Citizens Advice response to Ofgem consultation on the Regulatory treatment of CLASS as a balancing service in the RIIO-ED2 price control
We understand the reasoning behind the minded-to position of Ofgem in continuing to permit the provision of CLASS (Customer Load Active System Services) to the Electricity System Operator (ESO) within the RIIO-ED2 price control on the same basis as it is currently under RIIO-ED1. We also appreciate that it appears reasonable to make the best use of Distribution Network Operators’ (DNOs’) assets in the interests of balancing the electricity system. However, we would note the following points:
Ofgem should continue to actively monitor the competitive and market power position of the DNOs providing the CLASS service and take action to address these issues if there is perceived distortion in the market for flexibility services to the ESO.
Stakeholder feedback should be periodically sought to monitor any potential detrimental behaviour by DNOs in their operation of CLASS services including whether they are perceived to be abusing their knowledge position.
At present, only one company (Electricity North West Limited (ENWL)) among the DNOs is offering CLASS to the ESO as a service. ENWL is intending to further increase the roll-out of CLASS on its network (from 55% of primary substations to 59%). Reconsideration of the CLASS service may need to occur if the market position changes due to high take-up, including by other DNOs, which could lead to potential distortion in market operation and power.
Transparency of the CLASS service operation should be made available by ESO to the maximum extent possible, including bid and contract information.
The current sharing factor between the DNOs and consumers under RIIO-ED1 is in the range from 53% to 70% to DNOs with 30% to 47% to the consumer. Under the proposed continuation of the DRS8 mechanism, DNOs would continue to share profits with consumers at their respective sharing rate under RIIO-ED2. There are implications for consumers if the sharing rate moves from the current levels, which may increase the risks to consumers, with potential changes to both gains or loss profiles. At this stage, it is difficult to evaluate the full risk to the consumer as the sharing factors are still to be determined for RIIO-ED2.
Consideration should be given to the merit of separating Distribution System Operator (DSO) functions, including the operation of the CLASS service, from the DNOs’ business as usual activities. This separation may serve to mitigate some of the perceived or actual conflicts of interest that may arise from operating DSO functions within a DNO structure, including CLASS services. We acknowledge that Ofgem is continuing to investigate routes to mitigation of conflicts and that this is an ongoing area of work. We agree with Ofgem’s view that a “more holistic, consistent, and principled regulatory approach to managing conflicts and transparency across DNOs’ operations is appropriate, rather than introducing several bespoke mitigations”.
We would welcome further analysis of the differing funding mechanisms for this activity. Specifically, we would welcome modeling of the cost/income profiles utilising both the DRS8 and DRS9 mechanisms to assess the extent of difference between them and how this might serve to incentivise or dis-incentivise a DNO. The DRS9 mechanism offers potentially valuable protections for consumers in removing the risk of losses.