Electricity network charging reform: recent updates from Ofgem

United Kingdom

On Monday 6 November, Ofgem published updates on two interrelated reviews in relation to electricity network charging, intended to inform discussions with stakeholders on their subject matter:

Review

Recent Ofgem publication

Targeted Charging Review (“TCR”)

Update on approach to review

Reform of electricity network access and forward-looking charges

Working paper

In addition, Ofgem announced on Monday 6 October that it has been served with a judicial review claim in respect of its recent decision in respect of the reduction of the benefits available to embedded generators.

TCR – reform of residual network charges – key developments

We have previously published detailed analysis on the TCR (see here and here). The recent TCR update relates to Ofgem’s intended reforms of “residual” network charges. By way of a brief reminder on this issue:

  • Transmission and distribution network operators recover their costs by way of “use of system” charges levied on network users, made up of a “forward-looking” component (intended to reflect the operators’ investment costs) and a “residual” element (covering all other costs as determined by price controls);
  • The value of the residual component is influenced by users’ export and demand at times of peak demand;
  • Ofgem is concerned that grid users are distorting the market by altering their behaviour to avoid residual charges – e.g. by investing in and strategically deploying potentially inefficient on-site generation or storage.

Ofgem’s update moves the TCR forward in two key ways:

  1. Suppliers should bear the cost of residual charges – A fundamental decision point in the TCR process is who should pay residual charges. Ofgem has preliminarily concluded that this should be entirely the demand-side users of the grid as opposed to generators. The paper argues that, since the charges are ultimately passed through to the consumer either way, the crucial objective is to reduce market-distorting behaviours carried out to avoid the charges. Since it is supply-side operators who have greater control over their impact on the network at any time, Ofgem asserts that it is more efficient for demand-side operators to bear the burden of residual charges such that the charges cannot influence generator decisions. This allocation has the added benefit of being closer to the current charging arrangements, since the types of generator which currently pay residual charges are limited.
  2. Narrowed field of charging methodologies under consideration – motivated by the avoidance of market-distorting decisions, Ofgem has proposed to exclude volume-based (kWh) charging methodologies from its analysis. This leaves the following options:
    1. Fixed charges for each user (with possible discounts for smaller users to avoid unfair burdens);
    2. Capacity-based (kW) charges; or
    3. Gross volumetric consumption charges (based on the user’s consumption from all sources – not just what is imported from the network; to be considered in only the business context due to the administrative difficulties of metering such usage)

Reform of electricity network access and forward-looking network charges

The primary concern which Ofgem seeks to address in the course of this project is the inadequate market signalling available to potential network users on when, where and how to connect. Options for access to grid connections are limited; transmission and distribution network operators’ various forward-looking charging methodologies are inconsistent in how well they reflect operators’ costs. The working paper sets out a broad range of options which might address these issues, including the following:

Access

  • Introduction of connection offers of limited duration and/or geographical area;
  • Moving away from first-come-first-served model and towards a periodic allocation of grid connections (e.g. auctions);
  • Increase in the ease of assigning grid connections between parties.

Forward-looking charges

  • Rebalancing of charging methodologies to focus on the drivers of investment (e.g. charges could be based on maximum usage during constrained periods rather than total annual usage);
  • Achieving the correct level of sensitivity of network charges to the location and time of the use of the system;
  • Harmonising the approach across networks with different voltage levels to the extent that discrepancies are distorting decisions.

Judicial review of embedded benefits decision

As the two network charging reviews discussed above progress, Ofgem is now also defending a judicial review challenge in relation to its decision last month to adopt Workgroup Alternative 4 to CUSC Modification Proposals 264 and 265 (see here and here). This decision is set to have the effect of significantly reducing the benefits available to small distribution-connected generators through the residual network charging regime. The challenge is brought primarily on the basis that

  1. the decision breaches the directly applicable EU law principle of non-discrimination by treating embedded generators like large transmission-connected generators and differently from demand-side response providers and “behind-the-meter” generators;
  2. the decision is legally flawed by reason of failure to take account of material considerations/facts;
  3. the decision is irrational.

Next steps

Ofgem held stakeholder workshops in Glasgow and London last month on the TCR. Further stakeholder engagement is envisaged in early 2018 before a consultation on the proposed policy outcomes of the TCR is published in summer 2018.

In relation to network access and forward-looking charges, Ofgem is assembling task forces, including industry participants, for the holistic consideration of the options proposed. The output of these task forces, expected to culminate in final recommendations by April 2018, is intended to form the basis of wider stakeholder discussions.

The judicial review challenge, brought by Peak Gen and seven other companies, has been granted permission to proceed to trial. The trial is expected to start in early 2018.