Australia is in the middle of the fastest, most decentralised energy transition in the world. Rooftop solar is now the largest generator in the National Electricity Market (NEM), virtual power plants (VPPs) are emerging, and millions of behind-the-meter assets are operating at the distribution level with limited visibility or control. Yet the way we operate the grid hasn’t caught up.
Our system was designed for a centralised past. It assumes AEMO at the top, dispatching energy from big transmission-connected generators to passive consumers.
But the grid we have now is no longer top-down. It’s two-way, fast-moving, and increasingly local… And yet, no one is truly in charge at the distribution level.
That’s where Distribution System Operators (DSOs) come in.
What is a DSO?
A Distribution System Operator is a new role that would sit between households and the transmission system operator (AEMO), providing real-time coordination, visibility, and control of energy flows at the distribution level. It’s a function, not just a title, that enables:
- Local balancing of supply and demand
- Real-time control of DER, such as rooftop solar, batteries, and EVs
- Secure operation of mini-grids and microgrids, including islanding
- Enablement of local energy markets
In practical terms, a DSO might be a reformed DNSP that is empowered, resourced, and obligated to actively manage the low-voltage grid.
Why Do We Need DSOs?
1. System Strength is Declining
DER is growing rapidly, but inverter-based systems don’t provide inertia, fault current, or voltage stability the way synchronous generators do. The result is lower short circuit ratios (SCR), weaker system strength, and a greater risk of voltage collapse or instability at the local level. Today, DNSPs aren’t responsible for system security. AEMO tries to manage it centrally, but without local control, it’s like driving a car with no suspension on a gravel road.
To move forward, each Transmission Node Identifier (TNI) must be treated as a self-contained mini-grid capable of operating independently or in coordination with the broader NEM. This requires distributed control strategies and local system strength capabilities.
2. No One Has Visibility or Control
Most DNSPs can’t see, let alone control, rooftop solar or household batteries. AEMO uses estimates and workarounds to maintain system stability, but lacks fine-grained visibility. Consumers can’t trade energy locally. There’s no market, no operator, no real-time situational awareness. As DER grows, this invisibility becomes an operational liability.
Currently, DERs sit behind the meter, often invisible to both DNSPs and AEMO. Without tools like DERMS (Distributed Energy Resource Management Systems), HEMS (Home Energy Management Systems), and edge controllers, the low-voltage grid becomes a blind spot in an otherwise well-monitored system.
3. Tier Bypassing Causes Chaos
AEMO is beginning to dispatch VPPs that operate on the distribution network without DNSP involvement. This creates “tier bypassing”, like a CEO directing junior staff without informing middle management. The result is mixed signals, duplicated control logic, and an inability to optimise locally.
If multiple parties attempt to control the same rooftop PV systems or batteries, whether through market signals, constraint responses, or emergency management, the system becomes brittle. Authority must be delegated clearly and managed hierarchically, just as is done in military and government systems.
4. Resilience is More Than Redundancy
Climate risk and cyber threats mean our grid must be more than reliable. It must be resilient. Mini-grids and microgrids capable of operating islanded during outages, whether due to storms, fires, or attacks, could improve resilience dramatically. But to enable this, we need DSOs capable of managing those systems in real time.
Remote communities already function with limited connectivity. With DSOs and the right grid-forming technologies like inverters, batteries, and synchronous condensers, they could operate as microgrids, continuing to deliver electricity even if isolated from the main grid.
5. We’re Missing a Market Layer
We’ve built sophisticated wholesale markets at the transmission level. But there’s no mechanism for households to trade energy with each other or participate in local FCAS-like services. A DSO would enable distribution-level markets, giving consumers the ability to participate in and benefit from the energy transition.
Imagine a community where EVs, batteries, and solar can respond to real-time price signals or local security needs, without needing to go all the way up to AEMO. That’s the promise of distribution-level market coordination.
International Precedent
The UK, EU, and even Ukraine are all moving toward DSO models. In some cases, DNSPs have been reformed into DSOs. In others, new entities have been created. These transitions recognise a simple truth: when most generation sits behind the meter, the system needs a new operating model.
Australia can’t afford to fall behind.
What Would a DSO Actually Do?
At a minimum, a DSO would:
- Monitor and control DER within each Transmission Node Identifier (TNI)
- Provide aggregated forecasts and real-time data to AEMO
- Facilitate local markets for energy, FCAS, and demand response
- Manage system strength, inertia, and security at the distribution level
- Enable microgrids and islanding capabilities
- Provide distribution planning and publish investment advice to the market
This function could be taken on by existing DNSPs if they’re properly resourced, regulated, and re-scoped. Or it could be performed by a new entity subordinate to AEMO, designed explicitly for the task.
Key Challenges
- Regulatory reform. Existing rules don’t define DSO responsibilities. A whole new regulatory framework is needed.
- Funding. DERMS, edge controllers, batteries, grid-forming inverters and other infrastructure upgrades aren’t cheap.
- Cybersecurity. Decentralised control increases the attack surface. Hardened systems and standards are essential.
- Interoperability. Devices from different manufacturers must work together seamlessly.
What Happens If We Don’t?
If we fail to act, the risks are clear:
- AEMO will continue to operate blind at the distribution level
- DNSPs will lack the authority to maintain system stability
- DER growth will be capped or curtailed
- Local energy markets will remain a pipe dream
- Resilience will suffer in the face of extreme weather and increasing demand
Conclusion
The future of the grid is decentralised, digital, and dynamic. But without clear accountability at the distribution level, we’re holding it together with duct tape and guesswork.
DSOs are not a silver bullet, but they’re a critical missing layer in Australia’s energy transition. By enabling local control, improving system strength, and empowering consumers, they provide the operating model our future grid urgently needs.
Now is the time to make that vision real.
For more information, please download this slide deck.
