Author: Ayan Kanhai Aman, Policy and Markets Lead, Electron
In conversations across the US, the topic of distribution system operators (DSOs) keeps coming up. In the UK, the DSO transition is well established, with the six network operators introducing system operation.
Why? Grid operators worldwide face the same challenges – an explosion of distributed energy resources (DERs) and renewables, driving decentralisation and bi-directional power flows.
System operation is key to managing these complexities, optimising grids, and integrating new technologies. It enables DERs to support the system, while network operation continues to ensure the physical grid infrastructure remains reliable and well-maintained.
A system operation approach isn’t just an upgrade. It’s essential for a smarter, greener, and more secure grid.
The UK case study
In the UK, network operation has already evolved to encompass system operation thanks to its total expenditure (TOTEX) based price controls – considering both capital and operational expenditure. This meant a focus on system optimisation rather than simply on building more grid.
Alongside this, flexibility is explicitly incentivised in the UK as the priority for enabling this optimisation.
Managing power at a system level can help ensure greater reliability of the grid, while maintaining lower costs and aligning with regulatory demands, with or without a TOTEX approach.
Flexible DERs can help with peak load management through demand response, changing their energy consumption according to the needs of the grid. This can be a crucial tool for grid operators in balancing supply and demand, to deliver grid reliability.
UK DSOs buy local flexibility services. They incentivise DERs to shift their load or generation by time and location through a market-based approach, to help resolve congestion, constraints, and curtailment.
The underlying case for system operation in the USA
There’s a perception that energy systems in the US and the UK are wildly different. The UK operates with unbundled ownership of the UK energy value chain – generation, transmission, distribution, etc are all owned separately. In the US, a single owner often owns and operates all aspects of the value chain.
Yet, ownership is not the comparison to make, in the context of our evolving energy system; it’s all about visibility. In the US, as was the case in the UK, visibility over DERs can be limited, with data siloed at different junctures.
This challenge will grow as more DERs connect. In the USA, there’s a clear, regulatory shift towards making better use of and integrating more DERs, as an abundant and cheap power source that can help ensure energy security and affordability.
For example, FERC 2222 encourages US Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) to develop plans to help DERs access wholesale energy markets.
This is where system operation and neutral flexibility marketplaces in the US could bring much the same benefit as in the UK.
Reduced complexity and more MWs
A system-operation approach can coordinate DERs via a flexibility marketplace. This creates more network visibility while reducing the complexity of managing multiple bilateral contracts.
Marketplace price signals can help grid operators understand the right price to secure a certain volume of flexible capacity at a certain time – helping test that there’s reliable volume available.
These signals also reflect more revenue opportunities for DER operators, incentivising them to deliver their flexible capacity to the network.
That growing flexible capacity means more MWs to call on to help balance the electricity network.
Visibility and value
The more effective use of flexible DERs also has direct cost benefits for grid operators too, boosting energy affordability.
Indeed, flexibility and system operation go hand in hand. They work together to ensure the cost of the energy transition doesn’t become unfeasible, as the number of DERs connecting continues to accelerate.
In the UK, we estimate that the cost savings of flexibility instead of grid buildout will reach around £607 million – approximately $747 million USD – across the six UK DSOs in the current price control period (RIIO-ED2, 2023-2028).
Yet, flexibility can never replace grid buildout; that will still need to happen. This leads to another way that operators see value: better capex decisions.
All this new visibility over DERs can help electric utilities make decisions on where best to invest in grid infrastructure upgrades while deploying flexibility markets to support elsewhere. In the UK, we estimate this value at around £310 million (approximately $775 million USD).
Similarly, the UK has uncovered a third value pot equally applicable in the US as more renewable integration is encouraged: smarter connections. DERs that accept flexible or non-firm connections can connect faster. This, again, boosts the MWs available to grid operators while they continue to invest in infrastructure.
Integrated Resource Planning and rate cases
In the US, rates cases add another dimension of importance to these investment decisions. In 2023 alone, rate increase requests from electric utilities hit $13.51 billion in total. This reflects the capital spent from those utilities on grid upgrades.
Yet, with rates increasing, so too is the pressure on utilities to prove they’re taking steps to deliver a fair price to their customers, through making better use of the DERs in their networks in particular. This points to the need for grid operators to take a new approach in their Integrated Resource Planning.
A system operation approach supported by a coordinating flexibility market platform can enable the visibility required across the system to demonstrate how DERs are being leveraged to deliver an affordable grid.
This can help prove capital-spend efficiency and prove that progress has been made in using the abundant DERs available.
The value they deliver is about more than deferring grid upgrades and feeds into enabling more connections and helping make targeted investment decisions. All that, plus more capacity available to ensure the continued resilience of the grid.
Want to learn more about a system operation approach? Speak to Electron.
