A group of six industry associations have attacked plans by Ofgem to recover residual electricity network costs through fixed charges on consumers, saying they will undermine the transition to a more flexible, low-carbon energy system.
In a letter to business and energy secretary Greg Clark, they criticised the regulator’s decision to revamp residual charges before doing the same for forward-looking charges and urged him to intervene.
Residual charges are used to recover the sunk costs of the existing power grid, while forward-looking charges are used to pay for investments in new infrastructure. Unlike forward-looking charges, residual charges are not intended to reflect users’ impacts on network costs.
Ofgem launched a significant code review in August 2017 to examine residual charges as well as the favourable charging arrangements known as “embedded benefits” that are enjoyed by small generators connected at the distribution level.
The following November Ofgem revealed plans to remove generators’ liability to pay residual charges and instead levy them solely on consumers. Then a year later it proposed to recover residual costs using a “line rental” model by splitting consumers into segments and applying corresponding fixed charges.
The regulator said the reforms would prevent network users from reducing their exposure to residual charges using on-site generation, demand-side response or storage, and in doing so shift the burden onto others. It said those with higher electricity usage would likely see their bills fall, although those with lower usage would likely see them rise.
It also proposed to remove the exemption from balancing charges for smaller embedded generators and prevent them from receiving avoidance payments from suppliers in exchange for reducing their charges.
Ofgem launched another significant code review examining forward-looking charges and grid access arrangements in December last year.
The letter to Clark, signed by the bosses of the Renewable Energy Association, Renewable UK, the Solar Trade Association (STA), the Association for Decentralised Energy, BEAMA and Tech UK, says the proposed changes will be “damaging to the development of flexibility and low carbon generation within the system”.
Of particular concern is a misalignment between the timings of the reforms to residual and forward-looking charges. The letter says this will leave a year or two gap in which providers of flexibility and storage will face higher residual charges, without seeing any benefits from changes to forward-looking charges.
The letter also criticises the proposal to extend balancing charges to small embedded generators which it says could not have been foreseen: “The inability for industry to respond will be exacerbated by implementing it in April 2020 – leaving industry less than a year from the final decision.”
It concludes: “We view these decisions as contradictory to government’s ambition to decarbonise the energy system and create a market for flexibility… We are calling for urgent action to review all elements of the charging system and implement these changes at the same time, providing market certainty for continued investment in the market.”
The signatories include STA chief executive Chris Hewett, who said: “We cannot see how it can be fair that the single occupant of a small flat should pay the same contribution to recovering network costs as a family living in a mansion.
“And when it comes to the vital issue of carbon, unfortunately once again we are seeing policy penalise companies who have done everything government has asked of them to reduce their energy use and to invest in smart technologies, like solar and storage.
“Furthermore, the timing of these changes is totally out of sync with any rewards for smart energy use, creating uncertainty for everyone in this important market, and damaging the year-on-year business case.”
The deadline for feedback on the proposed changes was 4 February.
Among those to respond were Regen and the Electricity Storage Network. Their joint submission, which they have now published, raises similar concerns to the letter sent to Clark.
“Feedback and analysis from our membership has shown that these proposals will increase costs for renewable generators, storage and other flexible technologies resulting in decreased investment and potential failure of existing projects,” the document states.
It says the impact of on-site generation and storage on network costs should in theory be reflected through forward-looking charges.
“However, industry is being asked to agree to these significant changes without knowing how they might be rewarded through forward-looking charges,” it adds. “This uncertainty is raising costs for investors and driving away debt funders.”
It notes, for example, there is “no clear indication” from Ofgem on whether the relative amounts recovered through residual and forward-looking charges will change or how network costs will be split between distribution, transmission and balancing charges.
The submission also criticises the overall tenor of the review, describing it as a “chimerical search to reduce harmful distortions”.
“We support reform of how we pay for the electricity network,” said Regen chief executive Merlin Hyman, “but Ofgem’s proposals disproportionately affect renewable generation and flexible technologies and are another blow that will slow down investment in this vital sector”.
“Reducing carbon emissions is a key societal and government policy goal. Ofgem’s failure to make decarbonisation a principle of its reviews of network charging is an egregious failure to meet its statutory and moral duties to protect future consumers.”