How much we pay for connecting to the distribution electricity network is changing.

And there could be some significant positives for net zero from 2023.

The much delayed Ofgem minded-to decision on distribution electricity network access, was released yesterday and within it there could be some significant positives for helping the electricity networks to be enablers for net zero.

I have been sitting on the Challenge Group for this review for what is – and feels like – years. Three years of long meetings and a huge amount of work by Ofgem and others. It is definitely exciting to see that effort come to partial fruition, but there are some areas in the proposals that could significantly mute the positive impacts that Regen are hoping to see. We have outlined some of these below.

Demand connections to the distribution network to get cheaper

A key announcement is the intention to move to shallow charging for demand. At the moment a demand customer is required to pay a proportion of the cost of network reinforcement triggered by their additional demand. So, connecting electric vehicle chargers or a heat pump in a constrained area could land you with a very big bill to upgrade the local electricity network.

We believe many requests did not even get to the point of calculating said bill, as demand customers were put off by the equivalent of a sharp intake of breath by the DNO and muttering ‘it’ll cost you’.

The jury is out on how much this has stifled investment and growth across the UK, but it looks we may find out in 2023. It is very possible that, if this change goes ahead, DNOs may be faced with a flood of pent-up demand.

Some good news for distributed generation

 There is also some good news for generation: their requirement to pay for reinforcement on the distribution network is becoming ‘shallower’. Previously, they had to pay for reinforcement triggered on their connection voltage AND the one above. This change means that generators should no longer have to pay for the one above. And that is good because it can be the ‘one above’ where you see the highest costs.

Ofgem’s logic for not treating new generation the same way as new demand and removing all reinforcement cost, is because of the way that distribution use of system charges (DUoS) are calculated. This means generators can receive credits for being located on the distribution network as they offset demand. Ofgem feel it would not be cost reflective to make it both very cheap for generation to connect and then effectively pay them to be there. I can see the logic, but hope that would be reviewed when (or if) DUoS is.

So instead of new connections making an individual contribution to the DNO, these costs will be recharged through annual distribution network charges and paid by everyone in a DNO area. Unfair? Not really, as it recognises (finally) that it is not the newest connection that has caused this constraint, but instead it is the sum of all the existing demand and generation in the area.

Big cheer for unlocking strategic investment in the network

As well as unlocking individual projects, the really interesting part of this is that it should allow the networks to use these changes to strategically invest in the distribution network where previously there were obliged to only upgrade to support the needs of each individual change. Rather than giving a good locational signal, as is oft quoted, Ofgem have recognised that:

“The current arrangements…. contribute to DNOs taking an incremental and reactive approach to reinforcement as the means of facilitating new connections, rather than investing in light of anticipated wider network needs.” (p.32)

There are however several caveats, as you would expect…

What are the timescales for connections?

The first is about timetables. New customers that are currently paying (in some cases a lot) for their connection are, on the plus side, given a clear timescale for when they can connect. In this new world, you would expect the network to collate together requests and upgrade more strategically for both generation and demand. But what ‘evidence’ are Ofgem going to ask for to allow DNOs to spend customer money on reinforcements? And does this new process mean delays for projects seeking connections? How this process is developed by DNOs and Ofgem will be critical to making this a step forward rather than backwards.

How will the ‘high cost cap’ be applied?

There is another question about the ‘high cost cap’ and how it will be applied from 2023. Ofgem’s proposal is that generation will still have sole liability for reinforcement deemed to be ‘high cost’. This is defined as being above £200 per kW of capacity.

But if the liability for reinforcement is being reduced to the voltage level of connection, on what costs does this high cost cap apply? The proposal asks consultees if the costs for this cap should also be reduced so it is calculated only at the voltage level of connection. The option Ofgem seem most in favour of is the other option to keep it at the current system which covers all the costs at their voltage level and the one above.

It is noted on p.83 that “While it is rarely triggered, our understanding is that the HCC is a useful tool in early discussions with potential connectees.” – it seems this is a key tool for DNOs ‘putting off’ projects.

A good reason perhaps to reduce it. An additional complication for retaining the high cost calculation at two voltage levels is that if the new connection is part of a strategic network upgrade, then the cost of an individual connection may be difficult to delineate.

Responsibility for ‘sole use’ assets

Another note of caution is that demand and generation are still very much responsible for the cost of ‘sole use’ network assets. Changing or upgrading the bit of the network serving only that one customer can still prove costly. Regen have heard examples where ‘sole use asset’ upgrades to domestic capacity to support LCTs was £3,000. Short visits to de-loop or re-fuse individual connections can cost hundreds of pounds. This is a further barrier that needs to be explored and addressed if we are hoping to have millions of heat pumps and EVs within the next decade.

Small generation to pay TNUOS – at some point

The announcement includes the minded-to decision that small distributed generation will eventually be paying TNUOS, to a potentially large detriment to Scottish generation, but they are holding back implementation of this until a wider review of TNUOS charges is held. When that will happen is anyone’s guess.

Where is the opportunity to flex and storage?

The final, and perhaps biggest issue is the relative lack of good news for flexibility and storage.

Ofgem have decided to split the SCR, announcing the minded-to decision for access in the areas they are comfortable with, but doing further work on the changes that have proven tricker – namely forward-looking charges and their relationship with flexibility.

No doubt networks can happily build more network to support net zero – increasing their asset base and revenues – but Ofgem and BEIS are aware there is a tantalising £16.7 bn flexibility ‘bonus’.

In some cases, flexibility rather than new network could be a cheaper way to connect more generation and demand. The difficulty is understanding where.

This minded-to decision should mean that the networks can go ahead and invest for net zero (we hope) but the flexibility providers, DSR and battery storage are still waiting for the windfall promised to them in the forward-looking charges review. If the network investment is the default, the nascent flex industry could remain just that.

An opportunity and questions about improved definition and choice of access rights.

One glimmer of opportunity is around the improved definition and choice of access rights announcement. Where new connections can expect, from 2023, the option to have a time-profiled flexible connection where they have more certainty on the constraints they may face (and by implication be compensated by the network if constraints rise above this point).

Given the potential issues with timescales for connections under this new shallow/-er access regime. Is there a combination of flexibility market or flexible access rights which could plug the gaps and allow connections ahead of reinforcement? But who covers that cost? And is it okay that some of these opportunities are likely to be temporary?

So for access to the network, all-in-all a positive result – lots of things to clarify, but these changes have the potential to be an important step in moving the electricity networks from net zero barrier to enabler.

More work to do…

The next step is the announcement on forward-looking charges. This is likely to remove further ‘embedded benefits’ in the form of DUoS credits from some decentralised generation, impacting the business model. Ofgem’s pitch is that their work on ‘full chain flexibility’ will open opportunities for assets to provide services to the system, balancing the extra network costs. Developers and investors will need to continue to watch these developments closely to optimise their projects.

Read the full minded-to decision here: https://www.ofgem.gov.uk/publications/access-and-forward-looking-charges-significant-code-review-consultation-minded-positions

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