The UK has some CLASS, a peak into DSO regulation

May 10, 2023

In the UK networks are allowed to bid customer capacity into competitive markets where they share those revenues between themselves and the customers. This occurred through a fair orderly process of trialing a technology, then deploying it in stages through well thought out and considered regulatory structures.

The Customer Load Active System Services (CLASS) is a technology where networks can change the voltage level to temporarily change the energy demand of consumer assets on that part of the network.

Networks can dynamically cause voltage to go down which causes demand to drop. This effect is somewhat temporary as there’s a “thermostatic rebound”, some motors and kettles draw less power, so initially use less energy, but they therefore have to run for longer, so use more energy in the near future compared to if the voltage management wasn’t used. The converse occurs for a voltage increase.

Networks often already have this ability to dynamically control voltage in their normal day to day operations of the distribution network so often can provide this demand response at a very low cost.

CLASS began as a 2015 innovation trial by Electricity North West, a distribution network in the… North West… of England. During this trial they demonstrated how this technology could change customer demand on that part of the network.

In 2016 the regulator allowed distribution networks to use this capacity in the UK balancing markets. Networks were allowed to competitively bid, dispatch and earn revenue on their ability to change demand on the network. Revenues were shared with customers under Directly Remunerated Services 8 (DSR8).

Directly Remunerated Services are similar to our Shared Asset Guideline in the NEM, which dictates how networks can earn un-regulated revenue from existing and paid for (through customer charges) network assets. The example both Australia and the UK uses is leasing out space on the power poles for telecommunication equipment. We want networks to re-use existing assets for other things of value, and we allow them to earn revenue outside of normal regulatory price controls as an incentive to do so.

In the UK there are many different categories of DRS to reflect the different ways and circumstances a network can earn un-regulated revenue. Under DRS8 the revenue share between the network and customer is based on a network’s “totex incentive rate” which varies over time, but for simplicity we’ll say it’s about a 50/50 split just like NERA did in their 2022 cost benefit analysis of using CLASS under DSR8.

What this means is that distribution networks were allowed to operate this demand flexibility in the balancing markets in the ways they saw fit, and would split the revenue with customers at about 50/50. The regulator was keen to see how and where the capability would be used based on a competitive market need, and said it would let this run until 2023 (although had the ability to revoke it earlier if it wished).

In 2022 the regulator ran another consultation on allowing networks to use CLASS in balancing markets. Here they presented 4 options:

1. Allowing it to continue under DSR8, with a cost share between distribution business and customers.
2. Putting it under DRS9 where it offers CLASS competitively into the market but only bills the market operator for their costs + reasonable margin.
3. Making it a regulated service, where CLASS is offered to the market operator for free and the regulator would determine what costs the network could recover from customers.
4. Prohibiting CLASS from being used in balancing mechanisms.

Through rounds of consultation and economic modelling the regulator decided to keep it as option 1: allowed in the market under DSR8. There was discussion about anti-competitive effects it introduces to the market, the costs and benefits to consumers under different arrangements and how it fits into the UK’s larger strategy on demand flexibility.

Ultimately on the decision the regulated said:

1. Using CLASS is any of the three options is a net benefit to consumers (ruling out prohibiting it).
2. They chose to put it under DSR8 as they want to see when and where it is used in competitive markets. When do networks elect not to use it because costs or complexity are too high? Which balancing markets do they use it in? Does the system operator sometimes dispatch other sources of balancing capacity because they bid in at a low cost?
3. In the future they may make CLASS and how it’s used a regulated service if they gain better information in the intervening period on when and how it should be used.

There was much consternation from the competitive suppliers of existing and future balancing capacity that this would negatively effect competition to the level where it would negatively impact consumers by holding back innovative business and technologies. Ultimately though the regulator ran a pretty thorough and thoughtful consultation.

The regulator said they would revisit this issue half way through the 2023-2028 price control period.

To see a somewhat unfair comparison on how Australia’s National Energy Market is struggling with these issues, there’s another post here.

Thanks for reading.