EURELECTRIC policy workshop on the Business Challenges of Distribution Companies:

Finance, Regulation, Smart Metering

sponsored by

26 November 2009, Brussels

‘Growing Focus on Retail Market and Low-Carbon Energy Expands the Role of DSO’

“The integration of wholesale electricity markets is crucial and will continue in Europe but emphasis is shifting towards retail markets and the role of Distribution System Operators (DSOs),” said EURELECTRIC Secretary General Hans ten Berge as he welcomed some 120 participants to a EURELECTRIC policy workshop on the Business Challenges of Distribution Companies: Finance, Regulation, Smart Metering in Brussels on 26 November. DSOs “ have a key role to play both in facilitating the emergence of ‘smart’ electricity retail markets in Europe and in integrating the low-carbon power sources that are essential to fulfil the EU climate change agenda, and the regulators must now recognise this and adapt their approach to the regulation of distribution activities,” he told the regulators, EU officials, policymakers, power industry managers and energy experts present. Mr ten Berge explained that EURELECTRIC had increased its focus on DSO-related policy over the last eighteen months, this workshop being the third event dedicated to the distribution business within a year. However, while policy work focussing on other segments of the electricity value chain is relatively mature, as regards the distribution area, “we are just at the beginning,” underlined the EURELECTRIC Secretary-General.

Echoing Mr ten Berge’s words, Peter Birkner, Managing Director of RWE Rhein-Ruhr Netzservices and Chairman of EURELECTRIC’s Networks Committee, pointed to the work accomplished on behalf of DSOs, explaining that “within a year, we have managed to build a full operational working structure, gathering almost 100 experts” in the various working groups under his Committee. The key questions facing DSOs today - how to understand and meet the needs of the customer and make the business sustainable, while avoiding stranded investments due to a changing regulatory environment - would be addressed by various sessions of the workshop, Mr Birkner promised.

‘Energy Regulators Must Take a More Integrated Approach’

If regulation of electricity distribution is to be sustainable then there must be a long-term, stable and transparent regulatory framework conducive to investment in available technologies that will benefits network users, panellists at the early sessions of the EURELECTRIC workshop on 26 November agreed.

Peter Birkner, Managing Director of RWE Rhein-Ruhr Netzservices, who chairs EURELECTRIC’s Networks Committee, pointed to some of the new responsibilities facing DSOs in the wake of the adoption of the EU energy-climate legislative package. Underlining the role that electricity will have to play “as one of the means to control global warming, in the short term helping to fulfil the overall EU targets on the 2020 horizon and in the longer term attaining the industry’s goal of becoming carbon-neutral by 2050,” he stressed that “DSOs have to make sure an adequate infrastructure is built”. However, investment cycles in power systems last some 30 to 40 years and fair financial regulation of the distribution segment must take proper account of both costs and benefits of investments as the new investment phase appears on the near horizon. Mr Birkner also underlined that some of the investments that DSOs will need to make in the coming years – such as the installation of smart meters – will ultimately benefit other actors than DSOs. “It is not the DSOs who reap the benefits or the return on investment from integrating renewable energy sources (RES), peak-shaving and demand-side management. So if they are to invest in these areas, incentives must be clear”, he underlined.

Saverio Pagani from ENEL Distribuzione gave some practical examples of cases where regulation was well-conceived and conducive to investment and where it was not. A good example he cited is Italy’s regulation on continuity of supply, where the medium and long-term objectives were clear, a benchmark was applied to reducing the number of minutes supply lost by the customer, and a reward available for the distribution company when it met the target. By contrast, the incentives provided by the Italian regulator for installing low-loss transformers were not really conducive to investment as they took account only of costs for replacing transformers, not for new installations, and there were some bureaucratic requirements regarding information, so that ENEL continued to install traditional, less efficient transformers in some cases. Drawing lessons from experience, Mr Pagani told the audience that: “firstly, rewards are more effective than penalties, secondly regulation and incentives must be stable and fix long-term objectives and third the bureaucratic burden must be reduced to what is strictly necessary".

André Sarens, a member of EURELECTRIC's Working Group on Distribution Regulation & Policy, reminded the audience that “the current regulatory framework was designed to maximize the efficiency of operational expenditure and so achieve price reductions for customers.” However, times are changing and “on top of their traditional tasks, DSOs are now facing new challenges – including contributing to a low-carbon energy system – which require significant amounts of investment and innovation,” which means that “changes in the regulatory systems are also required. Regulators must take a longer view and shift the focus towards the achievement of environmental, energy efficiency and supply security objectives”. Outlining the results of an EURELECTRIC survey conducted in 15 European countries, Mr Sarens told the audience that the biggest gaps identified by DSOs between their expectations of the regulator’s actions and their real actions were in development of smart grids, connection of RES-facilities and other ‘distributed generation’ to the network, and in energy efficiency. A report by the EURELECTRIC Focus Group on Finance & Economics published that same day reveals that Regulation geared to ever-higher operational efficiency is leading many DSOs to destroy, rather than create, economic value and/or to disregard the environmental agenda.

This view was also shared by Jan Peters, Director of Asset Management at Enexis, who stressed that while the DSOs must meet the “triple challenge of reliability, affordability and sustainability,” the regulators, who are “economists, focussing on efficiency” are “not thinking in an integrated way ".
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Veli-Pekka Saajo from Finnish energy regulator EMV outlined his views on a “fair” regulated return on investments in electricity distribution, specifying four conditions: (1) investors’ interest in the DSO must be ensured - which implies a reasonable return on efficient network operations; (2) reasonable tariffs for the end-users of the network must be set, (3) the regulation must provide incentives for the DSO to invest in modern technology such as smart meters and smart grids; (4) the incentives set must serve to enhance supply security and service quality.
Alluding to the current financial and economic crisis, Antonio Espinosa de los Monteros, General Manager of the Electric Distribution Business of Iberdrola, argued that “investments in the distribution network have an anti-cyclical nature” and underlined that the electricity distribution business “will generate a lot of skilled jobs in the coming years”.
Continuing the employment theme, Jan Peters pointed out that the workforce in the European distribution business was now ageing and argued that the DSO segment needs to “become more sexy in order to attract young people,” which in turn will help distribution companies to take an innovative approach'', he suggested.