Ofgem has confirmed its intention to expose distributed generators with a capacity of less than 100MW to wider transmission network charges.
The regulator announced the change as part of the minded-to decision for its significant code review looking at forward-looking charges and grid access arrangements. It has also proposed changes to distribution connection charges and network access rights.
Transmission charges
Transmission Network Use of System (TNUoS) charges are divided between forward-looking charges, which are designed to provide price signals to network users, reflecting their impact on costs in different locations due to required reinforcements; and residual charges, which are the same across the country and intended to recover the remaining sunk costs of the transmission network. The charges are currently levied on both generation and demand, with the bulk falling on the latter.
The charges on generators are applied as a wider tariff – which incorporates forward-looking charges that depend on their location within 27 geographic zones as well as the generation residual – and local circuit and substation tariffs. Generators are charged according to their transmission entry capacity.
Distributed generators with a capacity of less than 100MW are currently exempt from both forward-looking and residual charges, aside from the Embedded Export Tariff – a credit that replaced the triad avoidance payments they were previously able to collect from suppliers for helping them to reduce their charges.
They were able to receive the payments because their output is considered as net negative demand during the triad periods – the three hour-half periods of peak demand each winter separated by at least 10 days – used to determine the TNUoS charges for half-hourly metered non-domestic customers. The portion of the Embedded Export Tariff corresponding to the residual element of the triad avoidance payments has been almost entirely phased out over recent years.
Ofgem has previously announced plans to remove all generators’ liability to pay residual transmission charges and shift the burden entirely onto demand in the form of fixed banded fees as part of its earlier significant code review looking at residual charges, also known as the Targeted Charging Review. The regulator recently delayed the implementation of the changes by another year until April 2023.
Explaining its latest decision to expose small distributed generators to the wider TNUoS tariff, Ofgem said: “We do not think the impact export has on the transmission networks differs between the size of the generator or whether they are connected at transmission and distribution and, therefore, the differences in the charging arrangements between large generation and small distributed generation creates a distortion that can lead to inefficient network usage.”
Ofgem said it considered instead removing the current cap of zero on the Embedded Export Tariff, which represents the inverse of locational demand charges plus a small credit to cover avoided network reinforcements at grid supply points. This would allow the tariff to become a fee for generators located in areas where there is a surplus of generation over demand and locational demand charges are therefore negative.
However, as the tariff is calculated on the basis of export volumes during the triad periods rather than transmission entry capacity, the regulator said this would create a perverse incentive for generators to reduce their output during winter demand peaks to avoid charges.
It said although small distributed generators would not be liable to pay the local TNUoS charges levied on transmission-connected generators, this would not leave a market distortion as in most cases they instead face Distribution Use of System (DUoS) charges.
Ofgem has also proposed to apply a minimum size threshold of 1MW, saying this would align with existing thresholds for the Balancing Mechanism and the embedded capacity registers that distribution network operators are now required to publish. The regulator said it is still considering how to determine the capacity of small distributed generators for the purpose of applying the wider tariff.
Ofgem said it is also undecided on the timeframe for implementation and whether grandfathering should apply to some generators. It said the significant code review has identified some potential issues with TNUoS charges, including volatility stemming from the current calculation methodology, which may mean there is benefit in conducting a holistic review of the charges to ensure they are fit-for-purpose. It said it may therefore decide to delay its final decision while this happens.
Distribution connection charges
Customers connecting to distribution networks currently pay all of the direct costs as well as a share of the cost of the network reinforcements required to accommodate the connection. The rest is paid by distribution network operators (DNOs) and recovered from all customers through DUoS charges.
Their contribution to reinforcement costs is determined by a series of rules in the charging methodology, including “the voltage rule”. This stipulates that connecting customers must pay for all reinforcement at the voltage level at which they are connecting plus the one above. Ofgem said the arrangements were originally intended to encourage customers to connect where spare capacity already exists.
However, the regulator said they do not provide an effective locational price signal in many instances: “Whilst some types of customer may have some geographic elasticity on where they locate (e.g. some types of generation), for most customers (typically demand) the location is driven by many factors other than the connection cost.
“In some cases, a high connection cost signal could result in a connection not proceeding rather than the connecting customer seeking to locate elsewhere on the network, whilst in other locations users may receive no locational pricing signal at all.”
Ofgem said this often applies to low-carbon technologies, for example, electric vehicle (EV) charging infrastructure, which is largely driven by road networks and customer demand.
“Stakeholders have told us that some connecting customers, particularly EV charging providers and distributed generation customers, can face prohibitively high reinforcement costs,” it added.
“While this is not necessarily supported by regulatory reporting by the DNOs, we are cognisant that this does not take into account those connections which do not proceed following initial discussions with the network company and which did not result in a connection offer being issued.
“We are also mindful that figures reported by the DNOs are, by their nature, backward looking.”
Ofgem said the current arrangements only give a price signal to those who require a supply capacity over and above the available spare capacity: “Connection customers who use up existing spare capacity leading receive no locational signal through the connection charge, despite contributing to the future need for reinforcement to meet the needs of other consumers.”
The regulator acknowledged that the charging regulations make provision for customers connecting subsequent to reinforcements to contribute towards the costs, but said it is the customer that originally incurs the costs that bears the investment risk. It said generators that are able to delay their connection can “free ride on those willing to pay for reinforcement.”
It said this situation could also lead to significant disparities between households looking to install technologies such as heat pumps depending on when they are able to connect.
Furthermore, Ofgem said the current arrangements hinder the efficient development of networks, incentivising DNOs to take an “incremental and reactive approach too reinforcement as a means of facilitating new connections rather than investing in light of anticipated wider network needs.
The regulator said they may also discourage both customers and DNOs from using flexibility to accommodate new connections: “If DNOs were more (or fully) responsible for funding such work, they would be better placed to consider alternative options other than reinforcement for meeting the capacity requirements of their customers.”
It said recovering the costs of new network capacity from individual consumers works for traditional reinforcement as the cost is known upfront: “However, the cost of procuring flexible resources as means of supporting new connections could vary over time and so could require the customer to accept an uncertain (and uncapped) liability to be settled retrospectively.
“All DNOs have reported issues with using flexibility to facilitate new connections with little or no appetite from connection customers due to this risk.”
Ofgem has therefore proposed to completely remove the contribution to reinforcements for demand customers and reduce the contribution made by generators by altering the voltage rule so it only applies to the level at which they connect. It said completely removing generators’ contribution would, in the absence of reforms to DUoS charges, leave them facing no price signal at all: “This is because generation currently receive DUoS credits and do not face charges, even in areas where they are driving costs.”
Ofgem noted the significant code review was originally expected to examine DUoS charges but this work was paused to enable alignment with other reforms being considered as part of its Full Chain Flexibility programme launched in late 2020. It said the proposed changes to distribution connection charging and transmission charges were considered more pressing the due the need for the former to be reflected in DNOs RIIO ED2 business plans and the latter in bids for the next Contracts for Difference auction expected later this year.
Access rights
Network access rights determine how users can import or export, when and for how long, and whether their access can be interrupted and what happens if it is.
“Small users do not have a well-defined level of access,” Ofgem explained. “For most other users, their network access is defined via their connection agreement.
“Traditionally users have had limited choice of access rights. Where new choices have become available, some of these choices have been loosely defined and require users to take on significant risk of curtailment.”
The regulator said improved choices and definitions could help customers to get quicker or cheaper access to the network by making better use of existing capacity. “Improved user understanding of their network access conditions will also improve their ability to provide flexibility services,” it added.
Ofgem has proposed to introduce new non-firm and time-profiled access option for customers connecting to distribution networks.
Non-firm access options would be defined in relation to the percentage of time that network users are willing to be curtailed, with customers able to choose what percentage of their total access rights are non-firm and subject to potential curtailment. Time-profiled access options would allow network users to either have no access or non-firm access during peak periods of demand, likewise with the ability to decide what percentage of their total access rights are time profiled. They would not be able to choose the periods themselves.
The regulator said it is not proposing any changes at the transmission level as they are not necessary.
Ofgem was also considering introducing shared access options, whereby multiple users connected below a certain level would be able to share access to network capacity up to that level. However, the regulator has decided against taking forward these proposals due to concerns over their practicality and likely take up.
Subject to feedback to the consultation on its minded-to decision, Ofgem is planning to implement the changes to both distribution connection charges and access rights by 1 April 2023. The deadline for response is 25 August 2021.