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.
As Regen set out in our paper ‘Network charging for a flexible future’ there is a clear need for a holistic review of outdated network charging to support a smart, flexible, decentralised electricity system.
This is the second blog in response to Ofgem’s proposals for a fundamental review of electricity network charging launched at the Charging Futures Forum.
In this blog we pick out some key issues from the Targeted Charging Review and forward-looking charges working paper – essentially dealing with how electricity users are going to be charged for their use of the network.
See our first blog dealing with network access charging here: https://www.regensw.co.uk/news/what-price-access-to-the-grid-part-1
Volumetric charges – paying for how much of the network you use.
Ofgem are essentially grappling with who is going to pay for network costs and at which levels.
This is thorny issue for the regulator. The system already has distortions. Currently private wires and generation behind-the-meter do not pay anything for the use of network. Small embedded generators on 11kV network currently do not pay for the transmission network (it is assumed that energy is used before it reaches higher levels of the grid). Transmission generators do not pay for distribution networks on which they rely to reach customers.
Harmonising this will be very complex and tracking whose electrons use which part of the grid is obviously impossible.
Ofgem are suggesting to broadly organise network costs into two areas, forward-looking charges that are payable by all users to reflect the impact they have on the network, and residual costs that are payable only by end consumers. Our thoughts on proposals so far are:
A local network use rate could stimulate community generation
It is exciting that the working paper covered the potential for having a local network access option for small generators. Network charging should send clear signals that if you balance supply and demand locally you should pay less towards higher levels of the grid.
A local network rate would help realise the value from local balancing, reduce network losses and ultimately (we hope – if the price signal is sufficient) stimulate investment in community generation.
Maintaining effective signals on energy efficiency
The current charging regime adds network costs to the cost of a unit of electricity and essentially helps send a signal about energy efficiency to users. We know that forward network costs are mainly about managing peak demand on the network. Forward looking charges are therefore likely to be put mainly on peak usage. This, along with a fixed residual charge raises a risk that the current signals to manage energy use at ALL times will be watered down. The consequence could be as with the Triads – stimulate a market in peak avoidance rather than more enduring energy efficiency.
Lots of generation also has (considerable) demand
Finally, a key recommendation for the Targeted Charging Review is to levy residual network charges on demand customers only (residuals are the remaining bit of network cost that needs to be recouped after forward-looking charges have been paid).
Exempting generation from these residual costs Ofgem hope will avoid distortions and unfair competition from Europe for example. However most generators also have demand – and some older generators have quite considerable demand loads that run on the same principle as private wires. There is an outstanding question therefore about how this demand is being treated and whether such generators are subject to the fixed residual charges that provide them with security of supply during outages for example.