Connections fee backed to clear logjam

The new connections process will fail to operate as effectively as possible without the use of financial instruments.

That is the general consensus from respondents to Ofgem’s unofficial consultation on connection queue reforms.

The use of financial instruments – which could be in the form of penalties, milestone fees or security deposits – is supported by Octopus, Centrica, SSE, National Grid Electricity Distribution, SP Energy Networks and Microsoft in their respective submissions.

It does not, however, have blanket support, with Scottish Power urging caution and developers including Low Carbon, Reg Power and Telis Energy actively opposed.

The Electricity System Operator (ESO) said the use of financial instruments was being “kept under consideration” when it revealed its revised proposals for reforming the connections process.

As part of the process – dubbed TMO4+ – existing and new projects will have to pass through two formal gates. At the first gate, projects will be able to apply to the queue during an annual window, where they will receive an indicative connection date based on coordinated network design. The second gate would then determine the queue position for projects once certain criteria has been met, such as having land rights secured and planning permission submitted.

As previously reported by Utility Week, National Grid has warned the ESO that the criteria for both gates is currently too low and will “not act as a strong enough deterrent to speculative applications in the future”.

Many of those in support of financial instruments argue that they will adequately increase the barriers to entering the connections queue.

Centrica says that “there must be more focus on including financial instruments in TMO4+ for go-live” in its submission, adding that it is the best way of “ensuring only viable projects enter the queue and to avoid capacity hoarding or overholding”.

It adds: “In particular, the proposal needs a mechanism to ensure we don’t end up with a pool of stalled projects between Gate 1 and Gate 2. With the ESO proposing no securities or milestones before Gate 2, there needs to be a financial incentive to move stalled projects out of the Gate 1 ‘hopper’.”

SPEN adds that the current gate criteria offers “no meaningful barrier to entry” and therefore backs the introduction of financial instruments, while SSE states that reforms “will have limited impact” unless financial mechanisms are introduced.

One such proposal backed by many of the respondents is the introduction of a fee to “hold” a place in the queue.

National Grid Electricity Distribution (NGED) claims this “would mean that only financially committed projects apply for and hold a connection offer through to connection”.

NGED also supports the use of financial instruments at Gate 2 to mitigate the risk of a “disproportionately distribution weighted queue”. It adds: “Applying financial instruments as part of the Gate 2 criteria, mitigating the risk of a disproportionately distribution weighted queue, as larger transmission customers may take longer to obtain the appropriate land rights, but have access to greater funding.”

NGED’s suggests this could be in the form of fees per MW, security deposits or cancellation fees.

Microsoft is the only project developer that supports the use of financial instruments. It suggests that applicants to Gate 1 should be required “to pay a fee equivalent to the renting of the network capacity linked to their project which will then be discounted once the project is given a firm slot in the queue”.

It is a stance opposed by most other developers which responded to Ofgem, with Scottish Power also urging “caution that the application of financial instruments [does] not pose a barrier to entry”.

Developers main concern is that financial instruments would disadvantage smaller players in the market.

Low Carbon’s submission adds it is “sceptical of financial holding charges”, adding that the ESO’s proposals “for tough, front-loaded obligations to submit planning applications […] is a better way to encourage projects to move quickly”.

It adds: “The cost of preparing planning applications can be millions or tens of millions of pounds. In this context, so long as a developer is proceeding with their planning application, we don’t believe that an additional financial holding charge is needed. Developers will only spend millions of pounds on projects that they believe are viable.”

Energy Technical & Renewable Services Ltd – a renewable energy consultant – stated that it was “rather alarmed by the suggestion of financial instruments”, adding that it could “stymie otherwise potentially strong projects”.

DNO incentives

As well as backing the introduction of financial instruments, several respondents also called for an overhaul of DNO incentives and obligations to ensure that they do not act as a blocker to the reforms.

In its submission, Octopus warns that the reforms will “not operate as efficiently as possible without the right framework of licence obligations and financial incentives for the network companies that sit at the heart of it”.

It adds that clear timescales should be introduced to “delimit stage gates in the end to end process, with penalties imposed for networks that miss these deadlines, particularly on decisions/information transfer between transmission and distribution companies”.

It adds: “Requiring both transmission and distribution connections to meet Gate 2 criteria is a sensible approach in theory to avoid creating perverse incentives in favour of connecting at either level.

“However, in practice there is a risk that distribution level projects face additional delays or complexity in having to demonstrate Gate 2 criteria to ESO with the DNOs acting as intermediaries.

“This risk will realise if issues in the current connection process persist under TMO4+, namely inconsistent DNO processes, slow DNO/ESO communication and lack of data transparency on network capacity and transmission/distribution interactions.”

It is a concern echoed by Centrica in its submission which warns that “Ofgem must update the obligations and incentives on DNOs” for them to “engage under the TMO4+ proposal”.

Centrica adds that the current “obligations and incentives on DNOs for major connections are not fit for purpose”, adding that “generation connections are being delayed because DNO connection teams are under-resourced and key non-contestable activities do not happen on time”.

“If the DNO makes a mistake or fails to do something we have no recourse,” Centrica’s submission adds. “The only meaningful obligation DNOs face is a requirement to provide connection offers within a specified period.

“This creates a distortion by incentivising the DNO to divert scarce resources to get offers out on time.”

A spokesperson for Energy Networks Association, which represents the UK’s electricity network operators, stressed that DNOs have accelerated nearly 5GW of queued projects in the past year and released around 15GW of capacity for storage and demand projects.

The spokesperson added: “Improving customer connections is the single biggest focus for our members right now. We’re bringing industry stakeholders together regularly and doing all we can to speed things up for customers.”

Utility Week’s brand new Reforming Grid Connections Conference connects developers, DSOs, government and policy makers, leading associations and the supply chain to help shape the future of grid connections, explore untapped potential in the current process, and demonstrate a united front. You can find out more here.