Ofgem has published a further consultation on its proposed reforms to balancing and residual network charges after stakeholders raised several concerns over its minded-to decision, which came out in November last year.
The regulator proposed to remove a number of favourable charging arrangements for generators connected to distribution networks – known as embedded benefits – and implement a “line rental” model for residual charges on consumers.
But responding to the decision, stakeholders noted that Ofgem’s impact assessment failed to explore the possibility that the capacity market is not reinstated following its suspension last year.
The regulator has now published new analysis from Frontier Economics showing that the absence of the capacity market would have a limited impact on the case for enacting the reforms.
In this scenario, the net present value of the benefits to consumers up to 2040 would be £4.8 billion and the system benefits would be worth £0.23 billion. This compares to £5.1 billion and £1.04 billion with the capacity market in place.
Ofgem has also acknowledged it did not use the correct carbon price when evaluating the impact of changes to balancing charges and residual transmission charges for generators. It said it should have used a forecast from the Department for Business, Energy and Industrial Strategy (BEIS) but instead used one from National Grid’s future energy scenarios.
The figures have been updated accordingly. There is no noticeable difference in the cost to consumers but the expected system benefits are slightly lower at £0.02 billion rather than £0.11 billion.
Ofgem has invited stakeholders to respond to the additional analysis as well as the findings of the Balancing Services Charges Taskforce, which recently concluded it is not possible to make balancing charges “more cost-reflective and forward-looking” in a manner that would “effectively influence user behaviour”.
The deadline for submissions is 12 July 2019.
The reforms were proposed as part of a significant code review examining the residual network charges used to recover the sunk costs of the existing power grid.
Small-scale generators connected to distribution networks are exempt from residual transmission charges and can also receive triad avoidance payments from suppliers for helping to reduce theirs. These are both examples of embedded benefits.
One of the main aims of the reforms is to create a level playing field between different types of generators and prevent suppliers from skirting the charges.
Ofgem intends to address this issue by removing charges on generators and shifting the burden entirely onto demand in the form of fixed charges on consumers. The regulator is already slashing residual triad avoidance payments to near zero and eventually plans to remove them entirely.
The regulator also proposed to make similar changes to balancing charges. Aurora Energy Research has claimed the package of reforms could delay the advent of “subsidy-free” renewables by up to five years.
The forward-looking charges intended to pay for new investments in the power grid are being examined separately through another significant code review that began in December.
Ofgem recently announced a delay to its final decisions on residual charges that would align them more closely with those on forward-looking charges.