. Customers will have ongoing commercial relationships with the DSOs, and via the DSOs with 3rd parties (for example aggregators, charge point operators and ESOs). DSOs need to understand their customer base in a way they never have had to before. That in itself will be a challenge required detailed understanding segmentation and personas, as well as the characteristics of each customer’s technology (or technologies).
Customers as providers: DSOs will need to procure flexibility to manage their networks. No longer will those connected to the DSO’s networks simply be “consumers”. They are also to become service providers to the DSOs, taking on a prosumer role. Again, this involves new relationships, contracts, and hence new contract management systems, monitoring of response, settlement and payment systems – all new territory for the DSOs. The urgency for entering the new territory is also brought about by rise of the need for enabling real time interaction with local flexibility markets and local “energy communities”[4].
So why is ‘digital’ key?
The ask for DSOs is large, but achievable. One of the biggest gaps is in joining up the understanding of evolving ecosystem (with focus on consumer) and consequentially designing the digital capabilities that will enable an affordable transition that is embarked upon using methods and approaches that inherently adapt to uncertainty and the need to iterate, rapidly[5].
DSOs have a significant journey to travel to change their strategy, culture and outcomes to reflect the needs of the new future energy system customer. But before accelerating through a digital journey DSOs need to re-consider the future ecosystem, its participants and the commercial interactions between parties. With this refreshed understanding, the DSO role in the future digital energy system can be fully defined, and, in turn, the required digital capabilities of the business can be understood, funded and grown.
Culturally, excellence in risk identification and mitigation is held in the highest esteem. Planning and building for the future with no false steps has been the desired approach. There is limited appetite to rapidly test and learn, and despite consistent under delivery of promised benefits, internal change activity persists under a waterfall methodology. As a result of these cultural and historic norms, DSOs digital capabilities are not at a maturity that is creating value for consumer or for the DSO business.
In many organisations the value of digital is not fully understood at any level, and most importantly not within leadership. It is too often dismissed or assumed to refer to website functionality or rolling out lower cost SCADA assets. In our Baringa experience, digital value for DSO as local heart of energy transition is created if[6]:
– Digital business models enable a shift from traditional linear income streams enabling new exchanges of value
– Digital proposition enables true customer centricity and the ability to delight and adapt to each segment of customers changing needs in a tailored way
– Digitalisation of your processes moves them from disconnected activities to an integrated data rich value stream
– And digitisation of your organisation moves away from large siloed departments to smaller, end to end multi-disciplinary skills delivered by empowered employees.
Only recently, have DSOs begun to operate differently. Many now evidence the base capability of digital organisations, albeit fewer manifest the cultural traits.
The majority of DSO operations still assume predominately demand connections, firm capacity allocation, constraint management via reinforcement, focus on capacity, asset health and reactive outage management. Variance or unique requirements break the machine.
However, we are seeing DSO starting to develop Digital Strategies and share with stakeholders. Based on an informal Chatham house survey across senior stakeholders in European distribution, we have observed that out of nearly 200 biggest DSOs in Europe, only a few DSOs from Austria, Finland, Netherlands, Portugal and UK lead the way in digital, and have a digital customer-centric strategy and senior leadership that drive that strategy. The limited uptake of having explicit digital strategies echoes another recent survey outcomes published by European Commission. For example, that survey shows that only 28 per cent of European DSOs is ready to handle prosumers[7]:
DSOs handling prosumers
Image source: JRC, European Union
As an example what triggers a digital strategy to come about, in the UK, regulatory requirements by regulator Ofgem in late 2019 forced all DSOs to publish their digitalisation strategies, yielding a broad ranging interpretation of scope and ambition. Through this window of learning in UK, we can learn lessons for the benefit of wider Europe as EU DSO harmonisation unfolds, with a focus on demand side response, platforms for flexibility and European open data strategy (which has parallels with the UKs Open Banking and Energy Data Taskforce).
Properly delivered, far from being a potential barrier to delivering the desired future, DSOs should be able to facilitate and indeed to drive the change needed to empower consumers.
Quo vadis for DSOs: how to be a hero in digital?
One, this means spending time learning from stakeholders to inform a vision of a future ecosystem and understanding the options available to each DSO. Then engaging customers and shareholders so that the DSOs role (and return) in this ecosystem can be captured. The vision should leave room for uncertainty and optionality but be clear on how this will be managed.
Two, it also means re-thinking or adopting agile work management operating models, embedding AI and optionality into asset management strategy, and embracing automation and enterprise digitalisation across the back office.
Three, yes to digitalisation means more telemetry, IoT etc. but we knew that five years ago.
Four, what has worked historically is in many cases hitting the glass ceiling of performance and efficiency. The industry needs to look further afield to other sectors that have already realised significant value such as telecom, water and even oil and gas where data and analytics is starting to transform exploration activity driven by digital tools and data available.
Five, data and analytics must be a core competency for DSOs, and at the heart of the business strategy.
And finally, DSO must evolve to focus on delivering value early and often aggregating this towards delivering network investment plans that are efficient over 40 years, but flexible over five.
Quo vadis for DSOs: how to be a hero in energy transition?
As surveys have shown, most of EU DSOs have not yet prioritised building out market led business strategies.
One, they do excel at focusing on secure energy supply, and developing network development strategies (with relevant stakeholder input to some degree). Two, With a fixed and predictable revenue stream, and historic network usage being highly predictable there has been little need to look over the horizon, or understand the wider consumer behaviours and commercial interactions that exist or will emerge within the energy ecosystem. Three, the energy transition breaks this habit – and requires improved customer centricity and increased commercial maturity to enable a true ecosystem of partners. Four, growth on the networks has in the past been reasonably predictable, allowing planning to be based on a narrow set of growth projections. But whilst decarbonisation has forced more probabilistic thinking about the future, events such as Covid-19 remind us that the future is always uncertain even if the source of that uncertainty is unknown and unseen. And five, a digitally orientated business strategy considers and learns from the new way of doing business in the energy market and open data space. Hence, a hero ‘strategy’ elements would include the following:
– Customer led platform based proposition (for example co-operation with TSOs or across gas/power/heat in flexibility, services),
– Deep, insight led understanding of customers, driven by data and analytics as a core competency, and
– Servant leadership within an agile organisation. The latter is a critical factor to reinforce the first two elements.
Final words opening the debate
Successful digital business have leadership teams that ‘get it’. Each DSO will need to navigate its own education and learning path to be heroes of energy transition and digital space nexus in Europe – and some will fail to do so. The winners in process though may be reaping fruits of new services and new revenues, assuming at least Clean Energy Package framework is there to reward the helping DSOs for empowering consumers for energy transition. And, the champion role for DSOs in energy transition, is about to become mainstream in 2020-2021, with European entity for Euro DSOs being set-up under Clean Energy Package alongside now more known ENTSO-E. So watch those 1000s of heroes of clean energy transition emerge, and enter the debate on how digital and ecosystem should interact externally, and within the DSO-organisations.
You may connect with Erik Rakhou, Harry Taylor, and Chris Collins on LinkedIn.
Notes:
[1] https://ec.europa.eu/energy/topics/energy-strategy/clean-energy-all-europeans_en
[2] We use the term Distribution System Operator (DSO) synonymously with Distribution Network Operator (DNO)
[3] Data Netbeheer NL, 2020, quarterly.
[4] Energy communities are a key concept of Clean Energy package.
[5] Baringa has developed a bespoke approach for network operators to build this out, so-called ‘“The Twelve Shifts of Digital”, a methodology that helps to answer one of the most challenging question we face – “what does digital mean to my business”. This methodology has been tested in/beyond sector – including for example, SSEN, who defined their Digital Strategy using this approach, which you’ll find on their website: https://www.ssen.co.uk/DigitalStrategy/.
More detail on methodology is also available online at Baringa social media:
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Business Models: https://www.linkedin.com/posts/baringa-partners_twelve-shifts-of-digital-vision-and-strategy-activity-6633677329266683904-ht7N
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Ecosystems: https://www.linkedin.com/posts/baringa-partners_twelve-shifts-of-digital-vision-and-strategy-activity-6635945115720404992-bvos
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Customer: https://www.linkedin.com/posts/baringa-partners_twelve-shifts-of-digital-propositions-and-activity-6641314123969777665-8gs0
