Network charging review could lead to regulatory ‘hiatus’

UK Power Reserve says urgently-needed reforms must not be absorbed into slow-moving process

Concerns have been raised that a wide-ranging review of network charging launched by Ofgem earlier this month could result in a regulatory “hiatus”.

Peaking plant developer UK Power Reserve is worried that urgently-needed reforms to network charging could be delayed for years as they are absorbed into the significant code review (SCR).

The firm’s fears primarily relate to a connection and use of system code (CUSC) modification, which it proposed in November last year. The modification – called CMP 274 – was put forward in response to Ofgem’s proposals to drastically reduce the triad avoidance payments available to distributed generators.

Distributed generators are able to secure the payments from suppliers for helping them to reduce their transmission charges as the power they produce is counted as net negative demand during the triad periods used to determine the charges for half-hourly metered non-domestic customers.

The regulator has since confirmed its intention to slash the residual element of the payments – the portion used to recover the sunk costs of the existing transmission network – from the current level of £47/kW to between £3/kW and £7/kW.

But UK Power Reserve says the changes will create a distortion in the energy market as behind-the-meter generation will still be able to capture this value.

“Currently, I think what we have under the CMP264/265 decision is a perverse incentive now to put generation behind the meter going forward, which I don’t think necessarily was the true intention of Ofgem,” said UK Power Reserve’s chief commercial officer, Sam Wither.

To address the issue, CMP 274 would halt the use of triad periods –  the three half hours of greatest demand on the transmission system over the winter – to determine the residual charges. They would instead be set on the basis of network users demand during the morning and evening peaks throughout the season.

This would prevent network users from avoiding the charges by reducing their demand only during the expected triad periods. The triad periods would continue to be used to set the locational element of the charges, which reflect individual users impact on network costs.

“Now what that does is create a time of use transmission tariff for transmission networks charges,” Wither told Utility Week. “There’ll be no ultimate impact in terms of costs going up for the consumer. Actually, costs will be more evenly apportioned across the consumer base and therefore it’s a level playing field and a much fairer market signal for all.”

He said UK Power Reserve has become frustrated with the “slow progress” of the code modification process, “especially when you consider how quickly the regulator and national grid pushed through CMP 264/265”.

“It’s a stark contrast in regulatory treatment between two modifications that are supposed to be administered in a consistent and transparent way.

“I think there’s just a general resistance to change as people are wanting to push everything through the SCR. The concern with that is you could end up with a seven-year hiatus on any kind of regulatory developments,” he added.

Wither said previous SCRs – from the very beginning through to the full implementation of their recommendations – have sometimes lasted up to seven years.

He argued that the potential disparity between charges for distributed and behind-the-meter generation will inevitably have to be examined by Ofgem: “If you’re a distributed generator, or a DSR provider, or a factory turning down, the ability of you to turn off for three half hours and reduce your exposure to transmission charges to zero is too great an incentive, so they’re going to look at it one way or another. This is all about timing.”

UK Power Reserve was one of a number of industry players which called upon Ofgem to launch the review. Wither said UK Power Reserve still believes that examining network charges holistically through an SCR is “absolutely necessary”. However, he added that the review should not be allowed to delay the introduction of urgently-needed fixes.

Responding to the comments, a spokesman for Ofgem said: “For all CUSC modifications, including modification CMP274, it is up to the workgroup to decide whether the modification overlaps with Ofgem’s SCR and how best to proceed.

“Ofgem will consider the timing of any decisions on modifications where the scope overlaps with the SCR.  We have invited proposers to talk to us regarding existing modifications to provide a steer where possible as to the appropriate next steps.”

He denied that the changes to triad avoidance payments had been rushed: “Code modification is an industry-led process and the timetables on which modifications proceed is determined by the independent CUSC panel.

“In the case of the proposals to reduce the level of the embedded benefit payments during peak times, Ofgem did not push these through quickly, as has been claimed. In fact. we rejected the CMP 265 proposer’s request for the modification to be considered urgently so that time would be allowed for industry stakeholders to submit their views.”