The UK power market is fraught with risk; to meet 2050 UK carbon objectives, transportation and heat services must transition to new, lower-carbon fuels, with electricity expected to play a key role in the mix.
This will create a substantial need for new generation capacity, flexibility and better matching of supply and demand, from renewable, carbon-free resources and grid-scale energy storage.
While transmission network operators (TNOs) have become astute in managing risk and uncertainty, RIIO-T2 poses additional challenges and uncertainty to future business planning and investment returns.
The cyclical nature of the regulatory process continues to create boom and bust periods of investment, constraining the supply chain’s ability to invest in and maintain specialised resources at a time when the UK most needs to grow its resource pool. Ofgem has further challenged the TNOs by cutting the cost of equity to 4%, constraining investment into the transmission and distribution sector.
Capping returns on investment when arguably more investment is needed is a curious move by Ofgem when one considers that transmission accounts for only 5% of a customer’s electricity bill, and is arguably the most critical component of power infrastructure from a reliability perspective.
Ofgem has sought to justify its new price control proposal by citing the need to gain more input from consumers and to rein in the perception of high electricity costs. But investments must account for known and unknown future needs and transform the transmission network into a flexible platform for a wide array of generation and load-bearing assets.
For example, in the United States, the New York Public Service Commission is asking network operators to invest ahead of need to meet stakeholder demands. Recently, the regulator authorised utilities to spend US$31.6 million to build more than 1,000 fast-charging EV stations in the region and recover costs from ratepayers over seven years.
Outperforming Ofgem’s incentive mechanisms requires TNOs to achieve approximately double-digit percent efficiencies while improving services. In order to realise these efficiencies and focus investment on the transmission network’s future needs, TNOs must fundamentally change how they plan, execute and maintain the required transmission infrastructure and transform their own business models.
Traditionally, when TNOs have looked to cut costs, they have done so by deferring projects, asking partners to do more with less, and by squeezing their supply chains. While this has enabled incremental savings, TNOs are unlikely to deliver the required transformational change. TNOs can draw from the experience in other global transmission and distribution markets to challenge how project portfolios are planned, designed and constructed so as to realise the desired outcomes.
They should plan by using a whole system approach that quantifies system risks and prioritises investments based on those risks, following essential tenets of asset management. Integrated plans cut costs by aligning activities and potential synergies across a TNO’s operating units.
An engineering-led approach to capital delivery
TNOs can further reduce total system costs and achieve greater efficiency through earlier engineering engagement to enable new solutions for traditional problems.
Engineering with real construction inputs during the front-end engineering design (FEED) process represents the greatest opportunity for cost reduction, but only if allowed to challenge the norm. Engineering and construction teams can assess the cost of preferential engineering standards against the expected risk mitigation and benefit.
Enabling innovative delivery models, such as a partnered engineer-procure-construct (EPC) approach taking the FEED designer through into construction, can help realise the benefits of the savings and carry them through to utility performance - exactly what Ofgem wants.
Redesigning the design process
Earlier engagement from the supply chain can unlock innovative yet proven design practises, align incentives, mitigate risk and provide greater cost certainty.
Modular design, for example, reduces the time and cost to design multiple assets. TNOs can pilot innovative delivery models and approaches for implementing their capital portfolio. Capital delivery as a service, similar to IT as a service, would enable TNOs to outsource traditional components of their portfolio and transfer risk. Third-party participants have the ability to identify and resolve inefficiencies that may not be apparent from inside the organisation.
Another innovative delivery model involves hiring an overarching integrator. The integrator brings together smaller, specialist partners who collectively represent a broad capability set, providing clients with transparency of delivery and certainty of outcome across a wider portfolio of works.
TNOs must also evolve their processes for planning and implementing capital programmes, as well as having early engagement with the supply chain. This will unlock innovation throughout the delivery process and enable TNOs to manage risk and gain greater certainty over outcomes.