Allowing local energy projects to avoid system charges would lead to a greater share of costs being passed through to those consumers who are not involved in such schemes and are more likely to be poor or disengaged.
In a new paper for its Future Insights series, energy regulator Ofgem said that as technology costs fall it may become “more realistic” for groups of consumers to form local micro grids, which seek to avoid certain network costs whilst keeping a connection to the national grid as an “insurance policy”.
Ofgem said some parties are already using such models to offer discounted tariffs to engaged local consumers. The reduced rates are made possible because those running the schemes are avoiding the “sunk costs associated with pre-existing network infrastructure”.
The regulator said the issue highlights a “fundamental tension” between economic efficiency and fairness: “Whilst the immediate consumers of such local schemes will benefit from reduced costs, the remaining consumers may increasingly have to pay a higher proportion of the costs of the infrastructure needed to maintain this essential service for all consumers.”
“These changes in cost burdens seem likely to have distributional effects – for example with relatively less well-off consumers being less able to take advantage of such offerings and bearing higher costs as a result,” the paper added.
Ofgem said it is already considering the issue, including through its ongoing review of the ‘embedded benefits’ available to distribution-connected generators.
It said network charging models must adapt to reflect the value of grid connections both in terms of actual use and as an insurance policy. On the other hand, the share paid by those who have the option to go “off grid” must not be too great – otherwise they may “defect” to avoid these costs entirely.
You can read Utility Week’s analysis of the review of embedded benefits here.