Distribution System Operator (DSO) in the European Union Internal Electricity Market is legally defined in Article 2(29) of the Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market in electricity (recast), and stands for a 'natural or legal person who is responsible for operating, ensuring the maintenance of and, if necessary, developing the distribution system in a given area and, where applicable, its interconnections with other systems, and for ensuring the long-term ability of the system to meet reasonable demands for the distribution of electricity'.
This definition is left unchanged by the so-called 'Winter Energy Package' proposed by the European Commission in December 2016 - the identical wording was previously used in Article 2(6) of Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC.
The said Directive 2009/72/EC accentuated that DSOs were responsible for providing and operating low, medium and high voltage networks for regional distribution of electricity as well as for supply of lower-level distribution systems and directly connected customers.
Although the definitions of the DSO as well as the distribution “originate in the context of electricity distribution systems, they can also be applied for the operators of distribution systems for gas at high and low pressure” (CEER Conclusions Paper of 22 March 2019, New Services and DSO Involvement, Ref: C18-DS-46-08, p. 9).
European Energy Regulators’ White Paper # 2 titled: "The Role of the DSO, Relevant to European Commission’s Clean Energy Proposals" of 15 May 2017 observes DSOs operate local electricity networks, traditionally distributing electricity from the higher-voltage transmission network and from small generators into homes and businesses, similar to regional/local roads on the road network.
The aforementioned White Paper of 15 May 2017 stresses that DSOs are typically natural monopolies, overseen by energy regulators to ensure that they deliver value for money to consumers.
Besides the regional distribution and supply task it is also the DSOs' responsibility to ensure the security of their networks with a high level of reliability and quality. The thresholds, which determine whether a system is a transmission system or a distribution system, are established at the national level (Recital 9 of the Network Code on Demand Connection (DCC)).
The DSO's category is characterised by an extensive heterogeneity across the EU Member States - in some Member States there are hundreds of DSOs, in other countries there might be only one or two.
According to ACER Report of February 2021 (Report on Distribution Tariff Methodologies in Europe, p. 15, 16) the number of DSOs varies greatly from one EU Member State to another, i.e. from one single DSO in 5 Member States (HR, CY, IE, MT, SI) to 883 (DE). Moreover, the number of DSOs does not always show a correlation with the size or population of a country.
The number of network users served by a DSO within a Member State also greatly varies. For example, in France and Italy, where the number of DSOs is respectively 160 and 130, the largest DSO serves more than 95% and about 85% of the network users respectively.
A sub-set of the DSOs' generic category are Closed Distribution System Operators (CDSOs).
DSO separation - unbundling rules
There are different levels of DSO separation, the main types of unbundling being: accounting, functional, legal and ownership separation:
- full ownership unbundling (ownership separation) is where the DSO is a separate company to any interests in generation or supply;
- legal unbundling is where the DSO is a legally separate entity with its own independent decision making board, but remains within the umbrella of a Vertically-Integrated Undertaking (VIU);
- functional or management unbundling is where the operational, management and accounting activities of a DSO are separated from other activities in the VIU; and
- accounting unbundling is where the DSO business unit must keep separate accounts for its activities to prevent cross subsidisation, from the rest of the VIU.
DSOs need to facilitate new arrangements by acting as neutral market facilitators with the interest of the IEM at the forefront. This requires a sufficient level of unbundling between suppliers and associated DSOs. With the increasing penetration of distributed (including RES-based) generation, DSOs will be called to manage their systems in a more active way, similarly to TSOs, including by taking responsibility for managing congestions using local resources connected at the distribution level (with DSR among them). Therefore, the cooperation between DSOs and TSOs should be enhanced. Moreover the same level of separation of DSO functions from other activities, as envisaged for TSOs, should be considered. Exceptions could be maintained for very small DSOs, which are unlikely having to perform TSO-like functions. In this respect, we suggest significantly reducing the current de minimis threshold"
Joint ACER-CEER response to European Commission's Consultation on a new Energy Market Design of 7 October 2015, p. 20, 21
Ownership unbundling of the electricity and gas transmission network has been compulsory for EU Member States since the Third Energy Package came into force in 2009.
Vertical unbundling is widely applied in the electricity and natural gas industries not only in Europe but also in the US, as well as in many other infrastructure markets, such as railway transportation, telecommunications and internet broadband (Discussion Paper No. 18-050, Unbundling, Regulation and Pricing: Evidence from Electricity Distribution, Sven Heim, Bastian Krieger, and Mario Liebensteiner, p. 1).
While full ownership unbundling is considered to be the strongest model for the independence of the DSO, the other models can also ensure transparent and independent decision making and equal treatment of all DSO stakeholders, as long as sufficient ringfencing and regulatory monitoring and oversight are in place.
CEER document of 1 April 2016 "Status Review on the Implementation of Distribution System Operators' Unbundling Provisions of the 3rd Energy Package, CEER Status Review" (Ref: C15-LTF-43-03) observes there are in practice different unbundling regimes implemented in the Member States, some DSOs have a separate ownership to suppliers/producers, whereas others are part of a VIU.
Apart from the Netherlands, where full ownership unbundling is required by law, all the other participating Member States require at least a legal and functional unbundling for both gas and electricity DSOs (as far as non-exempted).
In most Member States, national provisions foresee that the DSO branding/communication (i.e. corporate identity) must not create confusion with production and supply activities of the VIU.
The degree of separation (the most effective being the ownership unbundling) from VIUs will influence whether the DSO is allowed to undertake activities that are listed in the „grey‟ area of the framework under certain conditions. The more DSOs engage in flexibility and DSR, the more robust separation is needed, especially if the DSOs also have a role in data management (see: The Future Role of DSOs, A CEER Public Consultation Paper, Ref: C14-DSO-09-03, 16 December 2014). The more responsibility the DSO has, the greater the potential need for further separation of its system operation activities from other competitive activities carried out by other companies of the same VIU (like supply and generation). More generally, if the DSO takes on new roles, sufficient controls are needed to ensure that DSOs do not use access to data to gain commercial advantage or create market distortions.
It is also useful to add that the unbundling provisions of the 3rd Package constitute a minimum set of rules and the Member States may consider adopting further measures to ensure the effectiveness of unbundling.
Shared services - controversial issue
CEER Status Review Document of 14 June 2019 (Implementation of TSO and DSO Unbundling Provisions, Update and Clean Energy Package Outlook, Legal Affairs Committee, Ref: C18-LAC-02-08, p. 37) contains the following passage as regards shared services between DSOs and their VIU:
“Shared services between DSOs and their VIU are limited and accepted under the condition that effective competition is ensured and conflicts of interest are excluded. The shared services concern all the different categories of services from personnel to finance, IT, accommodation, transport and call centres.”
Commission Staff Working Paper of 22 January 2010 (Interpretative note on Directive 2009/72/ec concerning common rules for the internal market in electricity and Directive 2009/73/ec concerning common rules for the internal market in natural gas - the unbundling regime, p. 25, 26) described the issue more broadly as follows:
“An important question in the context of management separation is the extent to which it is permissible to have common services, i.e. services that are shared between transmission/distribution, supply and possibly other businesses within the vertically integrated undertaking. Such services could relate to personnel and finance, IT services, accommodation and transport. It is appropriate to look at this issue on a case-by-case basis.
Under Article 26(2)(c) Electricity and Gas Directives the DSO must have at its disposal the necessary resources, including human, technical, physical and financial resources, in order to fulfil its tasks of operating, maintaining and developing the network. This means that the DSO cannot unduly rely on the services of other parts of the vertically integrated undertaking, as the DSO itself must have the necessary resources at its disposal to operate, maintain and develop the network.
Provision of services by other parts of the vertically integrated undertaking to the DSO will therefore be limited. Where such services are provided, conditions should be fulfilled to reduce competition concerns and to exclude conflicts of interest. In particular, any cross-subsidies being given by the DSO to other parts of the vertically integrated undertaking cannot be accepted. To ensure this, the service must be provided at market conditions and laid down in a contractual arrangement”.
Smaller DSOs serving less than 100 000 connected customers can be exempted from the requirements of both legal and functional unbundling. This is based on Article 26(5) of the Directive 2009/72/EC, which stipulates Member States may decide not to apply paragraphs 1, 2 and 3 [of Article 26] to integrated electricity undertakings serving less than 100 000 connected customers, or serving small isolated systems, similar provision exists in the Gas Directive for gas DSO.
Almost half of the EU Member States have adopted this exemption at national level (the aforementioned CEER Status Review of 1 April 2016, p. 6). The number of DSOs with fewer than 100,000 connected consumers varies across Europe. Discussion Paper No. 18-050, Unbundling, Regulation and Pricing: Evidence from Electricity Distribution, Sven Heim, Bastian Krieger, and Mario Liebensteiner, p. 5) refers to the German example, where under the 2005 amendment of the German Energy Law (Energiewirtschaftsgesetz, EnWG) only 45 of around 880 German DSOs were large enough to fall under the legal unbundling requirements in 2015. Smaller utilities were exempt from this regulation and thus allowed to remain vertically integrated. Although these small utilities have the right to voluntarily legally unbundle, “this rarely happens in practice”.
The above-cited CEER Public Consultation Paper of 16 December 2014 expressed the view that all European customers, whether they are connected to a bundled or unbundled DSO, should be able to benefit from the 3rd Package without discrimination.
If a DSO is carrying out activities identified as „grey areas‟, it should be subject to strict unbundling requirements regardless of whether or not it is subject to the de-minimis rule.
Furthermore, as the role of some DSOs develops into an active grid manager, it may be worthwhile to reconsider the application of the (current) de-minimis rule and if it is still appropriate. Such review could entail either the adaptation or the decrease of said threshold.
Forward-looking approach - DSOs as neutral market facilitators
Regulatory bodies consider, with the increasing penetration of distributed (including RES-based) generation, DSOs will be called to play a more active role in the overall management of the electricity system (Joint ACER-CEER response to European Commission's Consultation on a new Energy Market Design of 7 October 2015, p. 28). It is underlined, however, DSOs in Europe are represented by several "associations", not always speaking with one voice. Therefore, consideration should be given to whether DSOs should be encouraged, or mandated, to establish a single body through which they can more efficiently participate in this process. Such a single EU DSO body would also facilitate the communication and cooperation with ENTSO-E, whose effectiveness should be improved given the need of a closer relationship between Transmission System Operators (TSOs) and DSOs.
In the same vein goes the Winter Energy Package establishing the EU DSO entity. DSOs are becoming more important in the electricity sector because many new services and developments are happening at local distribution level. They include more active customers with varying electricity demand, self-generation, small-scale renewable generation, energy storage, power-to-heat and electric vehicles.
Council of European Energy Regulators (CEER) and ACER advocate that DSOs must act as neutral market facilitators performing regulated core activities and not activities that can efficiently and practicably be left to a competitive market.
The CEER Conclusions Paper of 22 March 2019 (New Services and DSO Involvement, Ref: C18-DS-46-08, p. 5, 6) draws the delineation between the DSOs':
1. core activities related to the distribution system,
2. activities which, in principle, are open for competition (non-exhaustive list).
Within the former catalogue energy regulators indicate the following fields:
- the design, maintenance, development, and operation of the distribution system (this includes providing relevant network information to third parties to enable them to provide their services),
- connection and metering activities can be considered as core activities (this includes Member States where DSOs are legally obliged to carry out those activities).
The latter list includes:
- providing flexibility services (including storage),
- the development, ownership and operation of electric vehicles charging points,
- the provision of direct services to consumers (including specific energy efficiency advice),
- data analysis services and enriched data to third parties.
Moreover, according to the said CEER Paper of 22 March 2019, DSOs may be permitted to offer services outside the energy sector, for example telecommunication services, however, such activity may only be granted under certain conditions.
Regardless, it is crucial that DSOs do not neglect their core tasks and retain separation between their regulated activities and other service provisions. This is primarily required to avoid cross subsidisation. Moreover, the European energy regulators underline transparency of medium-term forecast of network needs/service requirements is essential to enable market-based solutions to be developed. Therefore, CEER and ACER supported the prohibition on DSO ownership/operation of energy storage and electric vehicles’ charging infrastructures in Articles 2, 33, 36 (and 54 for TSOs) of the Proposal for a Directive of the European Parliament and of the Council on the internal market for electricity (recast) on common rules for the internal market in electricity (recast), 30.11.2016, COM(2016) 864 final 2016/0380 (COD).
According to Article 15(1) of the Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing, DSOs, TSOs, balancing service providers (BSPs) and balance responsible parties (BRPs) are required to cooperate in order to ensure efficient and effective electricity balancing.
Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity, Articles 24-27
Articles 30-39 of the Proposal for a Directive of the European Parliament and of the Council on the internal market for electricity (recast) on common rules for the internal market in electricity (recast), 30.11.2016, COM(2016) 864 final 2016/0380 (COD)
Designation of distribution system operators
1. The distribution system operator shall be responsible for ensuring the long-term ability of the system to meet reasonable demands for the distribution of electricity, for operating, maintaining and developing under economic conditions a secure, reliable and efficient electricity distribution system in its area with due regard for the environment and energy efficiency.
2. In any event, it must not discriminate between system users or classes of system users, particularly in favour of its related undertakings.
Tasks of distribution system operators in the use of flexibility
1. Member States shall provide the necessary regulatory framework to allow and incentivise distribution system operators to procure services in order to improve efficiencies in the operation and development of the distribution system, including local congestion management. In particular, regulatory frameworks shall enable distribution system operators to procure services from resources such as distributed generation, demand response or storage and consider energy efficiency measures, which may supplant the need to upgrade or replace electricity capacity and which support the efficient and secure operation of the distribution system. Distribution system operators shall procure these services according to transparent, non- discriminatory and market based procedures.
1. Member States shall provide the necessary regulatory framework to facilitate the connection of publicly accessible and private recharging points to the distribution networks. Member States shall ensure that distribution system operators cooperate on a non-discriminatory basis with any undertaking that owns, develops, operates or manages recharging points for electric vehicles, including with regard to connection to the grid.
Tasks of distribution system operators in data management
Member States shall ensure that all eligible parties have non-discriminatory access to data under clear and equal terms. In Member States where smart metering systems have been implemented according to Article 19 and distribution system operators are involved in data management, compliance programmes as set in Article 35(2)(d) shall include specific measures in order to exclude discriminatory access to data from eligible parties as provided for in Article 23. Where distribution system operators are not subject to Article 35(1), (2) and (3), Member States shall take all necessary measures to ensure that the vertically integrated undertaking do not have privileged access to data for the conduct of its supply activity.
Ownership of storage facilities
Confidentiality obligation of distribution system operators
(b) the requirement under Article 6(1) that tariffs, or the methodologies underlying their calculation, are approved prior to their entry into force in accordance with Article 59 (1).
3. Where an exemption is granted under paragraph 2, the applicable tariffs, or the methodologies underlying their calculation, shall be reviewed and approved in accordance with Article 59(1) upon request by a user of the closed distribution system.
Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market in electricity (recast), Recitals 47, 61, 62, 65
(47) This Directive empowers Member States to allow citizen energy communities to become distribution system operators either under the general regime or as ‘closed distribution system operators’. Once a citizen energy community is granted the status of a distribution system operator, it should be treated as, and be subject to the same obligations as, a distribution system operator. The provisions of this Directive on citizen energy communities only clarify aspects of distribution system operation that are likely to be relevant for citizen energy communities, while other aspects of distribution system operation apply in accordance with the rules relating to distribution system operators.
(61) Distribution system operators have to cost-efficiently integrate new electricity generation, especially installations generating electricity from renewable sources, and new loads such as loads that result from heat pumps and electric vehicles. For that purpose, distribution system operators should be enabled, and provided with incentives, to use services from distributed energy resources such as demand response and energy storage, based on market procedures, in order to efficiently operate their networks and to avoid costly network expansions. Member States should put in place appropriate measures such as national network codes and market rules, and should provide incentives to distribution system operators through network tariffs which do not create obstacles to flexibility or to the improvement of energy efficiency in the grid. Member States should also introduce network development plans for distribution systems in order to support the integration of installations generating electricity from renewable energy sources, facilitate the development of energy storage facilities and the electrification of the transport sector, and provide to system users adequate information regarding the anticipated expansions or upgrades of the network, as currently such procedures do not exist in the majority of Member States.
(62) System operators should not own, develop, manage or operate energy storage facilities. In the new electricity market design, energy storage services should be market-based and competitive. Consequently, cross-subsidisation between energy storage and the regulated functions of distribution or transmission should be avoided. Such restrictions on the ownership of energy storage facilities is to prevent distortion of competition, to eliminate the risk of discrimination, to ensure fair access to energy storage services to all market participants and to foster the effective and efficient use of energy storage facilities, beyond the operation of the distribution or transmission system. That requirement should be interpreted and applied in accordance with the rights and principles established under the Charter of Fundamental Rights of the European Union (the ‘Charter’), in particular the freedom to conduct a business and the right to property guaranteed by Articles 16 and 17 of the Charter.
(65) Non-discriminatory access to the distribution network determines downstream access to customers at retail level. To create a level playing field at retail level, the activities of distribution system operators should therefore be monitored so that distribution system operators are prevented from taking advantage of their vertical integration as regards their competitive position on the market, in particular in relation to household customers and small non-household customers.
19 January 2024
31 January 2022
16 July 2020
Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market in electricity (recast), Articles 2(29), 30 - 37
Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, Article 2(6) and Articles 24-27
Commission Staff Working Paper of 22 January 2010 (Interpretative note on Directive 2009/72/ec concerning common rules for the internal market in electricity and Directive 2009/73/ec concerning common rules for the internal market in natural gas - the unbundling regime
Proposal for a Directive of the European Parliament and of the Council on the internal market for electricity (recast) on common rules for the internal market in electricity (recast), 30.11.2016, COM(2016) 864 final 2016/0380 (COD, Articles 30-39 and Annexes
CEER Position Paper on the Future DSO and TSO Relationship, Ref: C16-DS-26-04, 21 September 2016
Status Review on the Implementation of Distribution System Operators' Unbundling Provisions of the 3rd Energy Package, CEER Status Review, Ref: C15-LTF-43-03, 1 April 2016
The Future Role of DSOs, A CEER Conclusions Paper, 13 July 2015, Ref: C15-DSO-16-03