Regen is part of an industry Challenge Group feeding into the ‘Access and forward-looking network charging Significant Code Review’. This Ofgem process is fundamentally changing how we pay for our electricity network and will determine how the network will develop in the future. It will have significant impacts on the business cases for new connections, smart systems and distributed renewables.

In particular, we think there is a fundamental issue within this review of putting a level playing field on uneven ground. We suspect that there may also be an even bigger issue of the process lacking a clear outcome. At the moment the review objective is ‘ensuring that electricity networks are used efficiently and flexibly, reflecting users’ needs and allowing consumers to benefit from new technologies and services while avoiding unnecessary costs on energy bills in general. This outcome is clearly only meaningful within a context, and we think that this context needs to explicitly be decarbonisation.

The existing system is fiendishly complicated and so in this article, Regen is exploring some concerns about how the early stage proposals might impact decarbonisation targets, and specifically new renewable generation.

In a future blog we will be exploring what a good outcome for the charging review might be (a fair way to charge users to develop an efficient network that supports our low carbon future) and how charging structures could be developed to achieve that.

Is there a big difference between forward-looking and residual charges?

Regen has already welcomed Ofgem’s intention to introduce cheaper upfront or ‘shallow’ access charges to users connecting on the distribution network. However, there is a condition on this that the costs of these new connections would instead be charged through the forward-looking charges.

By definition, forward-looking charges are the future costs for the network that can ostensibly be influenced by the actions of the users. This is as opposed to the residual costs which are a big lump of cost from past expenditure that we can’t change.

One example is the cost of tree cutting. Distribution Network Operators (DNOs) must cut down the trees to stop them falling on the power lines. As a result, maintaining the electricity network in rural areas is more expensive than in urban areas.

By that logic, people in rural areas, with lots of trees, should pay more for the electricity network because this ‘forward-looking’ cost is specific to them.

The problem is that the tree cutting is also function of the fact that the network company decided not to bury the cable. When the lines were installed it was presumably judged to be cheaper to cut trees regularly (a forward-looking charge) than dig a hole once (which would now be classified as a residual charge).

This network cost is also influenced by penalties and costs that the DNOs face during outages. It is worth DNOs spending money on preventative tree cutting to avoid trees falling on the lines and any resultant penalties.

Conversely it isn’t worth spending that money on reducing line losses (the amount of electricity that is lost as it travels across the network) because there is no incentive. Losses can be up to 6% on the distribution network and are influenced by how the network is set up and managed. However, losses are added directly onto consumer bills.

One piece of work feeding into the review comes to a quite staggering conclusion that losses are not a major driver of network cost. Which is like saying a homeowner whose house is falling into disrepair has no significant repair costs, because the person doesn’t spend a lot of money on repairs.

What is the problem with distribution generation exporting onto the transmission network?

Each area of the electricity network has different costs to run. Future costs to run the electricity network in an area will be a determined by the types of electricity users (homeowners, businesses, generators) and how the network is used. But the costs are also dependent on how the network is currently configured and crucially, whether it is still used in the way it was designed.

There are now several distribution areas in the UK that export electricity back onto the transmission network. Ofgem has noted in the review process how these reverse flows are driving costs and upgrades on the transmission network. Transmission generators feel this is unfair because currently distributed generators don’t pay or contribute towards these. The conclusion from Ofgem was that distributed generation might need to pay some of the transmission network costs. This is hard to argue against.

However, there is no talk about the reverse. So how transmission generation, which uses the distribution network to access pretty much all the demand customers, should pay for the distribution network (the EU network cost cap aside). This is presumably because they do not drive additional costs on the distribution network because they are ‘going with the flow’ of how the assets were originally designed. The costs associated with the original construction of the network are of course ‘residual’ and will be part of the lump sum recharged to, and paid by, demand customers.

By contrast any ‘forward-looking’ costs will be charged to those that ‘cause’ them. And we think those that cause them will be anyone operating counter to how the system was designed. Our concern is that the finger will be firmly pointed at distribution generation and particularly renewables.

What do Ofgem want to achieve with forward looking charges?

Ofgem has been approaching this thorny issue in what seems to be a logical order.

  • Firstly, Ofgem are exploring whether it is possible to identify ‘forward-looking’ parts of the costs that distribution network operators currently have.
  • Secondly, whether it is possible to identify users or types of users of the electricity network that might be causing these costs.
  • Thirdly, how practically these users might be identified and charged for their share of future network costs

And forward-looking charges are important to be recharged in order to make network users do… “something”… that might reduce those costs.

Therein lies another problem. What is that something?

There are a few options.

  • A) Making users physically move or invest in different places

If a generation or demand customer is already located in a geographic area that has high ‘forward-looking’ costs, there is very little they can do to avoid these, except to move to somewhere else. You could say these users were being unfairly penalised because of where they are sited.

Another approach is to apply higher costs only to new users. Projects may not invest in a location when they realise the network costs are too high. It may encourage some developers to move project plans to be located where it is cheaper to connect.

Despite this being economically optimal (for the electricity network, not for local economies who have local investment stifled) our concern is that this is a convoluted way of dissuading new renewable generation projects from connecting to the distribution network. Is this really the right result when we have less than 12 years to divert from a climate catastrophe?

Renewable technologies are often deployed in ‘clusters’ due to optimal resources or planning constraints. Renewable projects are also far more geographically constrained than other technologies. Flexible and compact technologies such as battery storage or fossil fuel generation, however, may well be able to locate so they benefit from these geographical charges.

  • B) Encouraging users to use the network differently.

This would mean that the network charges for a location would change depending on how the network is used. This means that network charges would then not be fixed, and in theory should be influenced by how the users act. Forward-looking charges may, for example, encourage a group of wind project developers behind a constraint to get together and buy a battery. This investment might remove the constraint, and the projects would no longer be subject to high forward-looking charges.

For this to happen the charges would need to be socialised across an area in some form. But by doing so you would remove individual incentives to act differently – and this is what the forward-looking charges are supposed to be aiming to achieve.

Another issue is the complexity this would introduce. There will be lots of other market signals through instruments such as the Capacity Market and Balancing Services which might run counter to the network signal. Would it be optimal for users to run their own flexibility market to reduce or avoid network charges? Or would this would compete/complement/undermine the new DSO flexibility markets.

In our engagement with the review we continue to have more questions than answers. This is because, without a clear outcome for the review (e.g. cost-efficient decarbonisation), the actual impact of these reforms remains elusive and, for renewables, fraught with risk.

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