Effect of losses on design and regulation of distribution networks

1. Effect of losses on design and regulation of distribution networks • Collaborative research project • UMIST, EPSRC, Alstom Transformers, Aquila Networks, East Midlands Electricity, Pirelli Cables, Association of European Copper Producers • Two streams of work • Technical: Develop long-term loss-inclusive optimal network design and replacement strategies for the UK distribution networks • Regulatory/commercial: Investigate alternative mechanisms for implementation of minimum life-cycle cost replacement strategies.

2. Background • Ageing electricity network infrastructure • UK distribution networks expanded in late 50s and early 60s • Golden opportunity to develop long-term replacement strategy • Climate change challenge • UK Governments committed to reducing CO2 emissions • Current emphasis on renewable sources, while the importance of efficiency in transport of electricity not yet well recognised. • Losses in the UK networks are significant

3. Business environment and asset replacement strategy • Pressures to satisfy conflicting objectives • reduce operating costs, • improve utilisation of existing assets, • expand the life of existing assets, etc • Result: lowest investment cost replacement philosophy replaces minimum life-cycle cost approach • Lowest investment cost policy is more expensive in the long run

4. Design of loss inclusive network replacement strategy • Concept of reference distribution system: optimal network that minimises total investment and operating cost of delivery. • Main input: • Customer load characteristics (density and profile), technical and cost characteristics of transformers and circuits, half hourly price of electric energy • Main output: • Optimal loss inclusive network design and replacement policy (optimal number of distribution transformers, optimal circuit and transformer designs for urban and rural networks, number of voltage levels, etc)

5. Electricity transport • driven capacity Capital cost Cost of losses • Additional, security • driven capacity Capital cost Security Standards Illustration: loss inclusive circuit design

6. Optimal utilisation of circuits

7. Transport Service Energy Market Supply Network Losses Costs and benefits from loss reduction • Suppliers’ cost of losses is passed through to customers • DNOs rewarded through the LAF (Loss Adjustment Factor) of the price control formula for reductions in losses: LAF = (1+RPI/100)2.9p/kWh (AL-L)

8. % revenue from loss reduction 100 50 years 5 10 Incentives for loss reduction Revenue from loss reduction over the 10 year period: R=5.5  Loss reduction[MWh/year]  29£/MWh Current share between DNO and customer: 30:70 • It is not clear whether this scheme supports minimum life cycle cost replacement strategy

9. Current review by OFGEM • Input vs. output based incentive mechanism • Different mechanisms for technical and non-technical losses? • Alternative incentive schemes: • Adjusting the current incentive scheme • The NGC approach • DNOs purchasing electricity under NETA to cover losses

10. Two approaches to replacement strategy Statistical model Geometric model

11. Summary • The importance of efficiency in transport of electricity not yet well recognised (now is the time to develop optimum long-term loss-inclusive network replacement strategyfor the future) • Approach based on minimum investment cost to network design and replacement will not deliver minimum overall cost solution • Minimum life cycle cost approach to design and replacement delivers overall optimum: need to quantify the relationship between investment decisions with distribution losses • Regulatory and commercial frameworks to be developed to encourage economic energy efficient network investment and operation policies