22 November 2017

What price access to the grid? – Part 1

The way access to the electricity network is allocated and charged for is, in our view, currently the single most important policy and regulatory issue for a decarbonised and decentralised energy system.

Technical sounding decisions about whether network charging is based on the amount of electricity we use or generate (volumetric) or the size of the pipe that gets it to us (capacity) will ultimately dictate future business models for storage, demand side response and decentralised energy more generally.

As Regen set out in our paper ‘Network charging for a flexible future’ there is a clear need for a holistic review of outdated network charging to support a smart, flexible, decentralised electricity system.

As a result, we welcome Ofgem’s proposals for a fundamental review of electricity network charging launched at the Charging Futures Forum.

But… the devil will be in the detail and there are, inevitably, vested interests with a strong voice in this process.

There are two main areas of the current review – access to the grid – and how people are charged for its us, both are interrelated and have huge challenges around fairness and cost.

In this blog we have looked at who gets access and capacity on the grid and at what price?  The existing first-come-first-served system is neither fair nor economically optimal. So Ofgem now are looking at creating flexible and tradable assets that it is hoped will unblock capacity issues for new generators. See access and forward-looking charges working paper.

The thorny issue of grandfathering.

Ofgem have two broad options on redefining access. Either to establish a new regime for new capacity and connections, and encourage to those with excess capacity to trade their rights for cash. The second option is much more radical, take access rights back to zero and re-allocate based on the new system.

The former would be easier but less effective and hands a nice cheque from new generators to those lucky enough to have more capacity than they need. The latter is most effective but hugely problematic – what to do about grandfathering the rights for those who had paid for access in the current system?

Access markets won’t work for everyone.

Markets can work well for big generators and users. But there is a level of essential service to customers that needs to be maintained. Ofgem acknowledge that a market is not appropriate for basic needs of domestic customers – although they may have to pay more if they want to charge an EV for example.

We would argue that it would also not be appropriate for small community owned generation and smaller businesses – those without the capacity or resources to understand how to trade rights, or the benefits and risks of one access option over another.

However, having two systems also has risks. Non-traded essential rights at a fixed price could ultimately disadvantage participants over those with more resources who can trade rights to manage down their access costs (think non-switchers paying for switchers cheap energy).

Proposals are likely to embed existing inequality.

Markets mean that capacity would be more expensive in areas of where there is less of it – this, unless there is strategic reinforcement by the networks – will perpetuate unfairness of the existing system but in a different way.

The best locations for renewable generation, solar and wind are mainly in areas of low historic network investment and already constrained capacity like the South West.  For renewables, therefore, it is likely that new access rights markets, though offering up some possibilities for managing cost, would continue to be more expensive than for traditional generators located in historically industrial locations.

For example, ex-coal sites (generally owned by incumbent generators) have an ample resource of capacity paid for by historic investment and paid for now by consumers in residual network costs. In this new market, areas with generous capacity would continue to benefit from this through cheaper access. It is no coincidence that EON is the first to operate EFR storage on an ex-coal site.

Communities have no voice in pure economics.

Finally, if access rights are traded and are scarce, you could have a situation where a CCGT plant wins out against a wind farm in the same access area. What say will local communities have in a process that might determine considerable local impacts? Should this be left purely to economics?

Author: Poppy Maltby

Contact: pmaltby@regensw.co.uk

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