By Derek Lickorish

The UK’s transformational journey to a smart grid and smart meter future will be a very long journey indeed… but no matter how long, it has to start with the very first step.

Although smart meter specification and communication consultations continue between suppliers and the government it is very good news indeed that the regulator, Ofgem, has taken that first step for distribution network operators (DNOs). Despite the fact that in the UK suppliers are responsible for metering, Ofgem has announced some very creative proposals for a distribution price control review over a 5-year period, effective from April 2010. This should facilitate some progress and positive learning.

Ofgem has consulted widely, taking the opportunity to review the regulatory framework to ensure that it encourages the type of behaviour that customers expect from the DNOs over the next five years, 2010 to 2015. For example, research revealed that customers expect DNOs to play a bigger role in helping to tackle climate change and not just the suppliers.

Ofgem judges it important that today’s customers pay for research and trialling; that means networks may be better able to accommodate customers’ changing needs and the challenge of reducing carbon emissions. Ofgem wants DNOs to use the next 5 years to test the new operating and commercial arrangements they will have to put in place to meet these challenges.

To this end, a very important part of the proposals is a drive to reduce network losses and potentially, the creation of a new £500 million low carbon fund. Ofgem anticipates that this will fund a number of flagship projects, including smart grid, from which the entire industry can learn.

Ofgem has now stated in its initial proposal that it would like to encourage the DNOs to:

  • Reduce their own environmental impact by monitoring and taking steps to reduce their business’ carbon footprint, improving visual amenity where customers are willing to pay for this and, most significantly, reducing the proportion of electricity that is lost on the distribution network. (According to Ofgem UK distribution losses account for some 1.5% of total GB greenhouse gas emissions).
  • Facilitate demand side management (DSM), the existing mechanism facilitating bigger assets to cope with demand effectively.
  • Facilitate distributed generation (DG) by making it easier for customers to adopt low carbon or energy saving measures. Some of these initiatives are often undertaken by parties who are not familiar with the energy industry, such as small scale businesses or households, and cannot afford to buy-in this from costly engineering consultants.
  • Explore the future network; making sure they adjust in a timely manner to the profound changes to network use that are anticipated over the next five years and beyond. The take up of electric vehicles, significant investment in local or household generation, increased use of heat pumps and the use of demand response as a balancing tool could mean that the networks need to use new technology and be operated differently in the future. While the DNOs expect the main effect will begin to be felt only after 2015, they must take steps now to get a clear understanding of what they need to do in the future.

The most significant developments are in the losses incentive and the new low carbon networks fund. Both are discussed below.

The current losses incentive rewards or penalises DNOs by £48 per MWh (2004/5 prices) if losses are lower or higher than a target based on historic losses on the DNO’s system. This is designed to incentivise the DNO to invest in “low loss” equipment, to introduce “low loss” operational techniques and to seek out theft, unregistered meters and other non technical losses. Under this incentive and existing price control some DNOs have received very high rewards, with one company earning £25 million per year on average over the first four years while one DNO was faced with high penalties.

There are a number of problems with the current incentive. Essentially, they revolve around the difficulty in getting an accurate measure of losses and the difference in the techniques that DNOs use in reporting losses. The problem is compounded by the nature of the liberalised market, the use of profiles for settlement purposes and other data inaccuracies. This can result in volatility year on year. Ofgem’s approach is to address these problems so that customers pay and DNOs are rewarded for real improvements.

The two key features of the revised losses incentive are:

  • Companies will be provided with upfront funding for “low loss” investments where they can make a robust business case using the electricity wholesale price including the shadow price of carbon
  • Ofgem will retain an incentive that rewards or penalises each DNO according to how it performs against a losses target. The incentive will be set at £60/MWh. Ofgem will require all DNOs to use a common approach for reporting losses and will introduce caps and floors in the mechanism.

Of particular interest to the smart meter convert is that Ofgem also plans to retain enough flexibility in the arrangements so that if any DNO is successful in finding a better way of measuring losses on their network, for example by installing smart metering equipment on their network, the caps on rewards will be removed.

Another significant development is that Ofgem wants DNOs to work with suppliers and other parties to achieve improved industry data, including that used for settlement, and to develop commercial arrangements to help tackle energy theft. This is a problem particular to the UK; it arises due to issues with data in its competitive markets.

One of the UK’s major DNOs, Western Power Distribution (WPD), serving 2.4 million customers in South West England and South and West Wales, has taken the initiative to prove the concept of gathering accurate data, in turn ensuring the integrity of the losses calculation.

The WPD trial, which has been welcomed by Ofgem, is the first real attempt to put accurate, real time measurement and management controls in place. According to Robert Symons, WPD’s chief executive, it is a crucial step forward for the industry. The WPD trial involves using smart meter technology to measure the electrical load input at a primary substation, Pontypool North in South Wales, and the output at 112 distribution substations. Calculating the difference between the two measurements will provide the losses. Around 80% of the trial involves pole-mounted substations while the remainder is ground-mounted.

The fund will enable the DNOs to try out new technology and new commercial arrangements to determine the services that users will need in a low carbon economy. A condition of participating will be that DNOs will have to share learning (including the lessons learned from projects that “fail”) to maximise industry benefit. Ofgem expects DNOs to enter into partnerships for many of the projects receiving finance through the fund, giving them access to additional expertise, allowing them to leverage other sources of finance and helping them trial new commercial arrangements with customers and other industry players such as suppliers.

WPD has therefore put forward a proposal that builds on its trial to install smart meters across the WPD area at HV/LV substations. This would give a complete active model of the WPD network with the ability to monitor voltage and current at all parts of the network in real time. This would “open the door” to a whole host of opportunities as basic real time information is needed to facilitate active network control and the connection of distributed generation, etc.

WPD is currently identifying the benefits for DNOs and conducting trials of some different communication models. It then intends to look at the wider scale rollout. The provision of communication paths from every distribution substation to a central server can offer a substantially cheaper option for use by operators of customer smart meters. Assuming the project gets funding from the low carbon networks fund, WPD will be approaching suppliers to investigate possible partnerships.

Internationally the issue of losses varies significantly. I contacted PRI and Secure Meters (part of the Entity Group) for their perspective on the developments in UK.

The proposed WPD concept to measure losses fits very well with their approach and experience in dealing with some “eye watering” losses in India, where there are some very big social challenges with illegal connections and meter tampering.

Utilities in India have gained substantially by implementing metering systems and conducting monthly energy accounting and audits. For example, a state-owned utility in East India that manages electricity distribution through its 500 EHV substations, serving nearly 7 million consumers over 88,000 km2, had losses of 43.4% in 2004 down to 25.2% in 2008 with more still to do. The metering project, known as the “100% metering project,” covered installation of appropriate meters at grid and distribution substations. These meters were read monthly and subsequently hierarchical energy and loss accounting MIS was produced. The reports also had supporting information to help the engineers reduce the losses. The utility set monthly loss reduction targets for every manager based on these reports. As a result, this once loss making utility had a dramatic turnaround in performance. In the year 2007-08, benefits of £95 million (Rs 760 crores) could be passed on to consumers while the utility retained a profit of £50 million (Rs 400 crores). In an interview in the Business Standard newspaper, the chairman said that the real story behind the turnaround was “metering.”

As Lord Kelvin said, “There is nothing new to be discovered in physics now, all that remains is more and more precise measurement.” … how right he was! The journey continues.