Energy industry stakeholders are opposed to using transmission network charges to provide operational price signals, including by linking them to constraint costs, according to Ofgem.
The regulator gave this as one of the key messages to emerge from responses to an open letter on network charging reforms published in November 2022.
Ofgem said the letter received 40 responses including from 13 generators, four suppliers, five developers, three trade associations, two renewable energy companies, two consumer bodies, one combined supplier and generator and one storage operator. It also received input from the Electricity System Operator (ESO) and the transmission arm of Scottish and Southern Electricity Networks.
The regulator said it has an established principle that transmission charges should not be used to send dynamic operational signals for generation or demand. It said respondents to the letter “largely agreed” this should remain the case, although some were “reluctant to rule out its potential value from future designs”.
“Primarily, respondents were concerned that the introduction of operational signals would undermine existing investment signals and further reduce predictability in transmission charging, and that REMA was investigating more effective options to deliver an operational signal,” it added. “Others noted a preference for temporal charges, particularly for storage and demand flexibility.”
Reforms to Transmission Network Use of System (TNUoS) charges have been proposed by the government as one of the alternatives to the introduction of zonal power pricing as part of its Review of Electricity Market Arrangements (REMA).
Supporters of locational power pricing, whether zonal or nodal, claim it would help to resolve multiple problems with the current market arrangements, including interconnectors flowing ‘the wrong way’ and rising constraint costs during periods of high winds.
Speaking to Utility Week recently, Adam Bell, a former government official and now director of policy at Stonehaven, warned against introducing zonal pricing before 2035 and said these problems could instead be resolved by, among other things, reforming network charges to provide operational price signals.
However, in the launch document for its second REMA consultation, the Department for Energy Security and Net Zero (DESNZ) indicated that reforms to TNUoS charges would primarily focus on improving investment signals.
In a summary of responses to its open letter, Ofgem said industry stakeholders were “strongly opposed” to using TNUoS charges to signal network constraint costs as this would further increase the unpredictability of the charges: “Respondents also feared that it could lead to further increases to all users in areas where constraints are caused by delays to transmission network asset upgrades, at no fault of the other transmission network users.”
It said there was a “strong preference” that network constraints be addressed through mechanisms “specifically designed for real-time or near real-time market operations”.
In the absence of zonal pricing, DESNZ has suggested that network constraints could be managed through by expanding the local constraint market being trialled by the ESO in Scotland or through changes to network access arrangements already being considered by Ofgem such as auctions for access rights.
Among respondents to its letter, Ofgem said there was broad agreement that reforms to TNUoS should focus on creating stable and predictable signals for investment that reflect the long-run cost of expanding the network in different locations. They said these signals should be coordinated with future network planning, examples of which include the creation of a Centralised Strategic Network Plan (CSNP) and a Strategic Spatial Energy Plan.
The regulator said there was also agreement that there should be longer periods between resets, with charges being fixed for multiple year. Respondents suggested that these resets could be aligned with the resets of network plans such as the CSNP.
Respondents additionally agreed that there should be specific investment signals for storage due its distinct characteristics.
Ofgem said there was some support for more network costs being recovered through “deeper” connection charges as well as for more granular temporal, particularly seasonal, charges.
Furthermore, Ofgem said respondents “universally recognised the traditional reliance on voltage levels as a primary determinant for network charges is becoming outdated as distributed generation and system complexity increases”.
“Respondents were particularly concerned about regional disparities, specifically the differential in charges for 132kV connected generation between England and Scotland, and the potential adverse impacts on wind development in Scotland under the current charging methodologies,” it noted.
Respondents also said there should be greater alignment and integration between transmission and distribution charging arrangements.
Ofgem said it will continue to examine these issues alongside DESNZ and the ESO as part of REMA and engage with industry through the Charging Futures Forum: “This will aid us to conclude whether long-term network charging reform is required and support a robust assessment of the potential options and associated regulatory questions, to determine whether there are solutions that could help the efficiency of the GB energy system, bringing benefits to consumers.”