Name, Function and Form of Distribution Entities – A brief description of the James McGinness 4 Blog Series
By Catherine Mitchell – IGov team, 19th October 2018
A recent 4 blog series by James McGinness, Founding Partner of David Energy based in Brooklyn, New York City has many interesting ideas about the future needs / functions / form etc. of a fit-for-purpose distribution entity (Blog 1, Blog 2, Blog 3, Blog 4). His first blog sets out his overall argument on why now is the time to liberalise distribution networks; his 2nd blog talks more about co-location and franchise rights; his 3rd Blog sets out how to create the modern electricity utility (the David Energy Roadmap); and the 4th blog is an introduction to blockchain and the retail electricity market.
This is the second of a two part blog series about the name, function and form of distribution entities. This blog very briefly sets out the arguments in the James McGinness 4 blog series. Whilst his arguments are an important aspect of Blog 1, they are not set out in detail in that blog. This blog is intended as an interim step for those people who are interested to know more about his blog series but who have not quite gone the whole way to read his blogs in their entirety – although it is recommended to do so.
Blog 1 In-search-of-a-logical-retail-market-structure-is-the-nyrev-dso the answer?
A central criticism of the current NY distribution utilities by McGinness is (1) their combined distribution and, what we would call, supply function; and also (2) their combined system operation and wires function. He wants both those functions separated out. In GB, we are in a fortunate position for our distribution function to be separated from supply or retail. However, currently our distribution network operators (DNOs) are combined system operation and wires companies.
McGinness argues there are 3 fundamental failures of the conventional US distribution entity – 1. that there is inadequate market segmentation; 2. that the distribution utility has franchise rights over the distribution network (i.e. they have control of, and priority for work on, the network); and 3. that the distribution entities have flawed incentive structures because of the inadequate market segmentation.
McGinness argues there are 3 segments of a distribution entity – poles and wires – what he calls the distribution service provider function; reliability and operation (both market and system) – the distribution system operator function; and a retail market and payment settlement process which is ‘non-censoring’ of prosumers and consumers – by which he means that there should be a competitive retail market with separate retail (or supply companies) which enable demand and supply prosumers and consumers to buy and sell as they wish, including owning / accessing networks (microgrids / private wires) as they wish. In GB terms, this is a competitive retail or supply policy but it also includes an open and fair network charging and access policy.
McGinness thinks there should be competition in all 3 market segments: a DSP manages the networks but other companies are able to compete for work on that network, and other companies are able to set up their own private wires etc.; the DSO should market facilitate an area so that there are markets for non-wire alternatives ( NWA)s, and that NWAs are always able to compete with wires alternatives; and retail competition should be further enabled not just so that new supply companies can come in but new suppliers could be able to work within an area via automatic access to wires or the ability to add their own wires.
In this situation, what McGinness is arguing for is a separate poles and wires company, a system operator and a competitive retail market.
Blog 2 Collocation-and-franchise-rights-infrastructure-on-the-modern-electric-grid
McGinness argues we are entering a new stage of electricity systems development: the liberalisation of the distribution grid. This means that the franchise rights of the utility – i.e. the monopoly rights of a distribution entity over distribution networks has to end – whilst also avoiding haphazard infrastructure spending. Instead of the static, top down grid planner of old, we need a dynamically responding grid instead. He argues that we need more markets so that distribution services and products are compensated properly, and this has to occur within bi-directional grids. Anything new happening to the D networks is bid for by 3rd parties via the DSO; then once those changes are completed, the D network is managed via, what McGinness calls, the DSP – what we would think of as a ‘poles and wires’ company. His basic argument is private, local power when possible PLUS wholesale, long range power when necessary – a bottom-up approach to system optimisation.
Blog 3 Creating-the-modern-electric-utility-the-David-Energy Roadmap
This blog is called Creating the Modern Electric Utility and the David Energy Roadmap – and reflects his preferred business model for his business. This is the blog I found my one single biggest point of disagreement with, or at least the greatest level of uncertainty about what is meant. In addition to separation of the SO from wires; and the DSO undertaking reliability and market responsibility, the third leg McGinness argues is:
‘that onsite assets should be managed by the entity that is procuring wholesale power, or the modern utility. Thus, the utility should become exclusively a TDSP or exclusively a retail electricity provider. If it is the latter, they should have access to behind-the-meter asset deployment’.
I am not clear what he means by this. On the one hand it is clear that the energy system is expanding to move behind the meter, and that this is an area which is going to have to have more regulation. The distribution SO entity can coordinate more effectively if it has visibility of what is going on behind the meter. This means greater data movement and coordinating of intermediaries between customers and the network, and coordination between customers, say with P2P and very disaggregated markets.
However, I do not agree that the distribution entity – whether the poles and wires entity or the SO entity or a combined poles and wires / SO entity should be involved in ownership behind the meter.
McGinness’s argument is fundamentally that market settlement and reliability should be handed to the separated DSO; poles and wires to DSP but open competition for change to that network; and an entity procuring wholesale power. I am not sure what that latter function is.
McGinness also makes a good point (based on Coase’s theory of the firm) that the energy system is moving from economies of scale to one where grid costs dictate which users do or do not self-organise into firms – another reason why network charging and access rules are so central to the move from the ‘old’ to the emerging system.
Blog 4 An-introduction-to-block chain-and-retail-electricity
McGinness argues we need renewed seriousness about how we manage data in the modern utility. In one simple way, greater granularity is needed, for example I MW minimum eligibility for markets is no longer acceptable, eligibility should be in much smaller bite sizes. BUT also a modern utility ‘requires a system which handles real time, secure, trust minimised transactions with embedded regulatory oversight and governance, which does not ‘censor’ users.
McGinness sees security as a trade-off to speed. Blockchain is secure but slower. It may be that this characteristic becomes more important as data protection becomes more important.
‘Censorship’, is a term he uses to mean utilities controlling prosumers / customers by deciding on what they can and cannot do, and part of that is by deciding on how much it would cost to do what they wanted to do (grid access and charging). As he says ‘ censorship is just the outward effect of centralised decision-making’ and it is why he argues ensuring a segmented market is so important because it should lead to a distribution world without utility monopolies. Censorship resistance is a term he uses to for those parties who are trying to stop ‘censorship’. Regulatory oversight would be one part of censorship resistance.
McGinness is writing in a US State situation – which is very different from the GB situation. However, it is interesting how little he writes about the type of regulatory mechanism which is important for this new, liberalised distribution world. For those interested in these arguments, please do read his blogs – this blog is a very short version of his blogs and I have picked out only the issues related to name, function and form of distribution entities.