Facing the unknown: The risks to Norway’s distribution network operators (DNOs)
The structure of the highly diverse Norwegian electricity distribution sector has been under intense scrutiny in recent years. Between large regional companies, and a vast number of smaller utilities, there are today 148 companies engaged in electricity distribution. Few of these are dedicated to distribution, with many also active in other utility sectors like engineering, energy retail, generation, district heating, and internet.
To make the situation even more complicated, the Norwegian power system itself is also divided across three different voltage levels—the transmission, regional, and distribution grids—and distribution network operators (DNOs) are able to own assets on several grids a the same time.
This has led to major discussions in the country over the risks this is posing to both investment in and the future of the grid, and customer satisfaction. These concerns were sufficient that, in June 2013, the Norwegian Ministry of Petroleum and Energy appointed the Reiten committee to investigate the challenges faced by the sector.
At the same time, we at DNV GL were aware that, whatever the outcomes of the Reiten report, the Norwegian energy sector faces a decade of change and uncertainty. It is, therefore, vital that the DNOs in Norway increase their competency and awareness in risk management to survive.
Working in conjunction with Energy Norway, DNV GL therefore, took the initiative to investigate the energy sector’s risk management and perceived risk exposure.
The first part of the study found that the energy sector currently focuses on primarily complying with given rules and regulations, with risk management only being undertaken as needed for financial control. This indicates there is a large opportunity to improve risk management in the sector, in order to allow DNOs to act proactively in the face of changes in the sector.
In the second, the mapping of the energy sector’s expected risk exposure took in to account 19 areas of potential change, with DNOs asked to rate both opportunities and threats within each.
Our top 3 most identified risks were:
- Changes in regulations / framework conditions
Interestingly, this was regarded as both a threat and an opportunity. No doubt the (then) anticipated findings from the Reiten committee and continued wait for clarifications on new EU policy played heavily in respondents’ minds.
- Changes in market structure
Cited as a top 3 risk by half of the respondents, many businesses questioned whether continuing with the current structure—where many small companies own a large share of the market – is viable or efficient.
- Changes in customer behaviour and expectations
The fact this was identified as a top risk by those we surveyed was itself an interesting shift; until not too long ago, consumers were a relatively stable factor for a DNO. However this reflects the expectation that consumers are expected to become much more active participants in the industry, thanks to the introduction of smart metering and grids.
Without a doubt, the distribution sector in Norway will undergo changes in the coming years—and there is no doubt that these will be influenced by the proposals from the Reiten report. However, our own analysis shows that not only will different DNOs be impacted to differing degrees, their levels of risk management in anticipation of these will also differ.
With the details of the measures to be implemented, and their implications, still unclear, a proactive approach to risk management is vital to help DNOs prepare for the merging future.
The full report, Main risks for DNOs in Norway’s sector restructuring—including full rationale, findings, and implications—can be downloaded for free here (in English and Norwegian).