Unravelling network charges
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The EU wants a coherent framework for network charges that doesn’t discriminate between transmission and distribution, but that is much easier said than done, as Simon Bradbury explains.
Following the release of the Clean Energy Package, the clear drive for unlocking decentralised energy grabbed the headlines. Tapping into this resource is front and centre of the European Commission’s vision of the smart, decarbonised energy system of the future. But what lies beneath the philosophy and what is needed to turn the potential of decentralised energy into reality? Thinking about this means turning attention towards the practicalities. And that throws up some big topics to address.
So, for example, the Clean Energy Package points to the need for aggregators and smaller scale, decentralised resources, such as demand-side response and storage, to provide services to network operators on an equal footing to conventional generation. It also pushes for smaller clip sizes and closer to real-time trading opportunities in the wholesale markets to improve accessibility for smaller resources and enhance the ability for flexibility value to be captured.
These are valid issues that need to be dealt with. But this is not the end of the list. The Clean Energy Package also draws network charging arrangements into the fray. Again, this is for good reason and it is right that the changing balance between transmission and distribution-connected resources should throw a spotlight on to the suitability of the network charging regime for the changing system. But this is where things start to get particularly complicated.
On the face of it, the objective stated in respect of network charging seems straightforward and reasonable enough. The aim is for a coherent framework for network charges across the voltages, which avoids discrimination between transmission and distribution connections and works for storage and demand response, as well as generation assets. But how to turn this laudable ambition into something tangible that works across the voltages and across different jurisdictions?
The challenges begin with the starting point, which varies significantly between jurisdictions. Focusing on transmission charging, a wide variety of approaches are currently in place, with fundamental differences in respect of the basic building blocks.
For example, the split between generation and demand in terms of charge exposure varies widely. In most European countries, demand bears 100 per cent of charges to fund the cost of the transmission grid, with generation facing no exposure to capex recovery charges. There are several other markets, such as Ireland, where generators face roughly 25 per cent of network charges and then a handful of others, such as Sweden, where the generator capex share is around 40 per cent.
Other key building blocks in respect of which different jurisdictions vary in approach include the existence (or otherwise) of locational pricing and the balance between energy-related (kilowatt-hour) and power-related (kilowatt) components of charges. The UK is one of a minority of markets with locational price signals, with the vast majority of jurisdictions having no locational differentiation in transmission charging. In respect of the energy/power split, practices employed vary considerably.
When lower voltages are brought into the equation, the complexity increases given the number of distribution entities and the variations between the charging methodologies employed. Even just looking in Great Britain, there are marked differences between distribution and transmission charging approaches and, across the distribution voltages, different approaches are applied. And when the focus moves to being pan-European, the degrees of variation multiply considerably.
A related issue is that in many places, there is reliance on purely energy-based charging arrangements, which is becoming less and less workable as an enduring solution, as solar generation, in particular, increases. Small-scale solar generation reduces payment of per kWh based charges by demand, but it does not help to reduce peak load, as it does not coincide with peak load on the system. Over time, this may be considered as a cross-subsidy for solar generation.
So the scope of the task is sizeable. Even getting to grips with the variations in existing arrangements across jurisdictions and across voltages is a significant undertaking.
Added to this comes the next challenge. Changes to transmission charging arrangements have proved to be contentious affairs, given the potential for distributional impacts and effects on business models. In GB, reforms to transmission arrangements have involved judicial reviews, for example, as part of the transition to Betta (the British Electricity Trading and Transmission Arrangements) and, more recently, in relation to Project TransmiT, as the one-off “wealth transfers” can be large in relation to the ongoing efficiency gains. Progressing reforms to the charging arrangements, as suggested in the Clean Energy Package, will be no less controversial given the potential for fundamental shifts in project economics and relativities between different resources.
The final and probably the most important challenge is to identify what actually is the preferred model for network charging. This brings the whole topic of access rights into play, because you cannot sensibly talk about how to charge for networks without also considering the nature of the underlying product being paid for. Through the Clean Energy Package, the Commission proposes to throw the charging challenge to Acer. Specifically, Acer is mandated to develop recommendations for the convergence of transmission and distribution charging methodologies, considering issues such as the split between generation and demand, locational signals and time of use component.
So, the Clean Energy Package calls for coherent overall framework for network charges across the voltages, which avoids discrimination between transmission and distribution connections. The words on the page look modest. But translating this into something workable is anything but modest, with difficult principles, practicalities and politics to address. This makes it essential to watch this space.
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