Distribution connection charges to be reduced: Ofgem publishes its decision on the Access and Forward-Looking Charges Significant Code Review

The title of Ofgem’s, “Access and Forward-Looking Charges Significant Code Review” (“Access SCR”) does not shed much light on the subject matter. However, along with Ofgem’s separate but even more broadly titled, “Targeted Charging Review Significant Code Review” (“TCR SCR”), the Access SCR decision (“Decision”) published by Ofgem on 3 May 2022 represents significant upcoming change to the way in which users pay for our electricity networks.

We set out in more detail below the background to the Access SCR and the Decision, but in brief summary the impact of the Decision (if implemented as Ofgem envisages) is that:

• From April 2023 the general rule will be that the connection charges paid under distribution network connection offers will be decreased, as the extent to which the necessary reinforcement to the existing network is recovered from the relevant customer will be reduced as against the current position. For connections serving demand for electricity (or mixed use connection sites with import and export) in most cases no reinforcement costs will be charged to the connecting customer. Connections serving generation will also see a reduction, with most reinforcement costs only applying to a more limited set of reinforcement works. The changes will not apply to (i) existing (as at April 2023) connection offers or (ii) connection offers in respect of connection applications made prior to April 2023.
• Also from April 2023, the availability and nature of ‘non-firm’ (also referred to as curtailable) distribution connections is to be made more consistent and clear-cut. In essence, non-firm connections are connections provided more quickly/cheaply ahead of reinforcement works to the wider network that would ordinarily been required, with the quid pro quo being greater rights for the distribution network operator to curtail connection capacity levels until the reinforcement works have been carried out. The changes will see distribution network operators required to make non-firm connections an option where reinforcement to the existing system would be needed in order to provide a firm connection and will see the terms of non-firm connections (curtailment limits, compensation for curtailment above this, etc.) more clearly and consistently defined.

These changes are designed to encourage a more dynamic and flexible energy system, in particular through the way in which distribution network operators manage reinforcement to the existing distribution network.

As mentioned above, these reforms are part of an ongoing set of wider changes to the way in which our electricity networks are paid for. In particular, the separate TCR SCR reforms have (i) reduced the extent to which on-site/distribution connected generation will avoid network charges, through a move to fixed ‘residual’ network charges rather than network charges by reference to volume of electricity taken from the grid; and (ii) have reduced the embedded benefits/avoided costs of on-site/distribution connected generation. For further information on the TCR, please read our commentary here.

Background

On 18 December 2018, Ofgem originally launched its Access SCR in relation to network access and forward-looking charging arrangements for the electricity network (see our previous Law-Now covering the Access SCR here). Following its review, Ofgem published its minded-to decisions (the “SCR Consultation”) on 30 June 2021. The Access SCR Consultation set out Ofgem’s proposals on access rights, connection charging and transmission charges (see our previous Law-Now covering the SCR Consultation here).

On 3 May 2022, Ofgem published the Decision, covering distribution connection charges and the definition and choice of access rights via non-firm connection offers. Ofgem are continuing to review distribution use of system (“DUoS”) charges and transmission network use of system (“TNUoS”) charges separately.

Network charges are costs added to consumers’ energy bills by Great Britain’s licensed electricity suppliers. Distribution network operators (“DNOs”) charge generators and suppliers an Ofgem-regulated price (RIIO-ED1) for their use of the network and suppliers reflect these charges in the tariffs they charge to end customers.

Ofgem launched the Access SCR as part of a package to reform how different parties access and pay charges for the electricity network. The objective of the Access SCR is to ensure that electricity networks are used efficiently and flexibly, allowing consumers to benefit from new technologies and services while avoiding unnecessary costs on energy bills.

Distribution connection charging boundary

Under current connection charging arrangements, connecting customers pay all the costs for the extension assets required to connect to the existing distribution network. If reinforcement[1] is required to facilitate the connection, the connecting customer contributes toward the cost of that reinforcement, up to one voltage level above their point of connection. In most cases the remaining cost of reinforcement is paid by the DNO’s wider consumer base via DUoS charges.

Ofgem has concluded that these current ‘shallow-ish’ arrangements no longer provide users with effective signals about the costs they incur on the network. This is for the following reasons:

• Ineffective price signals and ‘free rider’ effect – current arrangements do not provide consistent or fair signals for network reinforcement as they only exist for the specific customers whose connections trigger reinforcement. This incentivises prospective customers to ‘free-ride’ by waiting to request a connection until reinforcement has already been triggered by another customer, unnecessarily delaying connections and hindering the uptake of low-carbon technologies.
• Incremental reinforcement – current arrangements encourage DNOs to take an incremental and reactive approach to reinforcement due to the risk of not fully recovering their costs.
• Barrier to net zero – current reinforcement cost signals may be too strong for some users and risk creating barriers to investment.
• Boundary distortions between transmission and distribution – differences between connection charging arrangements at the transmission and distribution levels may be creating market distortions and/or impacting on competition between generators connecting to different networks.

Thus, Ofgem will reduce the overall connection charge faced by those connecting to the distribution network. This will involve:

• Removing the contribution to wider network reinforcement for most demand/mixed demand and generation connections by introducing a ‘fully shallow’ connection charging boundary. This will involve connecting customers paying for extension assets only, while reinforcement assets are fully funded via DUoS charges.
• Reducing the contribution to reinforcement for generation connections by introducing a shallow-ish connection charging boundary. This will involve most generation connecting customers paying for extension assets and a contribution towards reinforcement at the voltage level at the point of connection. Reinforcement above the voltage level will be fully funded via DUoS charges.

To mitigate the exposure of DUoS bill payers to excessively high costs, Ofgem will retain the high-cost cap of £200/kW for connecting generation, which is a threshold above which customers are required to pay for any reinforcement costs in full. It will also introduce a similar cap for demand customers set at £1,720/kVA. Although Ofgem expects the cap to be rarely triggered, Ofgem believes its existence could serve as a useful tool in early discussions between DNOs and potential connecting customers where reinforcement would be expensive.

The reforms will exclude speculative developments[2], which may require customers to pay in full for reinforcement costs and ongoing operational and maintenance costs, to deter connecting customers from over-specifying their capacity requirements (i.e., hoarding capacity), reduce the risk of stranded assets, and protect DUoS bill payers from excessive costs. However, Ofgem is directing DNOs to raise a code of modifications to amend the description of speculative developments as currently set out in the Common Connection Charging Methodology (CCCM) to ensure consistent interpretation across DNOs. This includes clarifying that phased developments and future expansion are not necessarily speculative developments. This will be subject to DNO discretion based on an evidence-based assessment of the timing and confidence in delivery of future phases of work. Exceptions may also be made where there is a cost efficiency and wider network benefit of not treating developments as speculative.

To give effect to the reforms, changes to the Electricity (Connection Charges) Regulations 2017 may be required. Currently, electricity distributors must recover reimbursement payments from a subsequent connecting customer (the ‘second comer’) in certain circumstances where prior works were paid for by a previous connecting customer (the ‘first comer’). However, the Decision notes it would not be appropriate to require the DNO to demand reimbursement from the second comer that the first comer would no longer be entitled to under the new charging arrangements. This has triggered an evaluation by BEIS which is expected to conclude in late 2022.

The Decision states that the proposed reforms should not affect the rights or reinforcement contributions required from connection applications made prior to its implementation, but customers may terminate their connection application and reapply should they wish to take advantage of a shallower connection charging boundary following implementation. Ofgem acknowledge this may lead to a potential surge in applications post implementation, but that it has not received sufficient evidence of the need for urgent derogation against DNOs’ licence conditions ahead of the reforms going live in April 2023. The Decision notes that established procedures for the assessment of interactive applications[3] should also be retained.

Definition and choice of network access rights

Network access rights define the nature of users’ access to the network and the capacity they can use. For a standard connection arrangement, a DNO must ensure there is sufficient network capacity available such that curtailment would not ordinarily be expected to take place. However, DNOs at times offer flexible (non-firm) connections as an alternative to paying and/or waiting for the network reinforcement that may be required for a standard connection. In exchange for quicker/cheaper access, users with non-firm connections have ‘curtailable’ access to the distribution network. As there is no standard definition of curtailment, there is no limit on the extent to which network access can be curtailed.

Ofgem has decided to reform such non-firm connection offers by way of mandating a more consistent approach and set of terms for such connection offers.

Ofgem will require DNOs to offer a standardised non-firm access option where the DNO has identified that there is a network benefit[4] to doing so. However, as Ofgem believes there may be potential risks for vulnerable consumers, connection offers to small users[5] or groups of small users will not be curtailable, and DNOs must manage their networks to ensure sufficient capacity is available for small users.

For larger users on non-firm agreements, the DNO will be required to set curtailment limits[6] and include these in the connection offer to the connecting customer, who will have to abide by those limits. If the network operator needs to curtail above this limit, they will be required to procure this service from the market. An ‘exceeded curtailment price’ will set both:

• the price connecting customers receive as compensation if DNOs curtail their connections above the limits; and
• a cap on the price of flexibility that DNOs are required to procure if they need to exceed the limits.

In addition, non-firm arrangements will have explicit end dates, after which the connection will need to be made firm or non-curtailable. Exceptions apply where the customer has not requested a firm connection or if the high-cost cap is triggered and the customer does not wish to contribute to reinforcement costs above the cap.

Comment and next steps

The Decision provides further detail on Ofgem’s thinking on the level of distribution network support that will be required to achieve the Government’s recently updated goal of achieving 95% low carbon electricity by 2030 (see here for our commentary on the energy security strategy), as well as supporting the UK’s overarching aim to achieve net-zero by 2050.

Overall reductions in connection charges will be welcomed by generators and developers of large-scale demand sites connecting to the distribution network. Flexible access options may also enable a quicker and cheaper connection in congested areas of the network and curtailment limits may provide more certainty about the extent to which connection may be restricted.

The reforms may also benefit domestic households installing heat pumps and electric vehicle chargers as the charge for any wider distribution network reinforcement will be removed in most circumstances. However, given the wider pressures of rising energy prices and the impacts of this on businesses and electricity consumers overall, placing the burden of reinforcement largely on DUoS charges may be a disappointing development for ‘small users’ of the network.

Ofgem issued a Direction alongside the Decision instructing the holders an electricity distribution licence to raise modifications to the Distribution Connection and Use of System Agreement (“DCUSA”) or other industry codes as required to give effect to the Decision. Ofgem expect the reforms to be effective by 1 April 2023, in line with the start of the RIIO-ED2 price controls.

[1] Upgrading or expanding the capacity of the existing shared network assets to facilitate a new connection.

[2] Developments may be considered speculative by DNOs if: i) their detailed electrical load requirements are not known; ii) the development is phased over a period of time and the timing of the phases is unclear; iii) the capacity requested caters for future expansion rather than the immediate requirements of (an) end user(s); iv) the capacity requested caters for future speculative phases of a development rather than the initial phase(s) of the development; and v) the infrastructure only is being provided, with no connections for end users requested.

[3] Describes how network companies determine which applications will be able to connect to the network using the available capacity where they have received two or more applications for connections which make use of the same part of the network, but where not all connections can be connected without reinforcement or another commercial solution.

[4] Considering factors such as network availability behind the relevant distribution network constraint, the forecast time-profiled levels of demand/generation, and a probabilistic assessment of the level of curtailment may be required.

[5] Households and non-domestic users that are billed on an aggregated and non-site-specific basis or who are metered directly using whole current meters.

[6] Defined in relation to the maximum number of hours (or percentage of time) that users have agreed to be curtailed.