Recently, Ofgem put forward proposals to reform the way that generators and users of electricity get access to, and are charged for using, the electricity network.
The consultation, Getting more out of our electricity networks by reforming access and forward-looking charging arrangements, has just closed and Ofgem will decide before the end of this year whether to issue a Significant Code Review to take the reforms forward.
New technology such as electric vehicles, storage and heat pumps will mean we will need more electricity in the future. The existing infrastructure cannot cope, and in some areas is already overloaded. It costs a lot of money to upgrade; costs which are passed onto consumers through their bills. Ofgem regulates what the network companies can spend on infrastructure upgrades and is currently looking at the next round of price controls, known as RIIO-2. These are likely to be tougher – see our article, RIIO-2 Framework Published, for background.
So instead of upgrading the network, Ofgem has for a while now been looking at how to make better use of it. See for example the Smart Systems and Flexibility Plan and the Targeted Charging Review of residual network charges (our article Ofgem Minded to Cut Embedded Benefits provides helpful context for this).
The latest consultation looks at the charges for accessing and for using the electricity transmission and distribution networks.
These set out how users access the electricity networks: how much they can import or export, when and for how long, where to/from, and how likely their access is to be interrupted and what happens if it is.
The problem is that some areas are congested because there is too much generation connected to the network whilst in other areas there is pressure on the network caused by increasing demand. At the moment there are limited ways of rewarding those who can be flexible, or of encouraging new generation to connect to the network in areas that are not congested.
Ofgem are thinking about introducing a "core" level of access for small users (including households with an electric vehicle), with options to obtain additional different types of access above this. For larger users, Ofgem want to improve the definition and choice of firmness (in other words, how much the connection can be interrupted) and time-profiled access rights; and are asking if they should give more choice of duration and depth (geographical extent) of access rights.
Another option, either Ofgem-led or industry-led, is to set up mechanisms to enable trading and exchange of access rights; and introduce "use it or lose it" conditions. Giving more choice of time-profiled access rights would support more of a capacity-based charging approach (e.g. off peak access would have lower capacity charges), to incentivise users to release spare capacity at times when they are not using it.
Forward looking charges
These include the upfront connection costs for connecting to the system and the ongoing forward-looking use-of-system charges.
Ofgem are proposing:
a comprehensive review of forward-looking DUoS (Distribution Use of System) charges: improving the granularity and predictability of locational signals and also considering the balance between usage-based and capacity-based charges;
a review of the distribution connection charging boundary: whether to move to a shallow connection charging boundary at distribution (where the connection customer only pays for their own sole-use connection assets, which is how the transmission connection boundary works) as opposed to the current shallow-ish connection boundary (where in addition to their own sole-use connection assets the connecting customer also contributes to wider network reinforcement); and whether to introduce user commitment requirements at distribution level; and
a more focused review of forward-looking TNUoS (Transmission Network Use of System) charges: aligning how distribution and transmission generation users are charged for their impact on the transmission network, and whether to review the charging of demand under TNUoS.
All this is technical stuff so, thankfully, Ofgem have included some case studies showing how the reforms could affect three different types of network user.
Large solar generator
A solar generator wants to connect to the distribution network and export electricity in an area that already has lots of generation and, as a result, network constraints. The local DNO has to curtail generation output at certain times and the distributed network frequently exports power onto the transmission network.
Currently, the DNO could offer either a "standard" connection, where the generator has a low chance of being curtailed but has to pay network reinforcement costs, or a "flexible" connection, where they pay no reinforcement costs but have to accept being curtailed with no cap on this.
The curtailed model throws up some obvious challenges from a funding perspective. To attempt to address those, the reforms could include a cap on the amount of curtailment generators can face, or make curtailment time-limited. They could also bid to not be curtailed, with other generators or users (such as demand side response providers) being able to offer in services to help manage the constraints.
Commercial customer with onsite generation
A large demand user with the ability to participate in demand side response wants to connect to the extra high voltage (EHV) distribution network. It also has an onsite generator, which can meet most of its demand. It does not export onto the network.
Currently it has no choice of its access option: if the connection requires reinforcement, then the customer has to pay the full cost of this.
The reforms could mean:
they could choose a time-profiled access right, and get a discount on their UoS charge, and use their onsite generation at other times; or a cheaper non-firm access right, using their onsite generation when the connection is curtailed
changing the connection boundary so that their connection charge only covers sole-use assets not wider reinforcement (aligning the distribution connection boundary with how the transmission connection boundary works).
Domestic user installing an EV connection
A domestic household with a smart meter wants to install a home EV charging point.
Currently, the customer would not pay any extra charges for this even if the network needed reinforcing as a result of the increased demand. There is no incentive/disincentive to charge at peak times or to use a slow rather than a fast charger.
The reforms could mean households are charged less if they opt for slow charging over fast charging, or only charge off-peak, or have their charging managed by their DNO. On the flip side, there could be higher charges for uninterruptible charging at peak times.
Ofgem will decide by the end of 2018 whether to launch a Significant Code Review (SCR) to take these reforms forward. If they do, then the SCR will conclude in late 2020 and there will be a Direction to licensees to develop Code modifications (the relevant codes here being the DCUSA and the CUSC) to implement the reforms. The scope of the SCR is still to be decided; those aspects that Ofgem decide are out of scope will be left to the industry to take forward, and could actually happen more quickly than those that end up part of the SCR process. The first set of SCR reforms should be in place by April 2022, the rest in April 2023.
These are exciting reforms as they will, if and when they go ahead, mean more choice for generators of how they connect to the network and more rewards for using the network flexibly. Gone are the days when everyone needed a constant supply of power, but the network charges are still based on this. These proposed reforms should mean those who can ramp their power use up and down as needed, to even out constraints on the network, can be appropriately rewarded. At the same time, this flexibility would bring a new level of complexity to these types of projects which might be a challenge for some funders and potentially unattractive to potential acquirers. That might limit the possibilities for certain project developers to take advantage of the full range of flexible options.